Exam 2 Study Guide Chapter 3 Interdependence Gains from Trade Production Possibilities Frontier graph that shows the combination of output that an economy can produce with available factors of production slope of PPF opportunity cost Qgood 1 Qgood 2 amt of good 1 given up for good 2 absolute advantage ability to produce a good using fewer inputs than another producer comparative advantage ability to produce a good at a lower opportunity cost than another producer opportunity cost amount of good 1 given up to produce good 2 slope of PPF Chapter 9 International Trade world price price of a good that prevails in the world market for a good tariff tax on goods produced abroad and sold domestically imported goods tariffs reduce the amount of imports and moves the domestic market closer to its equilibrium without trade fall in total surplus D F is the deadweight loss Chapter 10 Externalities externality uncompensated impact of one s actions on the well being of a bystander negative externality impact on a bystander is detrimental positive externality impact on a bystander is beneRicial private cost cost of producing an additional unit of a good marginal cost social cost cost incurred by the producer Negative Externalities negative externalities in production private cost is less than social cost pollution global warming positive externalities in production private cost is greater than social cost fable of the bees internalizing the externality altering incentives so that people take account of their actions Positive Externalities private value beneRit from an addt l unit of a good that the consumer receives willingness to pay social value beneRit enjoyed by the consumer and society negative externalities in consumption private value is greater than social value loud music positive externalities in consumption private value is less than social value vaccinations gov ts internalize the externality by taxing goods with negative extern and subsidizing goods with positive extern Corrective Taxes and Subsidies corrective taxes Pigovian induce businesses to take into account social costs that arise from a negative extern coase theorem if private parties can bargain without cost of allocation of resources they can solve the problems of extern Coase thm says that private economic actors can solve the problem of extern among themselves Interested parties can always reach a bargain Transaction costs costs that parties incur in the process of implementing a bargain lawyers Chapter 11 Public Goods and Common Resources excludable property of a good whereby a person can be prevented from using it rival property of a good whereby one person s use diminishes other people s use public goods not rival not excludable person cannot be prevented from using it one person s use does not reduce another s ability to use it common resources rival but not excludable anyone can use it but if someone takes some there is less available for others Public Goods Common Resources free rider person who receives beneRit of a good without paying for it Rireworks if gov t decides total beneRits of public good exceed costs it can provide the good thru tax revenue defense research cost bene it analysis compares costs and beneRits to society of providing a public good tragedy of the commons When one person uses a common resource he or she diminishes other people s enjoyment of it Because of this negative externality common resources tend to be used excessively The government can solve the problem by using regulation or taxes to reduce consumption of the common resource Alternatively the government can sometimes turn the common resource into a private good examples of common resources clean air and water congested roads wildlife Chapter 21 Consumer Choice budget constraint line that shows consumption bundles that the consumer can afford slope of budget constraint measures the rate at which the consumer can trade one good for the other slope price of good 1 x axis price of good 2 y axis slope quantity of good 1 y axis quantity of good 2 x axis
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