Economics Chapter 7

market efficiency and government intervention

Willingness to pay -- the maximum amount a consumer is willing to pay for a product
consumer surplus -- the difference between a consumer's willingness to pay for a product and the price that he or she pays for the product
willingness to accept -- the minimum amount a producer is willing to accept as payment for a product; equal to the marginal cost of production
producer surplus -- the difference between the price a producer receives for a product and the producers willingness to accept the product
total surplus -- the sum of consumer surplus and producer surplus
market failure -- a situation in which a market fails to be efficient because of external benefits, external costs, and perfect information, or in perfect competition
deadweight loss -- the decrease in the total surplus of the market
deadweight loss from taxation -- the difference between the total burden of a tax and the amount of revenue collected by the government
excess burden of a tax -- another name for deadweight loss

Government intervention in a market without externalities prevents consumers and producers from executing beneficial transactions, meaning that intervention reduces the total surplus of the market and causes and efficiency.

The total surplus of a market equals the sum of consumer surplus and producer surplus.
In a market that meets the four efficiency conditions (no external cost, no external benefits, perfect information, perfect competition), a market equilibrium maximizes the total surplus and is therefore efficient.

Price controls reduce the total surplus of a market because they prevent mutually beneficial transactions.

Quantity controls (like licensing and import restrictions) decreased consumer surplus and the total surplus of the market.

A tax on a good will be shifted forward onto consumers and backward onto input suppliers.
Because a tax causes people to change their behavior, the total burden of the tax exceeds the revenue generated by the tax.