Econ Exam #2 (Micro) Flashcards
Price Controls, Taxes, Welfare; Public Goods; Externalities; and Poverty, Information, and Insurance/Risk (130 cards)
1
Q
What are prices?
A
Prices are signals that guide the allocation of society’s resources.
2
Q
What is Michael Sandel’s theory about price regulation?
A
Once a good’s price changes the good’s ethical and moral standards, the good should no longer be able to hold a price value. Ex: human life, organ donation, good grades in school, citizenship are things people obtain without having to be/get paid. Once these goods/services get priced, the work it took to get them are no longer valued the same.
3
Q
What is the difference between Market Economies and Societies?
A
Market Economy uses markets to organize allocated resources while Market Society is a world where everything is for sale/has a price.
4
Q
What are the two main Government Policies that alter the private market outcome?
A
Price Controls (ceilings/floors) and Taxes
5
Q
What is a Price Ceiling? Give a common example.
A
Legal Maximum & Apartment Rent
6
Q
What is a Price Floor? Give a common example.
A
Legal Minimum & Minimum wage
7
Q
What are Taxes?
A
Buyers and sellers pay a specific amount on each unit bought/sold.
8
Q
How do Price Ceilings affect market outcomes?
A
PCs act as binding constraints below the equilibrium and create shortages in the market.
9
Q
What is the issue with shortages and rationing?
A
Who gets what? There are rationing mechanisms like lines and lotteries; however, these often fail due to discrimination, unfair treatment, and inefficient goods going to the highest value user.
10
Q
True or False: Prices as the rationing mechanism “work.”
A
True
11
Q
How do Price Floors affect market outcomes?
A
PFs act as binding constraints above the equilibrium and create surpluses in the market. For ex: price floors in the market for unskilled workers often leads to a labor surplus (unemployment) due to more labor needed than demanded.
12
Q
Why do governments levy taxes on many goods & services?
A
To raise revenue for goods like national defense, public schools, etc.
13
Q
Who can be taxed?
A
Buyers or sellers.
14
Q
How can good’s be taxed monetarily?
A
The tax can be a percentage of the good’s price or a specific amount for each unit sold (per-unit).
15
Q
What does a tax on buyers do to the demand curve?
A
A tax on buyers shifts the demand curve down by the amount of the tax.
16
Q
What is the Tax Incidence?
A
The TI is a measurement of how the burden of tax is shared.
17
Q
What does a tax on sellers do to the price of a good/service?
A
A tax on sellers makes the price of G/S more expensive for the same quantity.
18
Q
How do taxes affect prices differences between buyers and sellers?
A
A tax drives a wedge between the price buyers pay and the price sellers receive.
19
Q
Who will bear the burden of a tax?
A
This answer depends on how responsive buyers and sellers are to a price change. Responsiveness = elasticity for economists.
20
Q
What do different elasticity curves look like?
A
Relatively inelastic curves are steep and short in change. On the other relatively elastic curves are flatter in nature and longer wider in change.
21
Q
Who bears more of a burden when inelasticity of demand is higher than the inelasticity of supply?
A
The buyer
22
Q
True or False: Supply is steeper/less elastic than demand.
A
False - Supply is flatter/more elastic than demand.
23
Q
Who bears the bigger burden when supply is more inelastic than demand?
A
The sellers
24
Q
What is Welfare economics?
A
WE is the study of how the allocation of resources affects economic well-being.
25
What are the three main aspects of welfare economics? (CPTS)
Consumer, Producer, and Total surplus
26
What is WTP?
The willingness to pay is the maximum amount the buyer will pay for a given quantity.
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What does WTP measure?
The WTP measures buyers' "value" in a good/service (satisfaction/utility).
28
What is Consumer Surplus (CS)?
CS is the amount a buyer is willing to pay minus what the buyer actually pays.
CS = WTP - P where P is price paid.
29
CS Example:
Suppose WTP = $90
Suppose P = $80
What is the consumer surplus?
CS = $90-$80 = $10 added benefit
30
Where is CS in relation to the demand curve?
CS is the area BELOW the demand curve and ABOVE the price.
Formula: A = 1/2 (base x height)
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CS Graph Example
WTP = $60
P = $30
Quantity at P = 15
What is the consumer surplus?
