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Private goods
- excludable, rival in consumption
- Ex: food
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Public goods
- not excludable, not rival
- Ex: national defense
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Common resources
- rival but not excludable
- Ex: fish in the ocean
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Natural monopolies
- excludable but not rival
- Ex: cable TV
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Externality
- a type of market failure
- uncompensated impact of one person's actions on the well-being of a bystander.
- can be negaive or positive
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Pigouvian taxes
Corrective taxes. designed to induce private decision-makers to take account of the social costs that arise from a negative externality
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The Coase Theorem
If private parties can costlessly bargain over the allocation of resources, they can solve teh externalities problem on their own
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Average v. Marginal tax rate
Average = total taxes paid / total income: measures the sacrifice a taxpayer makes
Marginal = the extra taxes paid on an additional dollar o income: measures the incentive effects of taxes on work effort, savings, etc
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Tax systems: Regressive, Proportional, Progressive
- R: rich pay smaller fraction as it goes up
- Proportional: all pay the same fraction
- Progressive: rich pay larger fraction as it goes up
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Total revenue; Average revenue; Marginal revenue
- TR = P X Q
- AR = TR/Q = P
- MR = ^TR/^Q
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Profit maximization for competitive firm
- Profit maximizing Q:
- MR = MC
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Shutdown
- Cost = revenue loss (TR)
- Benefit = cost savings (VC) (must pay FC)
- So, shut down if TR < VC
- Shut down if P <AVC
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Exit
- cost: revenue loss (TR)
- Benfit: cost saving (TC)
- So exit if TR < TC
- Exit if P < ATC
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Long-run equilibrium
- entry/exit complete
- Remaining firms earn zero economic profit
in the long run, P=minimun ATC
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Perfect Competition
Many firms; no market power; easy entry/exit; identical products; rice, wheat, milk
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Monopoly
only one firm; has market power; difficult entry; electricity, cable TV, tap water
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Monopolistic Competition
many firms; has market power; easy entry/exit; differentiated products; shampoo, cereal, novels, movies, CD's.
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Oligopoly
just a few firms; market power; difficult entry/exit; similar-identical products; car, cigarettes
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D curves for markets
- Monopoly: market D curve
- Competitive firm: MR=P. p set at market p. flat
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Profit maximization for monopoly
- produce Q where MR = MC
- once Q identified, monopolist sets the highest P consumers WTP from D curve
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Profit for M and C firms
profit = (P - ATC) X Q. square on graph
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competitive market equilibrium
P = MC total surplus maximized
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Monopoly equilibrium
P > MR=MC. DWL!
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Monopolistic competition profit maximization
produce Q where MR = MC
Charge markup to D price.
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