Final Flashcards
Market Failures
occur to the extent that allocations do not maximize the total surplus associated with the exchange
Externalities
exist to the extent that costs or benefits of some action or decision are imposed on a third party
The existence of an external cost or external benefit
implies that the decision maker is not
factoring all things into the decision to engage in the activity
* The decision maker fails to internalize the external costs or benefits
The result? The activity is either over-performed or under-performed relative to what would
be socially optimal
The presence of an external benefit?
positive externality
ex) cleaning up after yourself, vaccination, using your turn signal
The presence of an external cost?
negative externality
ex) polluting, smoking, cheating in a curved class
Pigouvian tax
a tax assessed against private individuals or businesses for engaging
in activities that create adverse side effects for society
ex) carbon tax
Game
depends on the actions of two or more decision-makers—two or
more “players”
How does a negative
production externality affect
equilibrium price and
quantity?
Supply shifts left
How does a negative
consumption externality
affect equilibrium price and
quantity?
Demand goes left
How does a positive
production externality affect
equilibrium price and
quantity?
supply shift right
How does a positive
consumption externality
affect equilibrium price and
quantity?
demand shifts right
Business vs. Doctor
Doctor had to end up buying it
Brinkmanship
is the practice of trying to achieve an advantageous by pushing dangerous events to the brink of active conflict
