Unit 5

Word	Meaning
economic welfare	benefits consumers and firms receive by participating in the market (buying and selling)
consumer surplus / CS	the area under the demand curve above the selling price
willingness to pay / reservation price	the maximum amount that a buyer will pay for a good
willingness to sell / seller's serservation price	the lowest price a supplier will take to produce a good and offer it for sale
producer surplus	the benefit a producer receives when the price he receives is greater than his bottom line willingness to sell, the area below the selling price and above the supply curve.
total surplus	= consumer surplus + producer surplus = value to buyers - cost to sellers, maximized at equilibrium (so the equilibrium outcome is the efficient outcome)
deadweight losses / DWL	a loss in total surplus happens when the quantity traded is less than what would be traded when the market is in competitive equibrium $=\frac{1}{2}\times \text{tax per unit} \times (Q_{\text{pre tax}}-Q_{\text{after tax}})$
externalities	benefits and costs that arise in the market that go uncompensated
positive externality	a benefit enjoyed by individuals even though they did not pay to receive it result in too little production
positive externality in consumption	you getting a benefit from something somebody else bought.
positive externality in production	you getting a benefit from somebody else doing production.
negative externality	a cost suffered by individuals for which they are not compensated result in too much production
negative externality in consumption	you suffer from something somebody else bought
negative externality in production	you suffer from somebody else doing production
marginal private benefit / MPB	maximum price someone would pay to consume one more unit of the good. Generally decreases as more of the good is consumed
marginal private cost / marginal cost / MPC / MC	added cost to producers to producing one more unit of the good.
	when there are no externalities, in the competitive equilibrium MPB = MPC and the market outcome is efficient. when there are externalities that are unaccounted for, the market outcome is not efficient
marginal social cost / MSC	marginal private cost + externalities
internalize (an externality)	e.g. tax offenders to reduce negative externalities / regulate behaviour
marginal social benefit / MSB	marginal private benefit + externalities
the coase theorem	if private parties can bargain without cost (or very little cost) over the allocation of resources they can solve the externalities problem on their own
property right	the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals property rights have to be well defined for bargaining to work
public goods	goods and services supplied by the public sector, consumers don't need to pay for them
excludability	you can prevent someone from using or enjoying the good
rivalry	if one person is using or enjoying a good, the ability of someone else to use or enjoy it is diminished
free-rider	a person who receives the benefit of a good but avoids paying for it
tragedy of the commons	common resources get over used

	excludable	non-excludable
rival	private goods (a donut)	common resources (non-toll highways)
non-rival	club goods (cable TV)	public goods (a lighthouse)

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Last update: October 18, 2021
Created: October 16, 2021