4) Externality Diagrams - MMT Flashcards
what is the demand curve now known as?
known as the Marginal Private Benefit line (MPB)
what does the Marginal Private Benefit Line (MPB) show?
shows how much benefit a consumer receives from consuming the good or service
what is the supply curve now known as?
known as the Marginal Private Cost line (MPC)
what does the Marginal Private Cost line (MPC) show?
shows how much it costs the business to supply/produce the good or service
what does it mean MPB=MPC?
- where demand= supply is equilibrium, where MPB=MPC is the point of free market allocative efficiency, this is the same as equilibrium
when are resources allocated efficiently for society?
at the point where MSB=MSC, the S indicating social/society
how do you start a market failure diagram?
1) label P and Q
2) draw D= MPB, S= MPC
3) insert the point of free market allocative efficiency P1Q1
4) Then, make things happen in your diagram
how do you draw a diagram showing externality of production?
- we assume that the benefit the consumers gets is unaffected. In other words, there is no external benefit, only an external cost
- so D = MPB=MSB
- relatively realistic, eg a consumer buying painkillers wont know if the factory polluted
how do you draw a diagram showing externality of consumption?
- we assume that the cost of making the product is unaffected
- in other words, there is no external cost so S= MPC=MSC
- this is realistic, just because a consumer drinks too much alcohol doesn’t mean the process of making it was harmful
why in a negative externality of production diagram is the social cost higher than the private cost?
due to an external cost that needs to be added into the equation
how do you draw a negative externality diagram of production ? how is market failure shown?
- Every point on the MSC line should be higher up the graph than the MPC line
- The market failure is shown by starting from your MPB = MPC line (free market) drawing a line up to MSC line and then completing a triangle to where MSB=MSB
in a negative externality of consumption diagram, why is the benefit to society (MSB) less than the benefit to the private individual (MPB)?
because there is a negative benefit to consider
negative externality of production:
social cost is… than the private cost
higher
negative externality of consumption:
benefit to society is (MSB) … than the benefit to the private individual (MPB)
less
how do you draw a negative externality of consumption diagram?
- Every point on the MSB line should be lower down the graph than the MPB line
- Start your diagram at MPB=MPC, draw a line down to the MSB line and then complete the triangle to where MSB=MSB
for a positive externality of production, the cost to society (MSC) is… than the cost to the company
lower
how do you draw a positive externality of production diagram?
- every point on the MSC line should be lower down the graph than the MPC line
- this is illustrated by starting from your MPB=MPC line (free market) drawing a line down to MSC line and then completing a triangle to where MSB=MSB
for positive externality of consumption why is the benefit to society (MSB) greater than the benefit to the private individual (MPB)?
- there is a positive benefit to consider
positive externality of consumption:
the benefit to society (MSB)… than the benefit to the private individual (MPB)
greater
how do you draw a positive externality of consumption diagram?
- Every point on the MSB line should be higher up the graph than the MPB line
- Start your diagram at MPB=MSB; draw a line up to the MSB line and then complete the triangle to where MSB=MSB
what do the triangles on the negative externality diagrams represent?
- are welfare losses to society of the failing market
- this should point to the left
what do the triangles on the positive externality diagrams represent?
- also welfare losses to society
- should point right
if the externality is of production what is the D label?
D = MPB = MSB
if the externality is of consumption what is the S label?
S = MPC = MSC
