Exam 2 review
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Exam 2 Review Tuesday November 11 Chapters 6-11
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Exam 2 review
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Exam 2 Review !
Tuesday November 11 Chapters 6-11
7 Government Interventions in the Market
7 Government Interventions in the Market
Minimum Maximum
Tax Subsidy Exports Imports Tariffs
Chapters
6 Government Price Controls 7 Market Efficiency - Surplus 8 Taxes and Subsidies 9 Imports and Exports and Tariffs 10 Externalities 11 Four Types of Goods
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QD = QS
Price
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No Shortage No Surplus
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Demand
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Minimum
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MinimumLoss
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MinimumLoss
Loss
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Loss
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MinimumLoss
Loss
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Loss
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MinimumLoss
Loss
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Demand
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Government Price
Minimum Consumer Loss Producer Gain Loss
Loss
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Demand
SupplyConsumer
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Consumer Surplus Area Before = 125 After = 45 Change = Lose 80
Government Price
Minimum Consumer Loss Producer Gain Loss
Loss
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Price
Quantity
Government Minimum Price
Demand
SupplyConsumer
Surplus
Producer Surplus
Consumer Surplus Area Before = 125 After = 45 Change = Lose 80
Producer Surplus Area Before = 125 After = 165 Change = Gain 40
Government Price
Minimum Consumer Loss Producer Gain Loss
Loss
0
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Government Minimum Price
Demand
SupplyConsumer
Surplus
Producer Surplus
Consumer Surplus Area Before = 125 After = 45 Change = Lose 80
Producer Surplus Area Before = 125 After = 165 Change = Gain 40
Total Surplus Area Before = 250 After = 210 Deadweight Loss = 40
Government Price
Minimum Consumer Loss Producer Gain Loss
Loss
0
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Government Maximum Price
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Demand
Government Maximum Price
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Supply
Government Maximum Price
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Government Maximum Price
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Government Maximum Price
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Government Maximum Price
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Government Maximum Price
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Government Maximum Price
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Government Maximum Price
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Government Maximum Price
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SupplyConsumer
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Loss
Government Maximum Price
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SupplyConsumer
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Loss
Loss
Government Maximum Price
0
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SupplyConsumer
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Maximum
Loss
Loss
Government Maximum Price
0
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0 1 2 3 4 5 6 7 8 9 10
Price
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Demand
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Government Price
Maximum
Loss
Loss
Government Maximum Price
0
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Price
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Demand
SupplyConsumer
Surplus
Producer Surplus
Government Price
Maximum
Loss
Loss
Government Maximum Price
0
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
SupplyConsumer
Surplus
Producer Surplus
Government Price
Maximum
Consumer Gain Producer Loss
Loss
Loss
Government Maximum Price
0
10
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30
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
SupplyConsumer
Surplus
Producer Surplus
Consumer Surplus Area Before = 125 After = 140 Change = Gain 15
Government Price
Maximum
Consumer Gain Producer Loss
Loss
Loss
Government Maximum Price
0
10
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30
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50
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
SupplyConsumer
Surplus
Producer Surplus
Consumer Surplus Area Before = 125 After = 140 Change = Gain 15
Producer Surplus Area Before = 125 After = 20 Change = Loss 105
Government Price
Maximum
Consumer Gain Producer Loss
Loss
Loss
Government Maximum Price
0
10
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100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
SupplyConsumer
Surplus
Producer Surplus
Consumer Surplus Area Before = 125 After = 140 Change = Gain 15
Producer Surplus Area Before = 125 After = 20 Change = Loss 105
Total Surplus Area Before = 250 After = 160 Deadweight Loss = 90
Government Price
Maximum
Consumer Gain Producer Loss
Loss
Loss
Government Maximum Price
Tax
Taxusually on seller
Taxusually on seller
fewer
Taxusually on seller
fewereasier to find
Taxusually on seller
fewereasier to find
shift supply curve up
Tax Liability
Tax Incidence
Tax Liability
Tax Incidence
Who is legally responsible to pay the tax to the
government
Tax Liability
Tax Incidence
Who is legally responsible to pay the tax to the
government
Who actually pays the tax
Just because I have the Tax Liability does not mean that I have
the Tax Incidence
0
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Supply1
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Demand
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Supply2
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Total Surplus Before = 250 After = 90 Change = Loss 160
Supply2
Supply1
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Total Surplus Before = 250 After = 90 Change = Loss 160
Supply2
Supply1
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Supply Shift
Demand
Consumer Surplus
Producer Surplus
Total Surplus Before = 250 After = 90 Change = Loss 160
Supply2
Supply1
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80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Seller Price
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Seller Price
Taxes of 20
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Seller Price
Taxes of 20
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Seller Price
Taxes of 20
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand
Pizza Tax
Buyer Price
Seller Price
Taxes of 20
Supply no tax
Supply with tax
Tax on Supplier of 20 Shift the curve up by 20
• Taxes discourage market activity • Value creation is reduced • Deadweight loss • Buyers and sellers share the burden • Buyers pay more, sellers receive less
Taxes
Subsidy
Subsidyopposite of tax
Subsidyopposite of tax
shift supply curve down
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Supply with no subsidy
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
Subsidy
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Sellers receive 70
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
Subsidy
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Sellers receive 70
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
Buyers pay 30
Subsidy
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Sellers receive 70
