Exam questions Flashcards
Why might incentives not be effective at distributing resources efficiently?
- the free rider problem
- the existence of merit and demerit goods
Why might incentives be effective at distributing resources efficiently?
incentives perform the rationing and signalling functions.
what is the rationing function?
the function of the price mechanism that ensures that the quantity purchased is equal to the quantity available and that the purchasers are the one who gain the most utility from it.`
What is the signalling function?
the function of the price mechanism that encourages economic agents to either leave or enter the market.
How do market economies allocate resources?
The price mechanism distributes resources at equilibrium where the consumers who are willing to purchase a good is equal to firms who are willing to produce it. This is what Adam Smith cals the invisible hand.
What is a quasi public good?
A good which exhibits qualities of both a public and a private good. It may be rivalrous or excludable but not both.
What is an example of a quasi public good?
Bridges. they are not completely excludable since anyone can use them but only so many vehicles can fit on them and are therefore excludable.
Why might the existence of public goods result in the free rider problem?
Since public goods are both non-rival and non-excludable, a non-purchaser may benefit from the good as much as someone who payed for the provision of the good. Therefore, a rational economic agent would free ride and gain all the utility of the good for one of the cost. However, if everyone does this, the good will not be provided at all.
What is a public and private partnership (PPP)?
A contract between the public sector and the private sector where the private sector works on government projects in return for profits drawn from tax payers and/or users over the duration of the contract. This enables specialisation. However, the private sector don’t have the same incentives.
What are tradable pollution permits?
Tradable pollution permits are regulated allowances that allow producers to generate pollution.
What is information provision?
When the government provides information to help people make better behavioural choices and alleviate information failure.For example, the the 5 a day fruit campaign.
What is state provision?
Goods and services provided directly by the government. This is seen with the provision of public goods like street lights in the UK.
What is competition policy?
Government policy and laws to limit monopoly power and prevent cartels. For example, the Sherman anti-trust act.
What is profit maximisation?
The business objective of maximising profit.
Where does profit maximization occur?
Where MR = MC
What are the assumptions underlying profit maximisation as a business objective?
assumptions underlying profit maximisation as a business objective?
It is based on the assumption that all firms have perfect knowledge not only about their own costs and revenues but also of other firms. It is also based on the assumption of rationality that firms will only concern themselves with profit.
Why might profit ,maximisation be relevant to a business?
Classical economic theory suggests firms will seek to maximise profits. The benefits of maximising profit include: Profit can be used to pay higher wages to owners and workers, reinvestment and research and development.
What is sales revenue maximisation?
The business objective to maximise the amount of revenue
What is sales volume maximisation?
The business objective to maximise the number of sales.
What is utility maximisation?
A scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions.
What is profit satisficing?
Doing the bare minimum to keep shareholders and investors happy and confident in the firm.
What is corporate social responsibility?
Corporate social responsibility is the concern businesses have for society and their stakeholders.
What is the principle-agent problem?c
The principles (shareholders) have a divorce in interests from the employees (agents). The principles want profit maximisation whilst employees want utility maximisation.
What is total variable cost?
the cost of all variable inputs used in producing a particular level of output