Econ200 Study Guide Unit 2 Chapters 10 11 13 14 15 16 17 CHAPTER 10 EXTERNALITIES Externalities The uncompensated impact of one person s action on the well being of a bystander neither pays nor receives any compensation for that effect Positive externality If the impact on the bystander is beneficial Social value Private value Social value curve Private value external benefit above demand curve Socially optimal quantity Point where supply curve crosses social value curve socially optimal quantity quantity determined by market Negative externality If the impact on the bystander is adverse bad Lead markets to produce a larger quantity than social desirable Cost to society of producing a particular good cost to producers Social cost curve Producers private cost external cost above supply curve Demand Curve private value Original Supply Curve Private cost Socially optimal quantity demand curve crosses social cost curve point Inefficiency bc market equilibrium reflects only private costs of production Internalizing the externality Altering incentives so that people take account of the external effects of their actions Internalizing negative externality A tax could be imposed reflecting on producers so they would produce less Internalizing positive externality A subsidy could be given POLICIES TOWARDS EXTERNALITIES Command and control policies Regulate behavior directly require forbid Market based policies provide incentives so that private decision makers will choose to solve the problem on their own align private incentives with social efficiency 2 types 1 Corrective Tax A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality pigovian Ideal corrective tax external cost of activity w negative externality As effective as regulation but more efficient Raises revenue for gov 2 Corrective Subsidy Money given to a person group business etc for the purpose of a good that has a positive externality OTHER SOLUTIONS TO EXTERNALITIES Pollution permits Companies factories have permits to pollute a certain amount Firms can voluntarily transfer the right to pollute from one firm to another Private solutions Moral codes and social sanctions charities contracts Coase theorem Proposition that if private parties can bargain without cost over the allocation of resources they can solve the problem of externalities on their own Transaction costs The costs that parties incur in the process of agreeing to and following through on a bargain sometimes leads to no agreement CHAPTER 11 PUBLIC GOODS AND COMMON RESOURCES 2 CHARACTERISTICS OF GOODS Excludability Property of a good whereby a person can be prevented from using it Rivalry in consumption Property of a good whereby one person s use diminishes other people s use 4 TYPES OF GOODS Econ200 Study Guide Unit 2 Chapters 10 11 13 14 15 16 17 1 Private goods Goods that are both excludable and rival in consumption 2 Public goods Goods that are neither excludable nor rival in consumption Free Rider A person who receives benefit of a good but avoids paying for it o People have an incentive to be free riders rather than buyers o Gov can solve the problem if total benefits costs of the public good then provide that good and pay for it with tax revenue Cost benefit analysis A study that compares the costs and benefits to society of providing a public good 3 Common resources Goods that are rival in consumption but not excludable Tragedy of the Commons A parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole o When one person uses a common resource he or she diminishes other people s enjoyment of it rival in consumption o Negative externality causes many CR to be used excessively Avoiding tragedy of the commons depends on collective action by consumers o No single family has an incentive to cut down its consumption Gov can solve by regulation or taxes or turn it into private good Examples clean air and water congested roads fish ocean wildlife 4 Good produced by a natural monopoly Goods that are excludable but not rival in consumption Excludable Not Excludable Rival in Consumption Private Goods Common Resources Not Rival in Consumption Natural Monopolies Public Goods CHAPTER 13 COSTS OF PRODUCTION Total revenue the amount that the firm receives for the sale of its output Total revenue Quantity of output X Price of Output PROFIT TYPES Total Profit Total revenue total cost goal is to maximize profit Economic profit total revenue total explicit and implicit cost Must make positive economic profit to stay in business Accounting profit total revenue total explicit cost acct profit seems larger COSTS TYPES CURVES ETC Cost What you give up to get something Total cost The amount that a firm pays to buy inputs the market value of the inputs a firm uses in production 2 types difference can be from time horizon Total cost Fixed cost Variable cost 1 Fixed costs Costs that do not vary with the quantity of output produced o Incurred even if firm produces nothing at all Rent bills 2 Variable costs Costs that vary with the quantity of output produced o Includes inputs ex ingredients needed and salaries of workers o The more output is produced more of the inputs need to be bought Opportunity cost refers to all those things given up to get that item Explicit costs Input costs that require an outlay of money by the firm Ex wages cost of ingredients for the good Econ200 Study Guide Unit 2 Chapters 10 11 13 14 15 16 17 Implicit costs Input costs that do not require an outlay of money by the firm Ex forgone income from other places Average total cost Totalcost Quantity of output cost Variablecost Quantity of output Tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced Average fixed cost Average variable cost cost Quantity of output Variablecost Quantity of output Marginal cost The increase in total cost from an additional unit of production COST IN SHORT RUN Cost is fixed curve lies on or above long run curve bc less flexibility firm has to use short run curve chosen in past COST IN LONG RUN Cost is more variable flatter U shape curve that lies below short run curves firms can choose which short run curve to use Economies of scale The property whereby long run average total cost falls as the quantity of output increases Diseconomies of scale the property whereby long run average total cost rises as the
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