Jaja Econ

• Welfare economics


  The study of how the allocation of resources affects economic well-being
• Consumer surplus


  Amount a buyer is willing to pay for a good minus amount the buyer actually pays
• Demand schedule


  Derived from the willingness to pay of the possible buyers
• Demand curve


  At any quantity, shows the willingness to pay of the marginal buyer
• Producer surplus


  Amount a seller is paid for a good minus the seller's cost of providing it
• Supply schedule


  Derived from the costs of the suppliers
• Supply curve


  Reflects sellers' costs, used to measure producer surplus
• Total surplus


  Sum of consumer and producer surplus
• Efficiency


  Property of a resource allocation that maximizes the total surplus received by all members of society
• Equality


  Property of distributing economic prosperity uniformly among the members of society
• Free markets


  • Allocate the supply of goods to the buyers who value them most highly
  • Allocate the demand for goods to the sellers who can produce them at the least cost
  • Produce the quantity of goods that maximizes the sum of consumer and producer surplus
• The benevolent social planner cannot increase economic well-being by changing the allocation of consumption among buyers or the allocation of production among sellers, or by increasing or decreasing the quantity of the good
• Adam Smith's invisible hand takes all the information about buyers and sellers into account and guides everyone in the market to the best outcome
• Current public policy makes it illegal for people to sell their organs, imposing a price ceiling of zero which leads to a shortage
• Allowing a free market in organs would balance supply and demand, benefit both sellers and buyers, and lead to an efficient allocation of resources
• Market failure


  The inability of some unregulated markets to allocate resources efficiently
• Externality


  The uncompensated impact of one person's actions on the well-being of a bystander
• Negative externality


  Impact on the bystander is adverse
• Positive externality


  Impact on the bystander is beneficial
• Negative externalities cause the social cost curve to be above the supply curve, so the optimum quantity produced is smaller than the market equilibrium quantity
• Positive externalities cause the social value curve to be above the demand curve, so the socially optimal quantity is greater than the market equilibrium quantity
• Technology spillover


  Positive externality - impact of one firm's research and production efforts on other firms' access to technological advance
• Industrial policy


  Government intervention in the economy that aims to promote technology-enhancing industries
• Corrective taxes (Pigovian taxes)

  Taxes that induce private decision-makers to take account of the social costs that arise from a negative externality
• Tax revenue from a gasoline tax can be used to lower taxes that distort incentives and cause deadweight losses
• Corrective taxes


  • Place a price on the right to pollute
  • Reduce pollution at a lower cost to society
  • Raise revenue for the government
  • Enhance economic efficiency
• The gas tax


  Is a corrective tax that doesn't cause deadweight losses and makes the economy work better
• Corrective tax on gasoline

  Leads to less traffic congestion, safer roads, and a cleaner environment
• Optimal corrective tax on gasoline

  $2.28 per gallon in 2005 dollars, $2.78 per gallon in 2012 dollars
• Actual tax on gasoline in the U.S. in 2015 was 50 cents per gallon
• Tradable pollution permits


  Voluntary transfer of the right to pollute from one firm to another
• Tradable pollution permits


  • Create a new scarce resource: pollution permits
  • Establish a market to trade permits
  • Firm's willingness to pay depends on its cost of reducing pollution
• Advantage of free market for pollution permits

  • Initial allocation of pollution permits doesn't matter
  • Efficient final allocation
• Firms pay for their pollution either through corrective taxes or by buying pollution permits
• Clean environment


  Is a normal good with a positive income elasticity
• Private solutions to externalities

  Moral codes and social sanctions<|>Charities<|>Self-interest of the relevant parties<|>Integrating different types of businesses
• Coase theorem


  If private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
• Excludability


  Property of a good whereby a person can be prevented from using it
• Rivalry in consumption


  Property of a good whereby one person's use diminishes other people's use
• Public goods


  Not excludable and not rival in consumption