Vocab
This term describes a cost or benefit to a third party not involved in a transaction.
Externality
If MSC is greater than MPC, the good creates this type of externality.
Negative externality
A tax on producers shifts the supply curve in which direction?
Left
Public goods are nonrival and ______.
Nonexcludable
A monopolist maximizes profit where ______.
MR = MC
This occurs when one person’s consumption does not reduce another’s.
Nonrival
If MSB is greater than MPB, the market will produce too ______.
Little (underproduce)
A subsidy given to consumers will cause quantity to ______.
Increase
The inability to exclude non-payers leads to this problem.
Free-rider problem
Allocative efficiency occurs where ______.
P = MC
This measures income inequality in a country.
Gini coefficient
In a negative externality graph, deadweight loss occurs between which two curves?
MSC and MSB
Which policy is best to fix a positive externality?
Subsidy
Private markets tend to ______ public goods.
Underproduce
What is the goal of antitrust laws?
Promote competition / prevent monopolies
This curve shows the distribution of income in an economy.
Lorenz Curve
At the socially efficient level of output, what must be true?
MSB = MSC
A price floor in a positive externality market will cause DWL to do what?
Increase
Give one example of a public good.
street lights, national defense, parks, etc.
This illegal practice involves firms agreeing on prices.
Price fixing (or collusion)
This occurs when people benefit from a good without paying for it.
Free-rider problem
Why is the price too low in a market with a negative externality?
It only reflects private cost, not social cost
Why does a subsidy improve efficiency in a positive externality market?
It moves quantity toward where MSB = MSC
Why won’t firms provide public goods efficiently?
They cannot make profit due to free riders
Why do monopolies create deadweight loss?
They produce less than the socially efficient output