Ch.4 | micro approach to political & economic markets in theory & practice

Question 1

asymmetric information

Answer 1

A situation in which one party involved in an exchange knows more about the commodity being exchanged than the other parties do

Question 2

discount rate

Answer 2

The degree to which we allow the future to influence our current choices; a higher rate means that we place less value on the future than we do on the present

Question 3

externality

Answer 3

The effect of a transaction on a third party that is not directly involved in the exchange

Question 4

free riding

Answer 4

A collective action problem in which individuals have no incentive to contribute to the provision of a public good, since they cannot be excluded from consuming that good even if they fail to contribute

Question 5

incomplete information

Answer 5

A situation in which parties to an exchange or interaction are not fully informed about the resources and preferences of those engaged in the interaction

Question 6

median voter

Answer 6

The voter who is located exactly in the middle of all the voters arrayed on a political spectrum

Question 7

monopoly

Answer 7

A market condition in which a single producer is able to manipulate the price of a commodity by affecting the supply of that commodity in a market

Question 8

monopsony (monopsonists)

Answer 8

A market condition in which a single buyer is able to manipulate the price of a commodity by affecting the demand for that commodity in a market

Question 9

oligopoly

Answer 9

A market condition in which the actions of a few sellers will materially affect price and have a measurable impact on competitors and consumers

Question 10

oligoponists

Answer 10

A cartel of buyers that manipulates price and has a measurable impact on competitors and consumers

Question 11

Pareto optimal

Answer 11

A situation or equilibrium wherein another distribution of resources and efforts cannot benefit one member of society without hurting another and lowering the overall efficiency of the production and consumption of goods, given the mix of prefer­ences in society

Question 11

market failure

Answer 11

A situation in which market exchange fails to allocate societal resources as efficiently as theoretically possible, so that a society produces and consumes less than the optimal levels of goods and services

Question 12

plurality rule

Answer 12

A voting model in which the candidate, policy, or referendum with the most votes wins the election—a winner-take-all system

Question 13

pooling equilibrium

Answer 13

A dilemma caused by incomplete or asymmetric information whereby consumers face difficulties distinguishing among types—good sellers or good products from bad sellers or bad products;

(contrast: see separating equilibrium)

Question 14

price takers

Answer 14

All participants in economic exchange whose actions cannot individually control or manipulate prices; in efficient and competitive markets, all parties to an exchange are price takers and must accept the prices determined by the invisible hand of the price mechanism

Question 15

prisoner’s dilemma

Answer 15

A particular form of a social trap that requires the actors to cooperate and to resist playing their dominant strategies in order to achieve a better collective outcome, although the structure of the interaction pushes each player toward her dominant strategy of noncooperation

Question 16

property rights

Answer 16

Rules defining the ownership of property

Question 17

separating equilibrium

Answer 17

The ability to distinguish among types; a solution to the dilemma created by a pooling equilibrium, in which consumers cannot distinguish good sellers or good products from bad sellers or bad products;

(contrast: see pooling equilibrium)

Question 18

shadow of the future

Answer 18

A concept indicating how much we value the future as compared to the present and how the future affects our present choices;

(contrast: see discount rate)

Question 19

social choice theory

Answer 19

A body of inquiry that studies aggregation mechanisms in search of voting rules that accurately aggregate the preferences of society’s members

Question 20

transaction costs

Answer 20

The costs of negotiating, monitoring, and enforcing the terms of an exchange or a contract

Question 21

uncertainty

Answer 21

A situation in which decision makers have incomplete information about their world, their possible choices, the preferences and possible choices of others, and how multiple decision makers’ choices will interact

Question 22

voting rules

Answer 22

A mechanism that defines the process by which societies decide upon the political commodities they will consume; a wide variety of voting rules are employed around the world