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Subsidy of 40
Buyers pay 30
Government pays 40 in subsidy
Subsidy
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Supply with subsidy
Demand
Supply with no subsidy
Sellers receive 70
Subsidy Analysis
Subsidy to Seller with shift Supply curve down by the amount of the subsidy
Government spends 280 to get 240 gain
Deadweight loss of 40Subsidy of 40
Buyers pay 30
Government pays 40 in subsidy
Subsidy
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy AnalysisSellers increase
surplus from 125 to 245
Buyers increase surplus from 125
to 245 Total increase
from 250 to 490, or 240 gain
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
Government pays 280 in subsidy
Surplus increases by 240
Deadweight loss of 40
Sellers increase surplus from 125
to 245 Buyers increase
surplus from 125 to 245
Total increase from 250 to 490,
or 240 gain
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis1. If the
government wanted the price
to be 10, how large would the
subsidy be?
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis1. If the
government wanted the price
to be 10, how large would the
subsidy be?
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis1. If the
government wanted the price
to be 10, how large would the
subsidy be?
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis1. If the
government wanted the price
to be 10, how large would the
subsidy be?
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis1. If the
government wanted the price
to be 10, how large would the
subsidy be?
80
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis1. If the
government wanted the price
to be 10, how large would the
subsidy be?
2. How much would the total
cost of the subsidy be?
80
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis1. If the
government wanted the price
to be 10, how large would the
subsidy be?
2. How much would the total
cost of the subsidy be?
80
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis1. If the
government wanted the price
to be 10, how large would the
subsidy be?
2. How much would the total
cost of the subsidy be?
80
80 x 9 = 720
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis1. If the
government wanted the price
to be 10, how large would the
subsidy be?
2. How much would the total
cost of the subsidy be?
80
80 x 9 = 720
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Subsidy Analysis1. If the
government wanted the price
to be 10, how large would the
subsidy be?
2. How much would the total
cost of the subsidy be?
80
80 x 9 = 720
Exports
Exportsselling domestic
produced goods in another country
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Total Sales
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Total Sales
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Total Sales
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
Exports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
Exports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
Exports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
Exports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
Exports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
Exports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Domestic Buyers pay a higher price lose B to Sellers
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
Exports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Domestic Buyers pay a higher price lose B to Sellers
Domestic Sellers gain D from
world market and gain B from domestic buyers
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
Exports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Domestic Buyers pay a higher price lose B to Sellers
Domestic Sellers gain D from
world market and gain B from domestic buyers
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
Exports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Domestic Buyers pay a higher price lose B to Sellers
Domestic Sellers gain D from
world market and gain B from domestic buyers
Export Analysis
Domestic Price
World Price
New Demand Domestic & World
“kink”
Domestic Sales Total Sales
Exports 7 - 3 = 4
Consumers Lose Producers Win
• local consumers lose - higher price • local producers win - higher price • no deadweight loss • increase in value to producers
Exports
Imports
Importsbuying foreign
produced goods in your home country
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Total Sales
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Total Sales
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Total Sales
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
Imports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
Imports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
Imports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
Imports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
Imports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
Imports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Domestic Buyers pay a lower price
gain D from world sellers
and gain B from domestic sellers
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
Imports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Domestic Buyers pay a lower price
gain D from world sellers
and gain B from domestic sellers
Domestic Sellers lose B to Buyers
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
Imports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Domestic Buyers pay a lower price
gain D from world sellers
and gain B from domestic sellers
Domestic Sellers lose B to Buyers
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
Imports 7 - 3 = 4
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
A
B
C
D
Domestic Buyers pay a lower price
gain D from world sellers
and gain B from domestic sellers
Domestic Sellers lose B to Buyers
Import Analysis
Domestic Price
World Price
New Supply Domestic & World
“kink”
Domestic Sales Total Sales
Imports 7 - 3 = 4
Consumers Win Producers Lose
• local consumers win - lower price • local producers lose - lower price • no deadweight loss • increase in value to consumers
Imports
Tariff
Tarifftax on imports
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
World Price
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
World Price
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
World Price
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
World Price
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
World Price
Domestic Price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
World Price
Domestic Price
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
World Price
Domestic Price
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
World Price
Domestic Price
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
A
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
A
BTariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
A
BC Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
A
BC D Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
A
BC D E Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
A
BC D E F Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
A
BC D E F
G
Tariff of 10
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Demand
Domestic Supply
Tariff Analysis
Price with Tariff
World Price
Domestic Price
A
BC D E F
G
Tariff of 10
Consumers Lose Producers Win
Government Wins Deadweight Losses
• local consumers lose - higher price • local producers win - higher price • deadweight loss • government wins tariff revenue
Tariff
Favor
Favorvariety
lower costs competition
ideas
Oppose
Opposejobs
security infant
fairness
7 Government Interventions in the Market
7 Government Interventions in the Market
Minimum Maximum
Tax Subsidy Exports Imports Tariffs
Externality
ExternalityBenefits or Costs to someone else
- Third Party- !
