Externalities
Getting a college degree increases your future salary, but it also benefits society by creating a more educated workforce and lower crime rates. Because it helps bystanders, higher education is an example of this specific type of externality.
What is a positive externality.
The maximum amount a buyer will pay for a good.
What is willingness to pay.
A good that is both excludable and rival in consumption.
What is a private good.
The drop in total surplus that results from a tax is known by this economic term.
What is deadweight loss.
In a perfectly competitive market, a firm will choose to do this in the short run if the market price drops below its Average Variable Cost (AVC).
What is a shut down.
To fix a positive consumption externality, the government should institute this type of per-unit financial incentive for buyers.
What is a subsidy.
The area on a graph above the market price and below the demand curve represents this.
What is consumer surplus.
This problem arises when people cannot be stopped from consuming a public good, leading them to not pay for it.
What is the free-rider problem.
A tax where high-income and low-income taxpayers pay the same percentage of their income.
What is a proportional tax.
This rule dictates that a common resource will be overused and depleted because individual users ignore the negative impact their usage has on others.
What is the Tragedy of the Commons.
A negative production externality causes the Social Marginal Cost (SMC) curve to lie in this position relative to the Private Marginal Cost (PMC) curve.
What is above (or to the left of) the private cost curve.
This all-knowing, all-powerful, and well-intentioned hypothetical planner aims to maximize total surplus in an economy.
What is a benevolent social planner.
This critical government service uses a large army to protect the entire country from foreign invaders. It is a classic example of a public good because you cannot stop citizens from benefiting from it, and one person being protected does not reduce the protection available to others.
What is national defense.
If the government places a $2.00 tax on every gallon of milk sold, this term describes the specific group—either the buyers or the sellers—that ultimately bears the financial burden of paying that tax.
What is tax incidence?
This law states that as more variable inputs (like workers) are added to a fixed input (like a factory), the additional output produced by each new input will eventually decline.
What is the Law of Diminishing Marginal Productivity.
A local chemical plant produces fertilizer. The private cost to make each bag is $12, but the toxic fumes it releases inflict $5 worth of environmental damage per bag on the surrounding neighborhood. This is the total social cost of producing one bag of fertilizer.
What is $17.
This economic condition is achieved when the allocation of resources maximizes total surplus, meaning goods go to buyers who value them most and sellers who produce them at the lowest cost.
What is market efficiency.
Cable television is an example of this type of good: it is non-rival in consumption, but people can be excluded from watching it if they don’t pay.
What is a club good.
Under a new tax system, a citizen pays $0 on their first $20,000 of income, and a flat 20% on any income earned above $20,000. If an individual earns $50,000 total, this is their average tax rate expressed as a percentage.
What is 12%.
This type of private agreement or merger allows a company to bring a resource under its own control—such as a hotel chain buying its own private beach to stop outsiders from overcrowding it—effectively fixing a common resource problem without government intervention.
What is internalizing the externality.
This famous theorem states that if private parties can bargain without cost over the allocation of resources, they can solve the externality problem on their own.
What is the Coase theorem.
In a market, the demand curve is a straight line starting at a price of $10 (where quantity is 0). The equilibrium price is $4 and the equilibrium quantity is 20 units. This is the dollar value of the total consumer surplus.
What is $60.
A small town has exactly 3 residents. Person A values a new public park at $100, Person B values it at $150, and Person C values it at $200. If building the park costs a flat fee of $400, this is the amount of total social surplus (net benefit) created if the town decides to build it.
What is $50.
This famous curve graphs the relationship between tax rates and total tax revenue collected by the government.
What is the Laffer curve.
These specific legal, technological, or economic obstacles—such as patents, high startup costs, or exclusive resources—prevent new competitors from entering a monopoly's market.
What are barriers to entry.