How can a subsidy correct a market failure caused by a positive externality?
A subsidy can lower the private cost of production, encouraging more output and shifting the market quantity towards the socially optimal level.
How can a tax correct a market failure caused by a negative externality?
A tax can increase the private cost of production, discouraging output and shifting the market quantity towards the socially optimal level.
What is the effect of a government subsidy on flu vaccinations?
A subsidy increases the quantity of vaccinations by lowering the cost to consumers or producers.
What type of policy could the government use to correct the underproduction of education?
A subsidy to students or schools, or direct provision of education.
What is a potential drawback of using taxes to correct negative externalities?
Taxes can be politically unpopular and may lead to decreased production, potentially affecting employment.
What is a potential drawback of using subsidies to correct positive externalities?
Subsidies require government funding and can lead to overproduction if not carefully calibrated.
How does a subsidy affect the MPB curve?
A subsidy shifts the MPB curve upward, reflecting the reduced cost to consumers.
How does a tax affect the MPC curve?
A tax shifts the MPC curve upward, reflecting the increased cost to producers.
What is the goal of government intervention in markets with externalities?
To align private incentives with social costs and benefits, achieving a socially optimal outcome.
What is the effect of a tax on pollution on the MSC?
A tax on pollution internalizes the externality, causing the MPC to shift closer to the MSC, reducing overproduction.
What are the key differences between MSB and MPB?
MSB includes both the private benefits to consumers and the external benefits to third parties, while MPB only considers the private benefits.
What are the key differences between MSC and MPC?
MSC includes both the private costs to producers and the external costs faced by third parties, while MPC only considers the private costs.
Compare and contrast positive and negative externalities.
Positive externalities create benefits for third parties, leading to underproduction. Negative externalities create costs for third parties, leading to overproduction.
How do subsidies and taxes differ in their impact on market equilibrium?
Subsidies increase quantity and decrease price (for consumers), while taxes decrease quantity and increase price (for consumers).
Differentiate between private and social costs.
Private costs are incurred by the producer, while social costs include private costs plus any external costs imposed on society.
Differentiate between private and social benefits.
Private benefits are enjoyed by the consumer, while social benefits include private benefits plus any external benefits enjoyed by society.
How do MPB/MPC differ from MSB/MSC in the absence of externalities?
In the absence of externalities, MPB = MSB and MPC = MSC.
What is the difference between allocative efficiency and productive efficiency?
Allocative efficiency occurs when MSB=MSC, while productive efficiency occurs when a firm produces at the lowest possible cost.
What is the difference between market equilibrium and socially optimal quantity?
Market equilibrium occurs where MPB=MPC, while the socially optimal quantity occurs where MSB=MSC. They are the same only when there are no externalities.
Compare and contrast the effects of a tax and a subsidy on producer surplus.
A tax decreases producer surplus, while a subsidy increases producer surplus.
On a graph, what does the intersection of MSC and MSB indicate?
The intersection of MSC and MSB indicates an efficient allocation of resources, representing the socially optimal quantity.
On a graph, what area represents deadweight loss due to overproduction?
The area between the MSC and MSB curves, from the socially optimal quantity to the actual quantity produced.
On a graph, what area represents deadweight loss due to underproduction?
The area between the MSB and MSC curves, from the actual quantity produced to the socially optimal quantity.
How would you graphically represent a positive externality in production?
The MSB curve would lie above the MPB curve, reflecting the additional social benefits.
How would you graphically represent a negative externality in production?
The MSC curve would lie above the MPC curve, reflecting the additional social costs.
If a graph shows MPB and MPC intersecting at a quantity lower than where MSB and MSC intersect, what does this indicate?
This indicates a positive externality and underproduction in the market.
If a graph shows MPB and MPC intersecting at a quantity higher than where MSB and MSC intersect, what does this indicate?
This indicates a negative externality and overproduction in the market.
On a graph showing the market for education, how would you identify the area of deadweight loss?
The area of the triangle formed between the MSB and MSC curves, bounded by the market quantity (Q*) and the socially optimal quantity (Q).
On a graph, how is the size of the externality represented?
The vertical distance between the MPB and MSB curves (for positive externalities) or the MPC and MSC curves (for negative externalities).
How can a graph show the effect of a subsidy on a good with positive externalities?
The subsidy shifts the MPB curve upward, ideally to coincide with the MSB curve, increasing the quantity produced.
