Les 1: Introduction Flashcards
Public goods
have 2 characteristics:
- Non-exclusion
- Non-rivalry in consumption
Private Goods
Gods and services produced by the market mechanism.
you can be excluded from consumption and there is rivalry in consumption as well.
Quasi-public goods or joint products
Have only got one of the two characteristics
- rivalry yes, exclusion no: common pool resource
- rivalry no, exclusion yes: club goods
Joint product has a little both of both. ex: education, public transportation
What is the problem with public goods?
it costs money to build/maintain, so who’s going to pay for it? once it is there, nobody can be excluded from using it, even if they don’t pay for it. –> freeriding
This will lead to underprovision/undersupply of the good.
Free rider behavior
Private actors will not be interested in making these goods because they can’t force you to pay for it
o So, several goods and services will be under provided if you solely rely on the market mechanism, because of the specific features of public goods
• You need other actors to step in, to provide these desirable goods and services and so you come to the public sector
o The public sector steps in to make sure that these desirable services are supplied in a sufficient matter
• A public actor has its way to force people to contribute to the financing of the desirable services through the public sector
–> funds collected from taxes
• We can rely on institution, on rules, agreement of a public nature to step in and overcome that market failure
Common pool resources
Territories on the world that are not part of a country, they can be used by everyone (non-exclusion) but if everyone has access, you will have complete depletion.
Club goods
The club refers to excluding people in a non-rivalrous way. if you are not part of the club, you can’t benefit from the supply of the club.
E.g, public transportation: if you don’t pay you can’t ride, but your consumption does not affect someone else’s
Public goods: application to international economics
- rules on trade
- international financial stability, optimal capital provision
Global Public goods
Some market failures cannot only be cured at the national levels because of a number of the problems have cross-border dimensions
–> For example: pollution (clean air)
Some of these desirable goods and services that are under produced can best be tackled by the same reason as with free riding (states that are freeriding)
–> To solve that kind of failure you need interventions at a supranational level
Public goods: applications on institutions
- international trade issues: the WTO
- International finance: IMF/World Bank
All financial/trade systems are connected. Individual actors will act in their own interest, leading to crises. You need international institutions that are responsible for for looking for this stability.
Technology of provision
Technology of provision is the way of how individual contributions translate in the global total supply
The technology will determine what kind of intervention mechanism will be most effective and efficient
- Summation
- Weakest link
- Best shot
Summation
the total supply/production is the sum of all the individual contributions/efforts
–> example: pollution and clean air
Weakest link
The total effect is determined by the contribution of the weakest, the one who is contribution the least
–> Example of the island surrounded by the sea
Weakest link in Global financial stability
Global financial stability (the protection of a global financial crisis) has a lot of features of this weakest link
We have one global financial market, the level of protection of the world against a global crisis is the country with the highest probability of a financial crisis, because if it happens in one country while there is a global financial institute, it will spill over to other countries
Best shot
The opposite of the weakest link: the total gain will be determined by the one who is making the biggest effort
–> Example: the development of new drugs, vaccines for instance
Policy consequences of best shot technology of provision
You can’t give everyone money, because you have a different success rate so it’s better to give the money to the one who has the highest chance of being successful
Balance of payment
An accounting record of all transactions of goods, services, income and
financial assets between domestic households, businesses and government of a given country and
residents of the rest of the world during a specifc period (usually 1 year).
How BoP is usually presented:
A. Current account
B. Capital account
C. Financial account
Current account
straight transaction, import and export
Capital account
When you talk about an open capital account, you can do whatever transactions you want
Capital transfers: cancellation of debts, tangible assets
Acquisitions/disposal of non-produced, non-financial assets
BoP identity
CURRENT ACCOUNT + CAPITAL/FINANCIAL ACCOUNT = ZERO
This is because of double-entry booking.
Double entry booking
One entry indicating the ‘nature’ of the transaction, other one indicating the foreign exchange consequence (forex inflow or outflow)
BUT each of the different BoP components individually can be unbalanced!!!
Financial Account
FDI
Portfolio investment
Loans
Foreign Exchange reserves
Foreign Direct Investment
Another country transfers money (makes them shareholders of a firm), in shares
Your compensation for shares is a dividend payment; partly payed out to shareholders. Dividend payment is compensation for a factor of production, so the dividend is put under NET FACTOR INCOME.
Portfolio investment
Similar to FDI, but without the control.
Import transaction
import is -, the money you pay for it is +
Export transaction
export is -, the money you receive is +
Trade balance
difference between exports minus imports.
Negative trade balance: deficit, there is more imported than exported
Positive trade balance: surplus, there is more exported than imported
Current account balance
Trade balance plus two other factors (sum)account
Overall balance
Accout + capital + financial (excluding changes in reserve assets) + net errors and omissions.
What to do if there is an imbalance?
They add a line “errors and emissions” of the amount to make sure the balance is zero.
