chapter 5 Flashcards
demand0side of market failures
Underallocations of resources that occur when private demand curves understate consumers’ full willingness to pay for a good or service
private good
A good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits
private goods are distinguished by ____ and _____
rivalry: means that when one person consumes a product, it is not available for another person to consume
Ex: Garcia purchases water, not available for Johnson to consume
excludability: seller can prevent non buyers from getting the benefits
Public good
government provided
non-rivalry: one person’s consumption of a good does not preclude consumption of good by others
non- excludability: no effective way of excluding individuals
free-rider problem
The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability
what is the socially optimal amount of a public good
MB = MC
cost-benefit analysis
A comparison of the marginal costs of a project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent.
quasi-public good
A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an underallocation of resources.
Explanation: streets and highways: benefit flow beyond the benefit of individual buyer, the market system would underproduce these goods, so to avoid underallocation ; government provides them.
public choice theory
economic analysis of government making, politics, and elections
interest groups
people who share strong preferences for a particular public good may band together into interest groups and use advertisements, mailing, and direct persuasion to convince others of the merits of the public good in question
logrolling
The trading of votes by legislators to secure favorable outcomes on decisions concerning the provision of public goods and quasi-public goods.
convincing someone to say yes if you say yes to what they want
paradox of voting
A situation where paired-choice voting by majority rule fails to provide a consistent ranking of society’s preferences for public goods or public services.
paired choice voting
In the US, pairing occurs when two legislators in the same chamber agree to allow their votes to cancel each other out. Such pairing can occur between members of the same party.
median-voter model
The theory that under majority rule the median (middle) voter will be in the dominant position to determine the outcome of an election.
Alternative voting mechanism to majority rule: quadratic voting
A majority voting system in which voters can express strength of preference by purchasing as many votes as they like at a price equal to the square of the number of votes purchased.
alternative voting mechanisms like quadratic voting are studied by economist interested in the field of -mechanism design-
The part of game theory concerned with designing the rules of a game so as to maximize the likelihood of players reaching a socially optimal outcome.
government failure
Inefficiencies in resource allocation caused by problems in the operation of the government
examples of government failure
principle-agent problem, special interest effect, collective-action problem, rent seeking, political corruption
principal-agent problem
At a firm, a conflict of interest that occurs workers or managers pursue their own objectives to the detriment of the stockholders’ goals.
ex: in business world: manager spending high amount of company money of executive jests and lavish offices, nice for managers but costly for stockholders
in democracy: politicians goals such as reelections, may be inconsistent with pausing their constituents’ nest interest
special interest effect
Any political outcome in which a small group (“special interest”) gains substantially at the expense of a much larger number of persons who each individually suffers a small loss.
occurs when interest group is able to get government to grant money
ex: 10 million subsidy to a group of six drone makers would amount to less than 3 cents person when spread out over US. do drone makers will be happy to spend up to 10 million lobbying in favor of the subsidy while individual taxpayers won’t complain because so little amount, as a result politician doing the biding of a special interest group rather than what be allocatively efficient based on cost benefit analysis
the appeal to government for special benefits at someone else’s expense is called -reek-seeking behavior-
Attempts by individuals, firms, or unions to use political influence to receive payments in excess of the minimum amount they would normally be willing to accept to provide a particular good or service
collective-action problem
The idea that getting a group to pursue a common, collective goal gets harder the larger the group’s size. Larger groups are more costly to organize and their members more difficult to motivate because the larger the group, the smaller each member’s share of the benefits if the group succeeds.
politcal coruption
The unlawful misdirection of government resources, or actions that occur when government officials abuse their entrusted powers for personal gain
