Final Flashcards
Externality
Exists whenever the welfare of an agent (firm or household) depends on the actions of another agent
Negative vs. Positive Externality
Negative = entails an external cost and may result in market failure due to overproduction; positive = entails an external benefit; may result in market failure due to underproduction
Marginal External Cost and Marginal Social Cost
MEC; MSC = MC + MEC
Marginal External Benefit and Marginal Social Benefit
MEB; MSB = MB + MEB
Competitive Market Under-Provides Public Good
Amount provided is positive; amount provided is identical in each scenario
Under-Provision Results from a Free-Rider Problem
Scenario 1: B free-rides partially on A
Scenario 2: A free-rides completely on B
The Coase Theorem
Externalities do not cause market failure if entitlements are clearly defined and protected with a property rule; efficient outcome occurs regardless of which party has entitlement, but income distribution may change
Transactions Costs
Cost associated with a market transaction or negotiation, such as legal and administrative costs to transfer property or to bring disputing parties together
Efficiency: The First Equimarginal Principle
Efficient level of pollution abatement occurs when the marginal costs of pollution control equal the marginal benefits of pollution control
Cost-Effectiveness: The Second Equimarginal Principle
For continuous abatement cost functions, the targeted level of abatement (A^T) is achieved at least cost if the sum of the abatement by all “i” firms equals A^T and the marginal abatement costs (MACi) are equal across all firms
Why auction?
Many markets are imperfect, and it is hard to discover potential buyers’ true valuations of your asset; auctions help discover this information
English Auction
Bids are public announcements; bid price rises until there are no further bids; highest bid wins; winner pays his bid
Sealed-Bid First-Price Auction
Bids are private information; bids are made simultaneously; highest bid wins; winner pays his bid
Sealed Bid Second-Price Auction (Vickrey Auction)
Bids are private information; bids are made simultaneously; highest bidder wins; winner pays second-highest bid
Dutch Auction
Auctioneer announces a high bid and then gradually lowers the bid; first buyer to accept wins and pays that price
