Econ Flashcards
What do Pigovian taxes do?
Correct negative externalities by making firms pay for the damage they cause.
Social optimal quantity
Marginal social benefit= marginal social cost
Marginal social cost
Marginal external cost+marginal private cost (if negative externalities)
Marginal social benefit
Marginal external benefit + marginal private benefit (if positive externalities)
Economic surplus
sum of consumer and producer surplus
private cost borne by who
Producer
Private cost and social cost equal unless
theres an externality
private externalities cause
shortages
coase theorem
if low transaction costs- priv bargaining will result in efficient solution to problem of externalities.
rivalry
one persons consumption of a unit of a good means no one else can consume it.
excludability
anyone who doesn’t pay for a good can’t consume it.
private good
high excludability, high rivalry (big mac)
public good
low excludability, low rivalry (national defense)
common resources
low excludability, high rivalry (forestlands w no property rights)
club good
high excludability, low rivalry (gym membership)
price elasticity of demand
% change in Qd / % change in price
elastic if
PED > absolute value of one
Inelastic if
PED < absolute value of one
Vertical elasticity curve
Perfectly inelastic
as time passes
more elastic it becomes
cross price elasticity
% change in Qd of one good / % change in price of another
cross price elasticity positive
Substitutes
cross price elasticity negative
complements (decrease in Qd)
Income elasticity of demand
% change in Qd / % change in income
Price elasticity of supply
% change in Qs / % change in price
who bears burden of tax if demand curve vertical
consumers
income elasticity of demand positive and greater than one
normal and luxury
income elasticity of demand positive and less than one
normal and necessity
income elasticity of demand is negative
inferior good
price controls can
redistribute income, affect quality, cause queuing, cause discrimination
price floor
above equilibrium
more substitutes
more elastic
negative externality
marginal social cost > marginal private cost
positive externality
marginal social benefit > private benefit
social cost
private cost and external cost
monopsony
one buyer of good/service
natural monopoly
cost structure of industry makes it more efficient for single firm to produce entire market output
Adverse selection (asymmetric info)
before transaction. people with driving dangers more likely to get insurance.
moral hazard (asymmetric info)
after transaction. Knowing they have insurance makes them take more risks.
principal agent problem (asymmetric info)
workers interests and actions may not align with the rules.
monopoly as a market failure
charges too much and produces too little output
solutions to principal agent problem
tipping (makes workers want to perform better), wages and salaries, cameras
Why gov imposes taxes
impose or discourage production, increase money, income redistribution
excess burden
deadweight loss
limitations to coase theorem
coordination issues, bargaining breaks down, high transaction costs
command control approach
govn sets standard and enforces it with a penalty
pig tax
mpb-msb at socially optimal cost
socially optimal
social benefit hits supply line
consumer surplus measures
net benefit from participating in market
NOT result of imposing rent ceiling
some consumer surplus to producer surplus
