Final Econ 103 Flashcards
A dominant Strategy
A strategy that is a player’s best action regardless of the action taken by the other player
Nash equilibrium
The result when each player in a game chooses the action that maximizes his or her payoff given the actions of other players
Externalities (Spillovers)
the impact of a market exchange on a third party who is outside or “external” to the exchange
External cost
-Negative externalities
-External cost on third parties: the market produces too much of the good
External Benefits
-Positive Externalities
-External Benefits on third parties: the market produces too little of the good
marginal private benefits (MPB)
the benefits obtained by consumers from purchasing additional units of some product; shown by the market demand curve
marginal social benefits (MSB)
the sum of the private and external benefits when additional units of some product are purchased; aka the social demand curve
Marginal social cost (MSC)
is the total cost society pays for the production of another unit
Marginal private cost (MPC)
is the change in the producer’s total cost brought about by the production of an additional unit of a good or service aka the marginal cost of production.
What sorts of policies can push the market closer to the efficient outcome for negative externalities?
Imposing a tax can help reduce output and push the market towards an efficient outcome
Ex: Carbon taxes, congestion pricing, market permit
What sorts of policies can push the market closer to the efficient outcome for positive externalities?
Subsidies can help increase output and push the market toward the efficient outcome
Ex: tax breaks, Government subsidies, direct investment
-Education
-Research and development
Public goods
nonrival and nonexcludable
Ex: National Defense
-Street Lighting
-Flood Control
Common Sources
Rival and non excludable
Ex: Clean water
-Biodiversity
-Fish
Common Sources (Solution)
-Assign property rights to make them excludable
-Regulations, taxes, tradable licenses
Public goods (Solution)
-Collective Action
-Public provision: by taxing everyone and producing the public good, government can make people better off
Lorenz curve
a graph that compares the cumulative income actually received to a perfectly equal distribution of income; it shows the share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis
The Gini coefficient
is a statistical measure of inequality that describes how equal (or unequal) wealth is distributed among the population of a specified area (usually a country)
What thought experiment is central to Rawls’s theory of justice?
“Original Position”
-Imagine people in some initial fair situation. If they were to develop and agree on principles of justice, then these would be fair and valid
Competitive model of the labor market
Firms and workers are price takers
Monopsony model of the labor market
-There is only one buyer in labor market
-Single buyer has market power: can influence the price at which they purchase the good
Minimum wage in the monopsony model
Minimum wage causes firms to increase employment bc the firm refuses to hire another worker (it doesn’t want to raise pay for everybody else)
Adverse Selection
-Hidden types
-Adverse Selection occurs when someone knows more about the way things are than other people do
Moral Hazard
-Hidden actions, the incentive problem
-Moral hazard occurs when an individual knows more about his or her own actions than other people do
-This leads to a distortion of incentives to take care when someone else bears the $of the lack of effort
The market for lemons
The issues that arise regarding the value of an investment or product due to asymmetric information possessed by the buyer and the seller.
-Asymmetric info leads buyers to expect hidden problems in items offered for sale, leading to low prices and the best items being kept off the market
