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Examples of a negative externality
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-the pollution created when gasoline is consumed
-the noise created by an airport that bothers people living nearby
-the increase in traffic caused by someone deciding to drive instead of taking the bus
(on exam D-all of the above)
-the noise created by an airport that bothers people living nearby
-the increase in traffic caused by someone deciding to drive instead of taking the bus
(on exam D-all of the above)
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Since air pollution creates a negative externality,
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social welfare will be enhanced by a tax on air pollution
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When a good is excludable,
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people can be prevented from using the good
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For a particular pizza restaurant, the total cost of producing 9 pizzas is $80 and the total cost of producing 10 pizzas is $100. For this firm, the marginal cost of the 10th pizza is,
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$20
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For a firm that is producing the profit-maximizing level of output
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marginal revenue equals marginal cost
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The marginal revenue of a firm in a perfectly competitive market is equal to
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the price of their output
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not a characteristic of a monopolistic market
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there is only one buyer of the product
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When a firm faces a downward sloping demand curve for its product, its marginal revenue is
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less than the price of its product
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Not an example of price discrimination by a firm
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a natural gas company charging customers a higher rate in the winter than in the summer
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Monopolistic firm graph
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both negative and positive externalities
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Cost curves graph
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smaller than the optimal quantity
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what leads to inefficient outcomes in markets
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greater than the optimal quantity
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positive externalities cause the market to trade a quantity
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consumers fail to consider the external benefit in their decision making process
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negative externalities cause the market to trade a quantity
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producers fail to consider the external cost in their decision making process
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Markets with positive externalities do not trade the optimal quantity because
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efficient outcomes can be accomplished by private parties even when externalities are present, as long as there are no bargaining costs
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Markets with negative externalities do not trade the optimal quantity because
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there are sometimes too many people involved for them to be able to reach a negotiated solution
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Coase Theorem
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regulation is a command and control policy that can be used to deal with externalities
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private solutions to externalities are not always possible because
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can only be applied effectively in situations with negative externalities
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Regulating externalities
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must be placed on buyers of the good with the externality
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Pigovian subsidies
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both excludable and rival
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Pigovian taxes
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neither excludable nor rival
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private goods are
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rival, but not excludable
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public goods are
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when public goods are provided there is no way of preventing others from using them, even if they do not pay for them
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common resources are
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a slice of pizza
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the free-rider problem
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the grounds surrounding medieval towns, which became barren through overuse
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not an example of a public good
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having the government provide more of the common resource
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tragedy of the commons
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congested freeways
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not a solution to the overuse of common resources
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make freeways into toll ways, with the toll great enough to discourage some drivers from using them
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a good example of a common resource
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having the government provide the good
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most efficient solution to congested freeways
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any cost that has already occurred but is not necessarily shown or reported as a separate expense
-ex: the rent that could be earned on an aircraft that is owned and used by Superior Airways
-ex: the rent that could be earned on an aircraft that is owned and used by Superior Airways
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possible solution to the free-rider problem of public goods
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everything that needs to be given up whenever a choice is made
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implicit cost
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greater, do not consider
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opportunity cost
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every additional worker hired contributes a smaller increase in production than previously hired workers
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Accounting profit is generally _____ than economic profit, because accountants ____ implicit costs in their calculations
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variable costs
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Law of diminishing marginal product of labor occurs when
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fixed costs
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the cost of raw materials will fall under the category of
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occur when long-run average total cost fails as the quantity of output increases
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the factory rent payments made by a firm fall under the category of
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ATC is falling
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Economies of scale
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ATC is rising
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MC<ATC
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total revenues(TR)-total costs(TC)
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MC>ATC
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Price(P)*Quantity(Q)
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Profit
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change in total revenue generated by one additional unit of output
Change in TR/Change in quantity of output
Change in TR/Change in quantity of output
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Total revenue
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at the point where MR=MC (marginal cost)
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marginal revenue (MR)
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to produce additional output level as long as MR>= MC
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where should production stop
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profit= TR-TC>0
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for the profit maximizing firm, optimal output rule if it produces at all is
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profit= TR-TC=0
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positive profit
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profit=TR-TC<0
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breaking even
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If TR=P*Q>TVC
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negative profit
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If P*Q=TVC
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operate
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If TR<TVC
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Indifferent
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MC=P=AVC
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Shut-down
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undefined
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critical shut-down price
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undefined
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