TOPICS
- Price Ceilings
- Price Floors
- Negative Externalities (Spillover Costs, External
Costs)
OUTCOMES
Price Ceilings and
Floors
Define price ceiling and
give examples
How do price ceilings
affect allocative efficiency? (too little being
produced; underallocation of resources), explain using
the MSB=MSC model and the consumer and producer
surplus (dead weight loss) model
What other effects do price
ceilings have?
What happens if the government
sets a price ceiling that is lower than the
equilibrium?
Define price floor and give
examples
Explain the efficiency
effects of a price floor using the MSB=MSC model and
show on a graph (too much being produced;
overallocation of resources)
What happens if the government
sets a price floor that is higher than the
equilibrium?
Market Failure: negative
externalities
(also called external costs or spillover
costs)
what is a market
failure?
what is an
externality?
define negative externalities
(external costs or spillover costs)
give examples of negative
externalities
use the MSB=MSC model to show the
effects (overallocation) on allocative efficiency of
negative externalities
what can the government do to
correct the market failure caused by negative
externalities and show the effects of these policies on
the MSB=MSC model
Supply is usually equal to MSC,
but when there are negative externalities the supply
curve is to the right of the MSC curve. Why?
what is an excise tax?
what is the Coase
theorem?
explain how according to the Coase
Theorem that under certain circumstances bargaining can
solve the problems created by negative externalities
without the government using an example
what are the necessary conditions
needed for the Coase Theorem to work?
what is the tragedy of the
commons?
how does the tragedy of the
commons affect allocative efficiency?
what can be done to better achieve
allocative efficiency when there is a tragedy of the
commons?
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