Externalities
What is an externality?
A cost or benefit that affects a third party outside of the market
What two characteristics define a public good?
The good in nonrival and noxexcludable
What is deadweight loss?
A loss of total surplus due to taxes or other inefficiencies.
What is the purpose of a price ceiling?
To keep prices below equilibrium for consumer benefit.
Define government failure
When government intervention causes inefficiency or net loss
Give a positive and a negative example of an externality
Positive: education
Negative: pollution
What does it mean when a good is nonrival and nonexcludable?
Nonrival:consumption doesn't reduce others' use
Nonexcludable: can't prevent consumption
Who bears the burden of a tax?
Both buyers and sellers, depending on elasticities.
What is likely the outcome of a binding price ceiling?
A shortage
What causes government failure?
Bureaucracy, poor incentives, misaligned goals, corruption, or unintended consequences
What government policies correct externalities?
Taxes, subsidies, regulation, etc
What is the free-rider problem?
People benefit without paying
If demand is inelastic, who bears the most of the tax burden?
Consumers
What is the purpose of antitrust laws?
To prevent monopolistic behavior and promote competition
What is rent seeking?
Using resources to influence government policy for private gain
What is the socially optimal quantity of output?
Where MSC = MSB
Give an example of a public good
National defense, streetlights, public firework shows, etc.
What does a subsidy do to supply?
It shifts the supply curve to the right, which lowers cost.
Why might government regulation of natural monopolies be necessary?
To prevent excessively high prices and reduce deadweight loss.
Define income inequality
Unequal distribution of income among individuals or groups
Why do positive externalities lead to market underproduction?
Private benefits are lower than social benefits, so consumers under-consume
Why do private markets fail to supply public goods efficiently?
No firm can charge users easily, so profit incentives are weak.
What is tax incidence?
How tax burden is divided between buyers and sellers
Progressive taxes, transfer payments, social programs