Lecture 4 Flashcards
Pareto efficient
- It is not possible to make anyone else better off without making someone else worse off
- All potential gains from trade are achieved
Market equilibrium: Short Run
Some factors e.g. no of firms cannot change
P = MC
Market equilibrium: Long Run
All factors are free to adjust
P = MC = AC
Formal incidence
The formal incidence of a tax is upon the entity which is responsible for remitting the tax
Effective incidence
The effective incidence of a tax is upon the entity which beats the economic cost
Per unit (Specific duty)
Supply (after tax) = Supply + Tax (T)
Proportional (Ad Valorem)
Supply (after tax) = Supply x (1 + Tax)
Asset
- Anything of value that is owned e.g. real estate, shares in a firm
- Prices of assets depend on their fundamental value which is based on anticipated future earnings and the level of risk
- Asset markets are therefore subject to speculation where investors buy and sell assets in order to profit from an anticipated change in their price
3 distinct features of asset markets
- Resale value
- Ease of trading
- Ease of borrowing to finance purchases
Asset price bubble
Sustained and significant rise in the price of an asset fuelled by expectations of future price increases
Price dynamics curve (PDC)
Shows the relationship between prices in the current period and the next period
Stable equilibrium
- Tendency for equilibrium to be restored after a small shock
- If the slope of the PDC is greater than 1, the equilibrium is unstable
Prudential policy
- A policy that places a very high value on reducing the likelihood of a disastrous outcome e.g. respecting planetary boundaries (ensuring biodiversity)
- Prudential policies are necessary because there is a tipping point and we are unsure how close we are to that point
- Given the uncertainty over the tipping point, quantity based policies e.g. quotas/restrictions are more prudent than price based policies e.g. taxes, subsidies because they guarantee emissions are below the threshold
