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Efficient equilibrium:the price and quantity that maximizes socialsurplus. 10.2Efficient quantity:quantity that maximizes social surplus.*A tax on an ordinary good increases DWL but a tax on a good with an eternal cost reduces DWL and raises revenue. *Pigouvian tax (subsidy):a tax (subsidy) on a good with external costs; can more easily adjust to changes in supply and demand than tradable allowances. External benefit:a benefit received by people other than the consumers or producers trading in the market; vaccines help the receiver and others around them. 10.3*Subsidy will make market equilibrium equal to efficient equilibrium; also if it is on an item with an external benefit, it will reduce DWL and increase social surplus. *Internalizing an externality:adjusting incentives so decision makers take into account all the benefits and costs of their actions,private and social.Transaction costs:costs necessary to reach an agreement; identifying and bringing buyers and sellers together, bargaining, drawing up a contract.Coase theorem:if transaction costs are low and property rights aredefined, private bargains will ensure that the market equilibrium isefficient even when there are externalities; trading makes sure thatjust the right amount of the externality is produced; if met, in a free market the quantity of goods sold will maximize social surplus, the sum of CS, PS, and other surplus; often unlikely. *Government solutions to externality problems: taxes and subsidies, command and control and tradable allowances for the activity in question. **When external costs are major, Qmarket > Qefficient*Tariffs and import quotas consequences on domestic economy: when trade is restricted, prices rise since domestic producers with higher MC’s increase production. Resources that could have been used to produce other things are inefficiently allocatedCommand and control method:government tells firms what to do to decrease external costs; problem is that there are many methodsto achieve a goal and the government may not have the right information to choose the cheapest method; tax is better because the people can choose for themselves what they want to do; flexibility.Tradable allowances:Discount offered by producers or marketers to distribution members (distributors, wholesalers, retailers) usually as a short-term promotional incentive; effect a lower retail price to stimulate sales.Chapter 11 Costs and Profit Maximization Under Competition: To maximize profit:What price to set? What quantity to produce? When to enter and exit the market? Long run:time after all entry or exit has occurred; perfectly elasticcan be assumed.Short run:period before entry or exit can occur. *An industry is competitive when they don’t have much influence over the price of their product; the product being sold is similar across sellers, there are many buyers and sellers each small relative to total market, there are many potential sellers. * demand curve for firm’s output is perfectly elasticProfit = pi = total revenue – total cost or (TR/Q-TC/Q) x Q or (P – AC) x QTotal revenue = price x quantityTotal cost:cost of producing a given quantity of output; includes opportunity costs and money costs.