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eco105 > eco105: 11-12 > Flashcards

eco105: 11-12 Flashcards

1
Q

Negative externalities

A

costs to society from your private choice that affect others, but that you do not pay

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2
Q

Social costs =

A

private (opportunity costs) + external (opportunity) costs

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3
Q

Positive externalities

A

benefits to society from your private choice that affect others, but that others do not pay for

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4
Q

Social benefits =

A

private benefits + external benefits

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5
Q

Free riders

A

people who consume products or services without paying

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6
Q

Why do businesses produce too few products and services with positive externalities

A

Because free riders do not have incentives to pay us for the external benefits

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7
Q

When do externalities occur?

A

when clear property rights are missing

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8
Q

What happens without property rights

A

you have no incentive to produce for exchange because customers could take your work for free

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9
Q

How is the tragedy of the commons a negative externality problem

A

Adding your cow/sheep to the commons to eat the grass makes it harder for other animals to find grass to eat

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9
Q

Tragedy of the Commons

A

The tragedy of the commons was the overuse and depletion of the resource, the destruction of a common good

The grassland was overused and the grass would not regrow

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10
Q

How does the invisible hand help markets

A

helps markets coordinate private smart choices to be smart choices for society as a whole when prices adjust to reflect all costs and all benefits

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11
Q

What do economists think about pollution?

A

some level of pollution is “efficient”; there is a smart choice that balances the costs of a lower standard of living against the benefits of lower pollution

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12
Q

Efficient pollution

A

balances the additional environmental benefits of lower pollution with the additional opportunity costs of reduced living standards

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13
Q

Marginal social cost

A

marginal private cost (MC) plus marginal external cost

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14
Q

The rule for an efficient combination of output and pollution

A

Choose the quantity of output where marginal social cost = marginal social benefit (MSC = MSB)

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15
Q

What happens to social costs when there are negative externalities

A
  • social costs are greater than private costs
  • marginal social cost = marginal private cost directly paid by producers (MC) + marginal external cost imposed on others
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16
Q

Marginal social benefit

A

marginal private benefit (MB) plus marginal external benefit

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17
Q

What happens to social benefits when there are positive externalities

A
  • Social benefits are greater than private benefits
  • marginal social benefit = marginal private benefit directly received by consumers + marginal external benefit enjoyed by others
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18
Q

Market outcome

A

the intersection of the marginal private benefit and marginal private cost curves

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19
Q

Smart social choice

A

intersection of the marginal social benefit and marginal social cost curves

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20
Q

The rule for a smart social choice

A

choose the quantity of output where marginal social cost = marginal social benefit

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21
Q

How do governments support the invisible hand

A

set the environmental rules of the game in a way that aligns smart private choices with smart social choices → Create property rights (pollution laws)

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22
Q

two policies that force polluters to pay the cost of preventing or cleaning up the external damage they cause to others

