Efficient equilibrium the price and quantity that maximizes social surplus 102

Efficient equilibrium the price and quantity that

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Efficient equilibrium: the price and quantity that maximizes social surplus. 10.2 Efficient 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 are defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities; trading makes sure that just 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 allocated Command and control method: government tells firms what to do to decrease external costs; problem is that there are many methods to 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 elastic can 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 elastic Profit = pi = total revenue – total cost or (TR/Q-TC/Q) x Q or (P – AC) x Q Total revenue = price x quantity Total cost: cost of producing a given quantity of output; includes opportunity costs and money costs.

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