Tuesday, 18 October 2011
Tuesday, 11 October 2011
Lecture Note : Chapter 5 - Externalities, Environmental Policy, and Public Goods
Chapter Summary:
An externality is a benefit or cost that affects someone not directly involved in the production or consumption of a good or service. Negative externalities are costs imposed on individuals not directly involved in producing or consuming a good or service. Positive externalities are benefits received by individuals not directly involved in producing or consuming a good or service. When there is a negative externality as the result of production, the market supply curve understates the full economic cost, the social cost, of production. Economic efficiency would be increased if less of the good or service were
produced. When there is a positive externality, the market demand curve understates the full economic benefit, the social benefit, from consumption and too little of the good is produced.
produced. When there is a positive externality, the market demand curve understates the full economic benefit, the social benefit, from consumption and too little of the good is produced.
Negative and positive externalities lead to market failure. The absence of private property rights or the lack of sufficient enforcement of existing property rights is the underlying cause of externalities and other forms of market failure. Private solutions are possible and efficient if there are low transactions costs. When private solutions to externalities are not feasible, government intervention may be required. For example, if a negative externality is present, government can impose a tax equal to the additional external costs (the difference between the social cost and the private cost). When there are positive externalities,government can provide a subsidy to consumers equal to the external benefits.
To reduce pollution, governments have often used a command and control approach. With this approach, the government sets specific quantitative limits on each pollutant emitted, or the government may dictate the installation of specific pollution control devices.
Saturday, 8 October 2011
Wednesday, 5 October 2011
Tuesday, 4 October 2011
Economic Efficiency - Consumer Surplus & Producer Surplus.
Consumer Surplus and Producer Surplus
Learning Objective 1 :
Distinguish between the concepts of consumer surplus and producer surplus.
Consumer surplus measures the dollar benefit consumers receive from buying goods and services in a particular market. Producer surplus measures the dollar benefit firms receive from selling goods and services in a particular market. Economic surplus is the sum of consumer surplus plus producer surplus. When the government imposes a price ceiling or a price floor, the amount of economic surplus is reduced.
A. Consumer Surplus
Consumer surplus measures the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. The demand curve can be used to measure the total consumer surplus in a market. Demand curves show the willingness of consumers to purchase a product at different prices. Consumers are willing to purchase a product up to the point where the marginal benefit of consuming a product is equal to its price. The marginal benefit is the additional benefit to a consumer from consuming one more unit of a good or service. The total amount of consumer surplus in a market is equal to the area below the demand curve and above the market price. This area represents the benefit to consumers in excess of the price they paid for a product.
B. Producer Surplus
Supply curves show the willingness of firms to supply a product at different prices. Firms will supply an additional unit of a product only if they receive a price equal to the additional cost of producing that unit. Marginal cost is the additional cost to a firm of producing one more unit of a good or service. Often, the marginal cost of producing a good increases as more of the good is produced during a given time period.
Producer surplus is the difference between the lowest price a firm would have been willing to accept and the price it actually receives. The total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price.
Learning Objective 1 :
Distinguish between the concepts of consumer surplus and producer surplus.
Consumer surplus measures the dollar benefit consumers receive from buying goods and services in a particular market. Producer surplus measures the dollar benefit firms receive from selling goods and services in a particular market. Economic surplus is the sum of consumer surplus plus producer surplus. When the government imposes a price ceiling or a price floor, the amount of economic surplus is reduced.
A. Consumer Surplus
Consumer surplus measures the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. The demand curve can be used to measure the total consumer surplus in a market. Demand curves show the willingness of consumers to purchase a product at different prices. Consumers are willing to purchase a product up to the point where the marginal benefit of consuming a product is equal to its price. The marginal benefit is the additional benefit to a consumer from consuming one more unit of a good or service. The total amount of consumer surplus in a market is equal to the area below the demand curve and above the market price. This area represents the benefit to consumers in excess of the price they paid for a product.
B. Producer Surplus
Supply curves show the willingness of firms to supply a product at different prices. Firms will supply an additional unit of a product only if they receive a price equal to the additional cost of producing that unit. Marginal cost is the additional cost to a firm of producing one more unit of a good or service. Often, the marginal cost of producing a good increases as more of the good is produced during a given time period.
Producer surplus is the difference between the lowest price a firm would have been willing to accept and the price it actually receives. The total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price.
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