L4 Flashcards
Which 3 questions arise when going to specialization and trade?
How do I know what to specialize in?
How do I know what to exchange and with whom?
How to make sure that exchange goes as planned/agreed?
Which 3 mechanisms can be used to have a scale economies?
Tradition (social norms, religion, family, society. DO what parents did. Low cost but difficult with change) Command systems (state count input and output and allocate tasks and resources. Fast to adapt to change but difficult with the information exchange) Market (individual decisions, demand and supply signaled by price. False signals create inefficiencies)
Explain why there is institutions
Prisoners dilemma
Need to guide behaviour and change incentives to there is maximal total value created
Wealth maximizing people find it worthwhile to cooperate with others when:
If game is repeated
There is info about the other players
Small number of people
What does effective institutions do?
Raise cost of defection (when someone play bad)
Reduce transaction costs per exchange
Allow to realize the potential gains from trade and specialization
Five market failures and the consequences
Entry restrictions ->poor quality, no innovation and high prices
Distorted incentives (high tax or uncertainty)->less effort, investment and new firms->less products, innovation and growth
Lack of information (lemons)->undermines trust and market fails
Cheating (contracts) -> no exchange
Insecurity of property (steal or taken by state)->less investment and growth
Institutions job to make market work
Relatively free entry and competition Taxes not too high Quality standards Institutions to enforce contracts Law, police and courts to protect property
Problems with institutions in low-income countries
Difficult and costly to start new business, have contract enforced, get official proof of ownership
Taxes are too high
->large informal sector
