Lost Surplus vs. Eliminated Inefficiency
Consider a market where a firm's production creates societal costs not accounted for in its private expenses. On a market diagram, this is represented by a Marginal Social Cost (MSC) curve that lies above the firm's Marginal Private Cost (MPC) curve. Imagine the firm is initially producing at its profit-maximizing quantity, where its MPC equals the constant market price. To correct for the negative side-effects, the firm reduces its output to the socially efficient level, where the MSC equals the market price.
Are the geometric area representing the firm's 'lost producer surplus' from this output reduction and the area representing the 'eliminated deadweight loss' the same? Explain your reasoning by describing what each of these areas represents.
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Social Science
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CORE Econ
Economics
Economy
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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Consider a market for a good where its production generates a negative side-effect on society. A diagram of this market shows quantity on the horizontal axis and price/cost on the vertical axis. It includes an upward-sloping Marginal Private Cost (MPC) curve and an even steeper upward-sloping Marginal Social Cost (MSC) curve. A constant market price line at $340 intersects the MPC curve at a quantity of 120 units, which is the firm's privately optimal output. To achieve the socially optimal outcome, production must be reduced to 80 units, which is the quantity where the price line intersects the MSC curve. Which of the following accurately describes the area on the diagram that represents the total producer surplus the firm gives up by reducing its output from 120 units to 80 units?
Calculating Lost Producer Surplus from an Externality
Deconstructing Lost Producer Surplus
Evaluating a Policy's Impact on Producer Surplus
In a market where production creates a negative side-effect on society, the total producer surplus a firm forgoes by reducing its output from the privately optimal quantity to the socially optimal quantity is equal to the total external cost that is eliminated by this same reduction in output.
In a market model where a firm's production generates costs for society that are not borne by the firm, the firm reduces its output from its privately optimal level (120 units) to the socially efficient level (80 units). The market price is constant. Match each described geometric area on the market diagram with its correct economic interpretation. The diagram includes the market price line, an upward-sloping marginal private cost (MPC) curve, and a steeper upward-sloping marginal social cost (MSC) curve.
Explaining Lost Producer Surplus
Evaluating a Manager's Claim on Production Cut Costs
Consider a firm that produces a good and sells it at a constant market price of $340. The firm is currently producing 120 units, the quantity that maximizes its own profit. However, to account for broader societal impacts, a new regulation requires the firm to reduce its output to 80 units. On a standard cost-quantity diagram, the producer surplus lost by the firm due to this production cut is represented by the area between the price line and the firm's ________________ curve, from 80 to 120 units of output.
Lost Surplus vs. Eliminated Inefficiency