CS = ((60-30) x 15) x 1/2
CS = $225 net benefit
32
How do price changes affect CS?
Some area from producer surplus transfers to consumer surplus as additional cs to initial customers. Additionally, cs to new consumers (from more demand) is added.
33
What is Cost?
Cost is the value of everything a seller must give up to produce a good (opp costs).
34
True or False: A seller will only produce and sell the good if the P is equal to or more than the cost.
True
35
What is Producer Surplus (PS)?
PS is the amount a seller is paid for a good minus the seller's cost.
PS = P - Cost
where P is price paid
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PS Example
Suppose P = $40
Seller's Cost = $30
Q = 15
PS = $40-$30 = $10 of producer benefits
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PS Graph Example
P = $40
S = $15
Q = 25
PS = ((40-15) x 25) x 1/2
PS = $312.50 of producer benefits
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How do price changes affect PS?
Some consumer surplus transfers to producer surplus when the price changes. This is known as the additional producer surplus to initial producers. Additionally, more producer surplus available from greater supply is from new producers.
39
What do CS, PS, and TS measure?
CS = value to buyers - amount paid
PS = amount paid - cost to seller
TS = CS + PS
40
True or False: The market outcome if inefficient.
False
41
What is efficient or inefficient compared to the market equilibrium?
Do not make amount more than the equilibrium as they are inefficient.
Continue to make amount less than the equilibrium until they reach PE as this is efficient production.
42
True or False: The government cannot raise total surplus in a competitive market.
True. If you produce less or more there is less surplus. Max surplus is the best outcome and no one can change it.
43
What is Laissez faire?
Literally allow them to do.
This is the notion that government should not interfere with market.
44
What is deadweight loss?
Goods that could be made but shouldn't be.
45
True or False: More elasticity means more deadweight loss.
True
46
What happens when tax is doubled?
The DWL increases by roughly 4 times, and the revenue begins to decrease! This proves the law of demand.
47
True or False: Higher taxes guarantee higher revenue.
False: high taxes do NOT guarantee higher revenue. In fact, the higher up the tax reaches, the more revenue lost from the original tax-enforcer. This is also due to the law of demand.
48
What goods can be consumed without payment?
Public goods, like parks, national defense, clean air, and water are all provided by the government.
49
What are the important characteristics of goods?
Excludability: a person can be prevented from using a good
Rivalry in Consumption: one person's use diminishes others usage
50
What happens to private decisions when markets do not "work?"
inefficient outcomes
51
What are the characteristics of private goods? Provide examples.
Rivalrous and excludable (pizza, latte, etc.)
52
What are the characteristics of club goods/natural monopoly? Provide examples.
Excludable and non-rivalrous (cable tv, fire protection, etc.)
53
What are the characteristics of common resources? Provide examples.
Rivalrous and non-excludable (fish in the ocean, the environment, etc.)
54
What are the characteristics of public goods? Provide examples.
Non-rivalrous and non-excludable (national defense, tornado sirens, etc.)
55
What problem are public goods subject to?
The Free-Rider problem
56
What is the Free Rider problem?
A free rider is a person who receives the benefit of a good but doesn't pay for it. The good is NOT provided even if buyers collectively value the good higher than the cost of providing it.
57
What is the government's role in public goods?
The government's role regarding public goods is that it must provide the good. In specific, if the benefit is greater than the cost, the government should provide the good and pay for it by taxing people who benefit.
58
What is the Cost-benefit analysis?
The CBA is a study that compares the costs and benefits of providing a public good. It is incredibly difficult to measure the benefits of a public good because the cost is usually upfront. The CBA is often imprecise.
59
What does economist Tyler Cowan have to say about public goods?
The government is spending too much on private benefits to the point that investment and spending on national public goods is falling (roughly <19% compared to the 80s). Cowan argues that the consequences could be serious and that if the government does not provide the good, it won't get done ever! (ex: 8 lane collapse into the Mississippi River.)
60
What are common resources, and what are their characteristics?
Common resources are "open-access resources." Because they are non excludable, CRs cannot prevent free riders. Additionally, CRs are rivals in consumption as each persons use reduces others ability to use it (ex. conch shells from the ocean.)
61
What is the government's role in regards to common resources?
The government's role is ensuring common resources are not overused.
62
What is Garrett Hardin's 1968, "The Tragedy of the Commons?"
