No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Essential Questions

How can the government correct a negative externality?

Posted on April 18, 2014 at 9:45 AM Comments comments (0)

Negative externalities exist when the marginal social costs (MSC) exceed the marginal social benefits (MSB). Society is getting too much of the good at too low of a price.

 

The government can correct a negative externality by imposing per-unit taxes on producers to raise the costs of production. This way the MSC=MSB. Another policy option is to tax buyers so that the MSC=MSB. In the end, the correction will eliminate deadweight loss from the market.

 

AP Microeconomics Unit 4 Role of Government

How can the government correct a positive externality?

Posted on April 18, 2014 at 9:40 AM Comments comments (0)

Positive externalities exist when the marginal social benefits (MSB) exceed the marginal social costs (MSC). Society is getting too little of the good at too low of a price.


The government can correct a positive externality by offering buyers per-unit subsidies (or incentives) to increase demand so that the MSB=MSC. Another policy option is to offer sellers per-unit subsidies to encourage more production so the MSB=MSC. These policy actions will get rid of the deadweight loss in the market.


AP Microeconomics Unit 4 Role of Government

How do you graph a negative externality?

Posted on April 18, 2014 at 9:35 AM Comments comments (0)

A negative externality occurs when the marginal social cost (MSC) is greater than the marginal social benefit (MSB). Society is worse off from the production of the good. There is a misallocation of economic resources and deadweight loss. Markets overproduce goods that generate negative externalities.

  

The No Bull Review graph below illustrates a good that creates negative externalities (MSC>MSB). The area of deadweight loss (inefficiency) is the purple triangle. P1 and Q1 is socially optimal, however the market generates a price of P and quantity of Q. Society is getting too much of the good at too low of a price.


AP Microeconomics Unit 4 Role of Government

How do you graph a positive externality?

Posted on April 18, 2014 at 9:20 AM Comments comments (0)

An externality occurs when a third party (someone other than the buyer or seller) is affected by a market transaction. This is known as a market failure. Externalities can be positive or negative.


A positive externality occurs when the marginal social benefit (MSB) is greater than the marginal social cost (MSC). Society is benefitting from the production of the good. However, there is a misallocation of economic resources and deadweight loss. Markets underproduce goods that generate positive externalities.


The No Bull Review graph below illustrates a good that creates positive externalities (MSB>MSC). The area of deadweight loss (inefficiency) is the purple triangle. P1 and Q1 is socially optimal, however the market generates a price of P and quantity of Q. Society is getting too little of the good at too low of a price.


AP Microeconomics Unit 4 Role of Government

How does elasticity of demand and supply affect tax incidence?

Posted on April 16, 2014 at 11:10 AM Comments comments (0)

When the price elasticity of demand and supply are the same, then the buyer and seller share the tax burden equally.


Tax incidence on the buyer: If the demand curve is more inelastic (relatively steeper) than the supply curve, the buyer will pay a greater portion of the tax than the seller.


Tax incidence on the seller: If the supply curve is more inelastic than the demand curve, the seller will pay a greater portion of the tax than the buyer.


AP Microeconomics Unit 4 Role of Government

What are the effects of a per-unit tax?

Posted on April 16, 2014 at 10:55 AM Comments comments (0)

When the government imposes a per-unit tax, marginal costs increase and supply shifts to the left. The producer and consumer both share the burden of the tax. As a result of the tax, the producer surplus and consumer surplus decrease. Assuming no externalities, the tax creates deadweight loss (inefficiency).


The No Bull Review diagram below illustrates the effects of a per-unit tax. P represents price before the tax, P1 is the price after the tax, Ps is the price the seller receives. The yellow region is the part of the tax that the buyer pays to the government and the green region represents what the seller pays to the government. Yellow region + green region = total tax revenue. The purple region represents the deadweight loss.

AP Microeconomics Unit 4 Role of Government

What are the characteristics of a public good?

Posted on April 15, 2014 at 6:55 PM Comments comments (0)

A public good is a good that is typically provided by the government - such as national defense and street lights - and contains the following two characteristics:


1. Shared consumption (non-rivalrous): one person's use of the good does not prevent someone else from using it.

2. Non-exclusion: cannot restrict anyone from using the good.


AP Microeconomics Unit 4 Role of Government


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