Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can define marginal social benefit, marginal social cost and the socially efficient quantity. (Guide: “What ‘socially efficient’ means”; Practice Q1)
- I can explain why efficiency is about the size of total surplus, not how it is shared. (Guide: “What ‘socially efficient’ means”)
- I can explain why a perfectly competitive market with all benefits and costs internalised produces where MSB = MSC. (Guide: Figure 1; Practice Q2)
- I can name the sources of inefficiency (market power, negative and positive externalities, asymmetric information, public goods) and say whether each causes too much or too little output. (Guide: “How private incentives lead to inefficient outcomes”; Practice Q6)
Calculation and graphing
- I can find the efficient quantity from a table of MSB and MSC, and from two equations. (Guide: Worked examples 1 and 2; Practice Q4, Q7)
- I can calculate DWL for underproduction and for overproduction, in a table and as a triangle. (Guide: Worked examples 1 and 2; Practice Q3, Q4)
- I can draw a graph with MSB, MSC and Q*, and shade the DWL on the correct side. (Guide: Figure 2; Practice Q5)
Reasoning
- I can explain why a rational firm with market power chooses an output below Q*. (Guide: Worked example 1(d); Practice Q5)
- I can explain why buyers and sellers who weigh only private benefits and costs can reach an inefficient outcome. (Practice Q6)
- I can use cost-benefit analysis to decide whether a policy is worth its cost, and to choose between policies. (Guide: Worked example 2(c); Practice Q7)
All ticked? Move on to Topic 6.2, Externalities, or return to the course roadmap.