Efficiency Allocative The cost to society is the

Efficiency Allocative • The cost to society is the same as the price to the consumer • The price the consumer pays equals the marginal cost of production for the last unit. • P=MC • Also called ‘socially optimal output’ Productive • Production is at the point where price is equal to average total cost • This is the use of resources in the most productive way • P=ATC • Also called ‘fair return point’

Firm vs. Industry • The ‘firm’ is a single company within a given industry • The industry or market is the summation of all the marginal cost curves of the individual firms

Taxes/Tariffs/Subsidies on Producers • Taxes, tariffs and subsidies are used to either encourage or discourage production of a specific good or service • Per-Unit taxes and tariffs are used to discourage, per-unit subsidies are used to encourage production • A tax or tariff placed on producers of a good will increase production cost by adding to the ATC of each unit. Therefore, these shift the S curve to the left, decreasing Q and increasing P. • A per-unit subsidy to producers will lower production costs and lower ATC. Lower ATC will shift the S curve to the right, decreasing P and increasing Q. • Tax Examples: Cigarettes, Gasoline • Subsidy examples: College loans and grants, food stamps

Impact of Tariff and Tax