A

Carbon Taxes and Cap-and-Trade System

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23
Q

Carbon tax

A

emissions tax on carbon-based fossil fuels

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24
Emissions tax
tax to pay for external costs or emissions
25
A smart carbon tax is set at
an amount equal to the marginal external cost of the damage associated with the product
26
Internalize the externality
transform external costs into costs the producer must pay to the government
27
Cap-and-trade system
system that limits the quantity of emissions businesses can release into environment. (e.g businesses must have permits to pollute)
28
common objection to the cap-and-trade system
it allows businesses to “buy a license to pollute”
29
How does the carbon tax work
anyone using energy pays the tax up front A carbon tax makes the cost of a negative externality directly obvious to consumers and businesses
30
How does a cap-and-trade system work
businesses pay initially for emissions permits, but consumers pay eventually as the additional cost is passed on in higher prices for products and services The cost of emissions permits in a cap-and-trade system are far less obvious to the final consumer
31
3 shared benefits government policies to internalize the externalities of pollution have
1. As carbon-based energy becomes more expensive, less carbon-based energy will be consumed– the law of demand applies: when something gets more expensive, people economize on its use and look for substitutes 2. Carbon taxes and emissions-permit auctions raise revenues that can be used by government to repair the environmental damage, or for other environmentally friendly initiatives 3. Higher carbon-based energy prices makes solar, wind, and hydro power more competitive, and encourage businesses to search for alternative energy sources
32
Public goods
provide external benefits consumed simultaneously by everyone; no one can be excluded
33
Free-rider problem
markets underproduce products and services with positive externalities
34
why do markets avoid producing public goods
no business can make a profit for them
35
How can a market fail due to positive externalities
Markets underproduce products and services with positive externalities: For the socially best quantity output, the market-clearing price is too high for buyers to be willing to buy and too low for sellers to be willing to supply
36
2 policies that get everyone to voluntarily choose the quantity of output where marginal social benefit = marginal social cost
subsidies and public provision
37
Subsidy
payment to those who create positive externalities, opposite of taxes
38
smart subsidy =
marginal external benefit
39
What does a subsidy do to suppliers
increases supply
40
Public provision
provision of products or services with positive externalities, financed by tax revenue
41
When do governments resort to public provision
when positive externalities are widespread and important for citizens, and/or when it is difficult to collect revenues from users
42
Input markets
businesses buy from households the inputs they need to produce products In exchange, businesses pay households wages, interest, rent and other money rewards (households sellers, businesses are buyers)
43
Output markets
businesses sell their products to households In exchange, households use the money they have earned in input markets to pay businesses for these purchases (households are buyers, businesses sellers)
44
Labour
price is the wage you receive, quantity is the number of hours you worked; determined by marginal revenue product
45
Capital
physical or financial resources used to produce value in an economy determined by present value
46
Land
you can rent out land to get income; determined by economic rent
47
Flow
amount per unit of time, income is a flow
48
Stock
fixed amount at a moment in time, wealth is a stock
49
Income is what you ___, while wealth is what you ___
earn, own
50
Entrepreneurs' Income
Economic profits, aka reward for innovation and risk-taking
51
Income depends on
prices and quantities, which depend on demand and supply (in input markets)
52
in an input market what are businesses and what are households
Businesses are now demanders and households are the suppliers
53
What must a business do to hire any input
a business must pay a price that matches the best opportunity cost of the input owner
54
Derived demand
demand for output and profits businesses can derive from hiring labour
55
Marginal product
additional output from hiring more unit of labour Count only additional benefits and additional costs
56
Diminishing marginal productivity
marginal product is decreasing as the input increases holding other inputs constant
57
Marginal revenue product
additional revenue from selling output produced by an additional labourer
58
Marginal revenue product formula
marginal product x price of output
59
Marginal revenue products ___ as businesses add more workers
diminish
60
Recipe for Profits for Hiring Inputs
Hire additional inputs when marginal revenue product is greater than marginal cost
61
Present value
current value of a future sum of money
62
Present value formula
Amount of Money Available in n years/(1 + interest rate)^n
63
If the present value is greater than the price of the investment
smart choice
64
Discount
reduction of future revenues for forgone interest
65
Economic rent
income paid to any input in relatively inelastic supply
66
For inputs (like land) in inelastic supply, ___ output prices cause ___ input prices (economic rents)
high, high
67
Average market income for all Canadian families in 2010
$63.4K
68
One way statisticians measure inequality
calculating what percentage of total income earned in Canada is earned by each quintile
69
Human capital
economic value of a worker's experience and skills
70
Low-income families
defined as those who spend at least one-fifth more of their income than the average family on the basic necessities of food, shelter and clothing
71
Progressive taxes
tax rate increases as income increases
72
Regressive taxes
tax rate decreases as income increases
73
Proportional (flat-rate) taxes
tax rate is the same regardless of income
74
Marginal tax rate
rate on additional dollar of income
75
Transfer payments
payments by government to households
76
conservative politician: taxes
oppose progressive taxes and transfers because they believe the efficiency of markets is more important for generating the economic prosperity that will help the poor
77
left-leaning politician taxes
favour progressive taxes and transfers because they believe equal outcomes are more important than efficiency
78
Effects of Income Redistribution on Incentive
reduces the incentives you have to provide inputs and produce outputs

eco105 (3 decks)

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