Exam 2: 7, 10, 11 Flashcards
ECON-105 Exam study
Welfare economics is the study of how
the allocation of resources affects economic well-being
Which of the Ten Principles of Economics does welfare economics explain more fully?
Markets are usually a good way to organize economic activity.
Suppose Larry, Moe, and Curly are bidding in an auction for a mint-condition video of Charlie Chaplin’s first movie. Each has in mind a maximum amount that he will bid. This maximum is called
willingness to pay.
Consumer surplus is
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
Consumer surplus in a market can be represented by the
area below the demand curve and above the price.
A seller’s opportunity cost measures the
amount she is paid for a good minus her cost of providing it.
Producer surplus measures the
benefits to sellers of participating in a market.
Which of the following will cause a decrease in producer surplus?
the imposition of a binding price ceiling in the market
Economists typically measure efficiency using
total surplus
Total surplus is
the total value of the good to buyers minus the cost to sellers of providing the good.
What is an externality?
The uncompensated impact of one person’s actions on the well being of a bystander
Externalities can be what depending on if they are adverse or beneficial?
Positive or negative
What is a private cost?
The cost paid by consumer and the producer
What is an external cost?
The cost paid by bystanders by people other than the consumer and producer
The social cost is
the cost to everyone, private and external
Externalities are
the uncompensated external cost and benefits that fall on bystanders
What is a social surplus?
The consumer surplus, the producer surplus, and the bystander surplus
When there are significant external costs…
the market will not maximize social surplus
What is the Pigouvian tax?
the social costs will bring the supply costs to the socially efficient curve, less people will be incentivized to buy (brings in negative externalities)
External benefits are received by what type of people?
People other than the consumers or producers trading in the market, a benefit to bystanders (ex- flu shot, more social value than private value)
A subsidy is what type of benefit?
Social benefit, brings the market quantity to the socially efficient
What is the Coase theorem?
If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own (some people like owners or residence don’t have bargaining power)
What is the difference between a rival and an excludable?
A rival is one person using something that prevents another person from using it/getting the benefit, an excludable can stop someone from using it
Give an example of each: private goods, common resources, club goods, and public goods.
private: banana, jeans, housing
common: clean water, fish stocks, timber (tragedy of commons)
club: WiFi, satellite TV
public: National Defense, firework displays (free rides/forced riders)
What is the difference between a free and forced rider?
A free rider is someone who gets all the benefits and none of the cost, while a forced rider is someone who is forced to participate in something like taxes or a union
What are some policy options to prevent overconsumption?
- Regulate the use of the resource
- Societal Norms & community shame
- Impose a corrective tax to internalize the externality (hunting/fishing license)
- Auction off permits allowing the use of the resource
The impact of one person’s actions on the well-being of a bystander is called
an externality.
An externality results in
an equilibrium that does not maximize the total benefits to society.
All externalities cause
markets to fail to allocate resources efficiently.
Melissa engages in an activity that influences the well-being of a bystander. In order for Melissa’s activity to give rise to an externality, it must be the case that
Melissa neither pays nor receives any compensation for her activity.
The difference between social cost and private cost is a measure of the
cost of an externality.
Emission controls on automobiles are an example of a
command-and-control policy to increase social efficiency.
The tax on gasoline enhances
efficiency by serving as a corrective device in a market with negative externalities.
The Coase theorem suggests that private solutions to an externality problem
will usually allocate resources efficiently if private parties can bargain without cost.
Abe owns a dog; the dog’s barking annoys Abe’s neighbor, Jenny. Suppose that the benefit of owning the dog is worth $200 to Abe and that Jenny bears a cost of $400 from the barking. Assuming Abe has the legal right to keep the dog, a possible private solution to this problem is that
Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.
Once tradable pollution permits have been allocated to firms,
firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits.
