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30 Cards in this Set
- Front
- Back
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What are three reasons for government intervention?
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Achieve distributional aims, collect tax revenue to finance government expenditure, and correct market failure.
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When do economists use the term market failure?
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When the outcome of a market is not efficient.
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What are two reasons for why a market equilibrium without government intervention may fail to be efficient.
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Externalities and market power.
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When a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect.
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Externality
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The effect on the bystander is adverse.
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Negative Externality
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The effect on the bystander is beneficial.
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Positive Externality
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The market equilibrium is not __ when there are externalities.
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efficient
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The social cost of the good exceeds the private cost in the presence of a __.
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negative externality
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When the social cost of the good exceeds the private cost (negative externality), he optimal quantity is __ than the equilibrium quantity.
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smaller
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What can the government do to achieve the optimal quantity?
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Introduce a quantity control or introduce a tax that equals the difference between the social cost and the private cost.
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Using a tax that equals the difference between the social cost and the private cost is called __.
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internalizing the externality
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Giving sellers and buyers in the market an incentive to take into account the external effects of their action (i.e. the effects of their actions on third parties).
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Internalizing the Externality
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What are some examples of a negative externality?
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Pollution, noise, and congestion.
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When does the social value of a good exceed the private value?
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In the presence of a positive externality.
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When the social value of a good exceeds the private value (positive externality), the optimal quantity is __ than the equilibrium quantity.
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larger
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What can the government do to achieve optimal quantity.
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Introduce a quantity control or introduce a subsidy that equals the difference between the social value and the private value.
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The use of a subsidy that equals the difference between the social value and the private value is called __.
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Internalizing the Externality
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What are some examples of a positive externality?
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Research and development, education, and a beautiful building.
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The outcome of a perfectly competitive market is efficient so long as there are no __.
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externalities
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There is only one firm supplying the good.
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Monopoly
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The change in total revenue from an additional unit sold.
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Marginal Revenue
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The change in total cost from an additional unit supplied.
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Marginal Cost
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When are all firms willing to supply an additional unit?
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When marginal revenue is above or equal to marginal cost.
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When marginal revenue is below marginal cost, no firm is willing to __.
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supply an additional unit
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(Price of the good) - (Lost revenue due to the fact that the monopolist has to lower the price on all units to sell the additional unit)
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Marginal Revenue
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The quantity at which marginal revenue equals marginal cost.
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Profit-Maximizing Quantity
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The quantity supplied by a monopolist is __ the equilibrium quantity of a perfectly competitive market.
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below
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The quantity supplied by a monopolist is __ the quantity that maximizes the sum of consumer and producer surplus.
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below
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The price set by a monopolist is __ the equilibrium price of a perfectly competitive market.
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above
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What can the government do to achieve the optimal quantity?
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Introduce a price control, a quantity control, a subsidy, or ensure that there is a competition.
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