Midterm 2 Flashcards
(19 cards)
Public good
Neither excludable nor rival in consumption (national defense, rural roads, city streets, freeways, etc.)
Cost-benefit analysis
Study that compares the costs and benefits to society of providing a public good.
Club good
Excludable and not rival on consumption (police).
Common resource
Not excludable but rival in consumption (snow plowing or city streets when congested).
Private good
Excludable and rival in consumption (education).
Government provides non-public goods. Why?
The externalities associated with them.
Free rider
An individual who benefits from a good without paying for it.
How can government solve free rider problem?
Sponsoring a good and paying for it with tax revenue.
How can the private market solve the free rider problem?
By making a public good private (making it excludable).
Why do transportation services increase fares during rush hour?
Increasing the fare internalizes the externality caused by the congestion of the service, which leads people to not take the given service.
Benefits principle
Paying for the be fit received (sales tax or entry fee).
Ability-to-pay principle
Levying taxes according to the taxpayers ability to pay (taxed based on income).
Marginal Product (MP)
Increase in output arising from an additional unit of input. Decrease MP indicates that MP of an input declines as quantity of input increases.
Total Cost (TC)
All inputs needed to produce a given quantity of output (FC + VC).
Average Total Cost (ATC)
TC/Quantity
Marginal Cost (MC)
Cost of producing an additional unit of output (Change in TC/ Change in Quantity).
ATC and MC
MC>ATC = ATC rises.
MC Curve
U-shaped and rises sharply as output increases, MC increases for outputs greater than a certain quantity because of diminishing returns, MC intersects with ATC at the minimum of ATC curve (efficient scale).
ATC curve
U-shaped, when MC>ATC: ATC rises, when MC < ATC: ATC declines,