Positive or Negative
Negative Externality
Negative Externality
Pollution Second-Hand Smoke
Litter Congestion Boom Cars
Negative Externality
Negative Externality
Too much of the good is produced because
someone else is paying part of the costs
Positive Externality
Positive Externality
Trust Ideas
Improvements
Positive Externality
Positive Externality
Too little of the good is produced because
producer doesn’t receive all the benefits
Internalize the Externality
Internalize the Externality
altering incentives so people consider the effects
of their actions
Government Intervention
Government Intervention
Subsidize Positives !
Tax and Regulate Negatives
Government Regulation
Government Regulation
Command and Control Incentive-Based Optimal level of pollution? Coupons to pollute
Externalities & Market Failures
Externalities & Market Failures
Lack of Property Rights
Property Rights reduce
contention and create wealth
Transaction Costs
Transaction Costs
Costs in time and resources to negotiate and
enforce an agreement
Four Types of Goods
Four Types of Goods
Private Goods Public Goods
Common Resources Club Goods
Private Goods
Private GoodsGoods that are excludable and rival in consumption.
!
Can exclude others If I consume, you cannot
Excludable
ExcludableCan people be prevented
from using the good? !
Yes No
Rivalry in Consumption
Rivalry in Consumption
Can one person’s use of a good reduce others use?
!
Can two people consume at the same time without
reducing?
Public Goods
Public GoodsGoods that are neither excludable
nor rival in consumption. !
Cannot exclude Everyone can consume without
reducing amount
Free Rider
Free Rider
a person who receives a benefit
but does not pay for it
Common Resources
Common ResourcesGoods that rival in
consumption but are not excludable
!
Cannot exclude others If I consume, you cannot
Tragedy of the Commons
Tragedy of the Commons
If everyone owns it, no one owns it
Tragedy of the Commons
If everyone owns it, no one owns it
Privatize the commons
Club Goods
Club GoodsGoods that are excludable
but not rival in consumption !
Can exclude others Everyone can consume
without reducing amount
Excludable?
Excludable?Can people be prevented from consuming?
Yes
Excludable?Can people be prevented from consuming?
Yes
No
Excludable?Can people be prevented from consuming?
Rival in Consumption?
Yes
No
Excludable?Can people be prevented from consuming?
Rival in Consumption?
Yes
No
Excludable?
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes
Yes
No
Excludable?
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Snickers Bar
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Snickers Bar Pizza
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Snickers Bar Pizza
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Common Resources
Snickers Bar Pizza
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Common Resources
Snickers Bar Pizza
Fish in Ocean
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Common Resources
Snickers Bar Pizza
Fish in OceanAir
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Common Resources
Public Goods
Snickers Bar Pizza
Fish in OceanAir
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Common Resources
Public Goods
Snickers Bar Pizza
Fireworks National DefenseFish in Ocean
Air
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Common Resources
Club Goods
Public Goods
Snickers Bar Pizza
Fireworks National DefenseFish in Ocean
Air
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Common Resources
Club Goods
Public Goods
Snickers Bar Pizza
Satellite TV
Fireworks National DefenseFish in Ocean
Air
Is it reduced when one person consumes?
Can people be prevented from consuming?
Rival in Consumption?
Yes No
Yes
No
Excludable?
Private Goods
Common Resources
Club Goods
Public Goods
Snickers Bar Pizza
Satellite TVPaintings
Fireworks National DefenseFish in Ocean
Air
Is it reduced when one person consumes?
Can people be prevented from consuming?
