exam III Flashcards
what is the economy compared to
a perpetually spinning object
what will slow the economy down
friction
define externality
prices serve as dynamically efficient signals and incentives which maximize societal welfare, where there are no confounding factors
what do spillover effects influence
the well-being of third parties
social costs=
private costs+external costs
social benefits=
private benefits+external benefits
what do market supply and demand represent
private costs and benefits
define negative externalities
the social cost of a transaction are greater than the private costs
where are costs from negative externalities from
those outside the market
what is an example of negative externalities
pollution, smoking, deforestation
define positive externalities
social benefits of a transaction are greater than private benefits
are positive externalities under or over produced
underproduced
who can enjoy the benefits of positive externalities
people outside of the market
what are examples of positive externalities
internet usage, vaccines
what makes an externality positive or negative
the quality of the good
what will a free market oversupply? what will it undersupply?
negative externalities
positive externalities
what are external costs represented by
S2, or PC+EC
define Pigouvian subsidy
a positive externality-producing good set to equal the external benefit
define Pigouvian tax
a negative externality-producing good set equal to the external cost
what do externalities do
push the market to ideal consumption and production points
what does taxing do
causes a gap between what buyers pay and what price producers chose and depletes DWL
what is rivalry in consumption
if I consume a good, you can’t consume the same good
what does buying something first indicate
a higher willingness to pay
what does increased price signal
the good is more highly valued by society
what is the key distinction of externality
aggregated consumption, not production
define pecuniary
relating to/consisting of money
define pecuniary externality
actions by trading members affect the price paid/received by the third party
profits _________ firms to innovate
incentivize
what will markets fail to do
provide the supply demanded
competition can ______________ innovation
discourage
what is an alternate method to patrons and and copyrights
extending the intellectual property rights
what do intellectual property rights do
give inventors the exclusive legal right to make/use/sell the innovation for a limited time
what are property rights
well-defined, protected, and enforced
define public goods
non-excludable and non-rival
define excludable
those who do not pay are excluded
define rival
one persons use prevents another persons use
give some examples of club goods
security, wifi, concerts
give some examples of public goods
gravity, national defense, disease control
give some examples of common goods
roads, stocked fish, parks
give some examples of private goods
phones, groceries, shoes
- private goods
- common goods
- club goods
- public goods
what is the first rule of econ
there is never enough of anything to fully satisfy everyone
what is the first rule of politics
disregard the first rule of econ
define government failure
gov involvement in the economy leads to less favorable outcomes than what would’ve occurred otherwise
what are three things that may cause a government to be inefficient
bais for reasoning affects voter preference for policy
shared visions cause voters to have flawed perceptions
involvement makes asking for political favors more cost-effective than competing
define rationality
individuals choose options that best advance their personal desires at the least possible cost
what do people do when faced with uncertainty
weight the expected benefits vs expected costs
define expected
perceived possibility
what is a public good problem?
non-excludability which leads to free-riding
define tragedy of the commons
tendency of any non-excludable good to be overused and under-maintained
give an example of command and control
governments imposing shorter seasons due to over hunting/fishing
what is a con of command and control
black markets
who are cultural norms associated with
Elinor Ostrom
what does the enforcement of norms do
prevent tragedy of the commons
where are cultural norms effective
small, self-serving communities
what are cultural norms associated with
coarse theorem
define coarse theorem
transaction costs are low
property rights are clearly defined
what do many governments institute
individually transferable quotas
define cap and trade
the creation of private resources
expected benefit _ expected cost
≥
describe the anti-market basis
people do not understand the invisible hand
people perceive profit as a transfer from people to business while economists recognize it as a matter of progress
what do profits incentive
a reduction in production costs and move resources from less-valued industries
describe anti-foreign policy
people underestimate the benefits of interactions with foreigners
denies free movement, people, and goods
define human welfare
specialization and gains from trade
define economic growth
supply and demand
what do immigrants increase
supply and demand for local goods and services
what does a large increase in labor demand lead to
more jobs and higher wages
describe make-work bias
people equate prosperity with employment, not production
underestimate benefits of conserving labor
individual prosperity is associated with work
what is social prosperity
doing a job/helping others
what are shared vision problems
people see a perfect situation rather that the best solution
define rent-seeking
extraction of uncompensated value from others via the political process without making any contribution to productivity
define rent
unjust profit from mercy holding sacred assets rather than by its improvement
define protectionist
raising barriers to enter for firms that want to compete with each other
define kick-back
increases the odds of getting reelected much more than taxpayers
define GPD
market value of all final goods/service produced within a political region within a year
which country has the largest GDP? how much does it make
US, 20 trillion
what do richer countries usually have
education
life expectations
racial conflict
inequality
well-functioning legal systems
what are used to determine GDP? why?
final goods to avoid double counting
what is the expenditure equation
Y=C+I+G+NX
what does each letter represent in Y=C+I+G+NX
Y- GDP
C- consumption
I- investment
G- government spending
NX- net export-import
the US has a trade ________-
deficit
define trade deficit
goods are imported at a higher rate than they are exported
define per capita
per person
do
which countries have a higher GDP
countries with more people
what are GDP shortcomings? describe them
- governments are in charge of calculating GDP
a high GDP looks good for politicians - trade deficits
seen in most advanced economies - skewed menas
averages can be skewed with income inequality
define real GDP
measures the value of a good to a customer that has been adjusted for inflation
define nominal GDP
expressed in current $ value
define consumer price index
measures the cost of purchasing a bundle of goods at one point in time relative to the cost of purchasing identical goods years later
what is the base year normally set at
100
inflation rate=
%ΔCPI
what are problems that can be run into with CPI
can not account for the changes in the goods people purchase or product quality
what are CPI solutions
chained CPI and GDP deflators
define chained CPI
the changes of goods used in the time period prior
typically reduced yearly inflation estimated by .2-.4 percent
define GDP deflator
accounts for changes in a range price of all goods included in GDP
includes capital goods purchased by the government
RGDP=
NGDP x (100/πindex)
πindex=
cost of bundle/ (base year cost x 100)
%ΔRGDP
%ΔNGDP-%π
%Δ=
Xt-Xt-1/Xt-1