Hardin argues that the private incentives (using land for free) outweigh the social incentives (using it carefully) leading to an inevitable result of resource depletion (unusable land).
63
What causes the tragedy of the commons?
Externalities. People neglect external costs resulting in over usage of a good/service.
64
Describe the following policy options to prevent overconsumption of common resources:
Command and Control Approach:
Internalize the externality:
Auction off permits allowing the use of the resource:
Convert to a ____ good.
Command and Control Approach - (regulate use of the resource)
Internalize the externality - (impose a corrective tax)
Auction off permits allowing the use of the resource: (pollution permits)
Convert to a private good.
65
Public goods tend to be ____, while common resources tend to be ____.
under-provided, over-consumed
66
Why do problems of under-providing and over-consuming occur?
Property rights are not well established.
67
What makes an efficient market?
Competitive markets are efficient, maximize total surplus, and "work" to allocate. Efficient markets have perfect information and NO market failure.
68
What is market failure?
When the market fails to allocate society's resources efficiently.
69
What does market failure cause?
MF causes market power in which a single buyer or seller has substantial influence on market price.
70
True or False: Externalities are the compensated impact of a market exchange on the well-being of a bystander.
False: Externalities are the uncompensated impact of these exchanges.
71
What are other common names for externalities?
Spillover, third party effects
72
True or False: Governments can sometimes improve market outcomes.
True
73
Are externalities negative or positive?
Externalities can be both negative and positive and arise from self-interested buyers and sellers that neglect the external costs or benefits of their actions.
74
True or False: The market equilibrium maximizes consumer and producer surplus.
True.
Supply shows the private Opp costs and the willingness to sell.
Demand shows the private value and the willingness to pay.
75
What is the social cost?
The SC is the private marginal cost and the external cost.
76
What is the external cost?
The EC is the negative externality costs.
77
Do corrective taxes have deadweight loss?
NO
78
What does social value include with a positive externality?
It includes the private value (willingness to pay/benefit) and the external benefit (the value of the positive impact on bystanders).
79
What is an example of a positive externality?
Government placing a $10 subsidy on getting a flu-shot. This provides the incentive to get vaccinated and protect others as well as yourself.
80
If there is a negative externality, the market quantity is ____ than socially desirable creating a ____.
larger, surplus
81
If there is a positive externality, the market quantity is _____ than socially desirable creating a ______.
smaller, shortage
82
What does it mean to internalize the externality?
This means altering incentives, so people consider the external effects of their actions.
83
When market participants must consider the social costs or benefits, the market equilibrium is _____ to the social optimum.
equal (=)
84
What do command-and-control policies do? Hint: "Don't do this! Do that instead!"
These policies regulate behavior directly, e.g. limits on quantity of pollution emitted, tech requirements, immunization requirements.
85
What do market based policies provide?
These policies provide incentives to private decision-makers to change their behaviors, e.g... corrective taxes & subsidies as well as tradable pollution permits.
86
How do corrective taxes/subsidies work?
They align private and social interests (incentives). Corrective taxes differ from other taxes/subs because they don't distort incentives or the market. Instead, corrective taxes/subsidies result in more efficient markets because they have NO DWL!
87
The ideal corrective tax = _____
external cost
88
The ideal corrective subsidy = _______
external benefits
89
What is the point of tradable pollution permits?
They are issued with a face "pollution value" to create incentives to reduce pollution output.
90
Is there a fixed amount of pollution permits? (inelastic supply)
Yes
91
Firms with ____ abatement costs ____.
higher, buy
92
Firms with _____ costs _____ and ____.
lower, abate, sell
93
What are the goals of pollution permits?
Reduce negative externalities (pollution), and provide firms with efficient outcomes: firms with lowest abatement costs reduce the most pollution!
94
Comand Control (CC): regulation; ______
Tech requirement
95
Market Based: corrective tax; _____
tradable pollution permits
96
What are some private solutions to externalities?
Moral codes and social sanctions (Golden Rule).
Charities that lobby for changes in behavior (Sierra Club)
Contracts between market participants and the affected bystanders (ex: train tracks & farming land = fence line controversies)
97
The Coase Theorem states that if private parties can costlessly ____ over the allocation of resources, they can solve the externalities problem ____ without government intervention.
bargain, on their own
98
Why do Private Solutions not always work?
