Elasticity, Market Failures (Ch 5&6)

question

externality
answer

a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service
question

private cost
answer

the cost borne by the producer of a good or service
question

social cost
answer

the total cost of producing a good or service, including both the private cost and any external cost
question

private benefit
answer

the benefit received by the consumer of a good or service
question

social benefit
answer

the total benefit from consuming a good or service, including both the private benefit and any external benefit
question

when there is a negative externality in production of a good or service…
answer

too much of the good or service will be produced at market equilibrium ex: generation of electricity (people with homes on a lake from which fish and wildlife have disappeared because of acid rain have incurred a cost, even though they might not have bought their electricity from the polluting utility)
question

when there is a positive externality in consuming a good or service…
answer

too little of the good or service will be produced at market equilibrium ex: production of college educations because people who do not pay for them will nonetheless benefit from them
question

market failure
answer

a situation in which the market fails to produce the efficient level of output
question

property rights
answer

the rights individuals or businesses have to the exclusive use of their property including the right to buy or sell it
question

externalities and market failures result from…
answer

incomplete property rights or from the difficulty of enforcing property rights in certain situations
question

transaction costs
answer

the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods and services (time, other costs of negotiating an agreement, drawing up a binding contract, and monitoring the agreement) *when many people are involved, these costs are often higher than the net benefits from reducing the externality (cost of transaction exceeds gain from transaction…private solution to externality problem is not feasible)
question

coarse theroem
answer

the argument of economist ronald coarse that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities
question

command-and-control approach
answer

a policy that involves the gov’t imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices
question

pigovian taxes and subsidies
answer

gov’t taxes and subsidies intended to bring about an efficient level of output in the presence of externalities *the gov’t should impose a tax equal to the cost of the externality so the company has to internalize the externality–>cost of externality will become a private cost borne by utilities, and supply curve shifts up *gov’t can deal with positive externality in consumption by giving consumers a subsidy, or payment, equal to the value of the externality (students internalize externality-external benefit from college education will become a private benefit received by students) and demand curve shifts right
question

rivlary
answer

the situation that occurs when one person consuming a unit of a good means no one else can consume it
question

excludability
answer

the situation in which anyone who does not pay for a good cannot consume it
question

private good
answer

a good that is both rival and excludable ex: food, clothing, haircuts, big macs
question

public good
answer

a good that is both nonrival and nonexcludable ex: national defense, court system
question

quasi-public good
answer

nonrival but excludable ex: cable tv, toll roads
question

free riding
answer

benefitting from a good without paying for it
question

common resource
answer

a good that is rival but not excludable ex: tuna in the ocean, public pasture land
question

tragedy of the commons
answer

the tendency for a common resource to be overused
question

the economically efficient level of pollution reduction
answer

the marginal benefit received from eliminating another ton of sulfur dioxide declines as sulfur dioxide emissions are reduced as the level of pollution falls, further reductions become increasingly costly
question

the net benefit to society from reducing pollution is equal to…
answer

the difference between the benefit of reducing pollution and the cost
question

cap and trade system of tradable emission allowances
answer

gov’t gave allowances to utilities equal to the total target amount of sulfur dioxide emissions. the utilities were then free to buy and sell the allowances
question

demand curve for a good represents…(private good)
answer

the MB the consumer receives from the good (add HORIZONTAL individual demand curves to find market demand curve, and can also find marginal social benefit curve for this good, assuming there is no externality) *keeps price on graph constant
question

demand curve for a good represents…(public good)
answer

the total dollar amount consumers as a group would be willing to pay for that quantity of the public good (add individual demand curves VERTICALLY) *keeps quantity on graph constant *optimal quantity will occur where marginal social benefit (demand) curve intersects the marginal social cost (supply) curve
question

elasticity
answer

a measure of how much one economic variable responds to changes in another economic variable
question

price elasticity of demand
answer

the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product’s price
question

elastic demand
answer

demand is elastic when the % change in the quantity demanded is greater than the % change in price, so the price elasticity is greater than 1 in absolute value
question

inelastic demand
answer

demand is inelastic when the % change in quantity demanded is less than the % change in price, so the price elasticity is less than 1 in absolute value
question

unit-elastic demand
answer

demand is unit elastic when the % change in quantity demanded is equal to the % change in price, so the price elasticity is equal to 1 in absolute value
question

perfectly inelastic demand
answer

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero ex: insulin
question

perfectly elastic demand
answer

the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity
question

the key determinants of price elasticity of demand
answer

the availability of close substitutes to the good, the passage of time, whether the good is a luxury or a necessity, the definition of the market, the share of the good in the consumer’s budget
question

availability of close substitutes
answer

if a product has more substitutes available, it will have more elastic demand (pizza). If a product has fewer substitutes available, it will have less elastic demand (gas)
question

passage of time
answer

the more time that passes, the more elastic the demand for a product becomes
question

luxuries vs. necessities
answer

the demand curve for a luxury is more elastic than the demand curve for a necessity
question

definition of the market
answer

the more narrowing we define a market, the more elastic demand will be
question

share of a good in a consumer’s budget
answer

the demand for a good will be more inelastic the larger the share of the good in the average consumer’s budget (salt would be relatively inelastic)
question

total revenue
answer

the total amount of funds a seller receives from selling a good or service, calculated by multiplying price per unit by the number of units sold
question

when demand is inelastic…
answer

price and total revenue move in the same direction
question

when demand is elastic…
answer

price and total revenue move inversely
question

when demand is unit-elastic…
answer

revenue is unaffected
question

cross-price elasticity of demand
answer

the % change in the Q demanded of one good divided by the % change in the price of another good
question

income elasticity of demand
answer

a measure of the responsiveness of the Q demanded to changes in income, measured by the % change in the quantity demanded divided by the % change in income
question

price elasticity of supply
answer

the responsiveness of the quantity supplied to a change in price, measured by dividing the % change in Q supplied of a product by the % change in the product’s price
question

the supply curve for a good will be inelastic if we measure it over a short period of time
answer

it will be increasingly elastic the longer the period of time over which we measure it

Get instant access to
all materials

Become a Member