Lecture 1

Question 1

Economics

Answer 1

study of people’s choices given the constrains they face (time, money, info)

Question 2

poblic policy

Answer 2

uk gov policy on tax, spending and regulation

Question 3

When should the government intervene in the economy?

Answer 3

if it can increase social efficency or achive more preferred distribution of resources

Question 4

social wealfare

Answer 4

-level of well being in the society
-everything we value, but we also care who gets what= different redistribution and social protection
-can be done by improving market efficiency

Question 5

How might the government intervene?

Answer 5

-tax or subsidies private purchases which increase or decrease demand
-restrict or mandate private sale or purchase
-public provisison- the gov provides the good directly to attain the level of consumption that maximises social welfare
-public financing of private
provsion-gov finances private entities to provide the desired level of provision, influencing the level of consumption

Question 6

What are the effects of those interventions on economic outcomes?

Answer 6

try to increase social wealfare, improve market conditions, address market failures

Question 7

Social efficiency

Answer 7

-net gains to society from all activity in a market/ market is at its optimal level therefore the gov can’t make it better
-if it is not at its OPTIMAL LEVEL= THINK WHAT THE GOV COULD DO TO IMPROVE
-social efficency is maximised at the competitive equilibrium (under the assumption that markets work)
-total social surplus= sum of the consumer and producer surplus

Question 8

first fundamental theorem of welfare economics

Answer 8

-competative equilibrium (S=D) which MAXIMIzES SOCIAL EFFICEICNCY
-social efficiency relies on the market achieving this level, if the markets fail and can’t achive the social efficieny the gov intervenes and it could be able to imporve it

Question 9

examples of market failures

Answer 9

-imperfect competition
-imperfect or asymmetric information
-individual failures
-externalities

Question 10

Gov maximising social welfare level

Answer 10

Determined by both how much gets produced (social efficiency) and how it is distributed

Question 11

Second fundamental theorem of welfare economics

Answer 11

Society can attain any efficient outcome by suitably redistributing resources among individuals and then allowing them to freely trade

Question 12

Second fundamental theorem of welfare economics- dissandvantage

Answer 12

can’t redistrubute without reducing socIal efficiency leding to a EQUITY-EFFICIENT TRADE-OFF
TRADE OF social efficiency with increased equity

The question then is
*what policies can redistribute with the lowest efficiency cost
*how much efficiency are we willing to give up to redistribute

Question 13

the outcome of out of work benefits

Answer 13

Without benefits, the labor market is in competitive equilibrium X
*
Introduce generous out of work benefits: this increase equity by redistributing income, but labour supply falls, new equilibrium is Y, leads to deadweight loss
*
If benefits are reduced to a less genous level leading to equilbrium Z this reduces deadweight loss but also reduces redistribution
*
i.e. there is a trade-off between equity and efficiency

Question 14

effects of intervention

Answer 14

direct- people dont change their beh as a responce
indirect/unintended effects- effects that arise only because individuals change their behavior in response to the interventions.

Question 15

market failure

Answer 15

A problem that causes the market economy to deliver an outcome that does not maximize efficiency.

Question 16

efficiency losses

Answer 16

the act causes individuals to shift their behaviour away from the efficiency maximising point - due to redistribution

Question 17

correct misallocation

Answer 17

gov interventions that redistribute resources form these groups that society has deemed too well off to those groups that society has deemed not well off enough