Transaction Costs: costs incurred in the process of agreeing to and following through on a bargain.
Stubbornness: even in a beneficial agreement is possible, each party may hold out for a better deal.
Coordination problems: if # of parties are very large, coordinating them may be costly, difficult, or impossible.
99
Poverty is the income below that needed for a _______.
"basic standard of living."
100
What is the poverty line?
A number
101
Mollie Orshansky based her poverty assumptions on a ______
Healthy diet.
102
The poverty rate is expressed as a what, and describes who?
percentage of people below the poverty line.
103
The nation's official poverty measure is based on what?
cash resources only
104
The Supplemental Poverty Measure is based off of what?
cash resources and noncash benefits from government programs, taxes, etc.
105
For both poverty measures, individuals are considered in poverty if the resources they share with others in the ______ are not enough to meet basic needs.
household
106
If the SPM is ____ than the official rate, the benefits/programs are working to reduce poverty rates.
lower
107
The official poverty measure assumes all individuals residing together ____ income, while the SPM adds additional family members later.
share
108
The official measure is how many times the cost of a minimum food diet from 1963 in today's prices?
3 times
109
True or False: the official poverty rate is the same nationwide.
True
110
True or False: the SPM is the same nationwide.
False - the SPM is based off several factors like place of residence, mortgage, etc.
111
What is income inequality, and how is it measured?
A distribution of income is measured by the Lorenz Curve in quintiles or five 20% chunks.
112
Wealth inequality is _____ than income inequality!
Greater
113
What are some explanations for rising income inequality?
Changing of household/family structure, changing labor markets (more college degrees, more superstars like Taylor Swift), comparisons over time (fringe benefits), and globalization in which jobs with lower skill sets like manufacturing/textiles left the US forcing a loss of jobs for lower educated citizens.
114
What is redistribution?
The redistribution of income from higher level incomes to lower-level income households happens often through tax policies like the progressive tax system (% of taxes is higher for higher income holders).
115
Minimum wage laws, assistance to the poor (TANF, SNAP, Wick), EITC - negative income tax are all what kind of policy?
Policies aimed at fixing income inequality.
116
What is a poverty trap?
benefits and incentives that essentially cycle and trap poor households in poverty.
117
World Bank states that the global poverty rate is ____
$1.90 a person OR $2.15 a person a day.
118
The US poverty line is at what dollar amount per day?
$17
119
What is the measure of inequality formula?
Income of the richest 20% of the population divided by the income of the poorest 20%.
120
Perfect competition assumes perfect information. What does imperfect information intail?
Buyer, seller, or both are uncertain of qualities of what is bought/sold. Markets like used car sellers, real-estate, and inspections often fall victim to this.
121
How can the government reduce the risk of imperfect information?
FDA approved Labels, check references/trial employment when hiring, offer money-back guarantees, or bank loans.
122
What is a money-back guarantee?
warranty; service contract
123
What is part of a bank loan?
credit check; cosigner, collateral.
124
Asymmetric Information is a situation where either the buyer or seller has ____ information than the other, about what is being exchanged. In other words, they have different access to relevant information.
more (ex: insurance buyers)
125
Adverse Selection: people with _____ risk than "average" seek out the insurance to cover the risk.
higher; for example, people with known extended family risk of cancer would more than likely have cancer insurance.
126
Moral hazard is when one takes on a risk while believing he or she will not have to _____ of the consequences to the risk outcome.
bear the burden; people engage in riskier behavior than they would if they didn't have the insurance. Common occurrences includes financial industries, banking investments, etc.
127
What insurance industry policies reduce adverse selection and/or moral hazard?
Home owner's insurance (fire extinguishers, smoke detectors); auto insurance (driving record, deductibles); and medical insurance (deductibles, copayment, coinsurance).
128
Unemployment Insurance, Deposit Insurance, Workers' Comp insurance, and the Affordable Care Act (2010) are all what kind of policies?
Government and Social insurance policies
129
Mortgage/banking/finance industries commonly face issues of moral hazard as they often believe they are "too big to fail." What is an example of this event?
The 08/09 economic crash. There was a misunderstanding in the value of the housing markets as well as NINJA mortgages that required no jobs, insurance, or assets to receive loans. Both situations caused economic failure.
130
