Market Failure & Equity And Efficiency

Question 1

Efficiency occurs…

Answer 1

Perfectly competitive market: MR=MC

Question 2

4 Types of Market Failures

Answer 2

1. Monopoly
2. Public Good
3. Externalities
4. Asymmetric Information (Moral Hazard and Adverse Selection)

Question 3

Public Good

Answer 3

1.Non-excludability
2.Non-rivalrous
3. Consumption doesn’t affect another person

Question 4

FREERIDER problem

Answer 4

1. Can’t exclude people from using your product
2. Can’t produce the optimal amount
3. Can’t have optimal provision of the item/service

Question 5

Monopoly produce where…

Answer 5

MR=MC

Question 6

P>MC
P=Price: value of the resources used in this market
MC=Marginal Cost: value of the sources used elsewhere

Answer 6

Monopoly

Question 7

Private Good

Answer 7

1. Rivalarous
2. Excludable

Question 8

Common property

Answer 8

1. Non-excludable
2. Rivalrous
3. Consumption by one consumer or a group of consumers reduces the amount available for others

Question 9

Congestive public good

Answer 9

Public good for which the degree of non-rivalry depends on the volume of users

Question 10

Externalities

Answer 10

Occur when one person’s actions affect another person’s wellbeing

Question 11

How to solve externality problems?

Answer 11

1. Charge tax that equals the difference between the SMC and MC for negative externalities. The inverse would be for positive externalities
2. Property rights

Question 12

How do you solve a public goods problem?

Answer 12

The government pay for it (because people will always life)

Question 13

Moral Hazard occurs…

Answer 13

when an action is taken by someone unknown

Question 14

Adverse selection occurs…

Answer 14

When you do not have info on an individuals predetermined type

Question 15

Moral Hazard: an ____________ ________; ___________ _________

Answer 15

Unobserved decision; hidden action

Question 16

Adverse selection: an __________ _________; __________ _______

Answer 16

Unobserved characteristic; no choice is being made

Question 17

Example of a Moral Hazard

Answer 17

Used Cars (you don’t observe their choice of maintenance, how they drove the car, etc…)

Question 18

An example of Adverse Selection

Answer 18

Lemon Car - car with problems off the production line (Seller knows about it, but they didn’t do anything to the car (to make it a lemon car))

Question 19

How to get around the asymmetric information problem

Answer 19

1. Stock options (Moral hazard)
2. Warranty (Adverse selection)
3. Deductible (Moral hazard)

Question 20

Why should we care about asymmetric information?

Answer 20

The person the possesses private information is held to higher standard

Question 21

Allocative efficiency

Answer 21

MC=MB
The value of using those resources in the market = the cost of using those resources in the market

Question 22

Production Efficiency

Answer 22

Price = Minimum of the long run average cost curve (the firms most efficiency low cost technology) (Production)

Question 23

Pareto Efficiency/Pareto Optimality occurs…

Answer 23

Where you have both allocative and productive efficiency

Question 24

Kalder efficiency is when…

Answer 24

Gainers must gain more than the losers lose, but they don’t have to compensate

Question 25

Kalder efficiency is easier because…

Answer 25

It’s less costly and timely, and you don’t need to compensate others

Question 26

Kalder efficency is hard because…

Answer 26

It’s hard to find policy that never actually hurts somebody

Question 27

Efficiency

Answer 27

when all goods and factors of production in an economy are distributed or allocated to their most valuable uses and waste is eliminated or minimized

Question 28

Equity

Answer 28

distribution of income among individuals; fairness (MAYBE NOT THE DEFINITION LOOKED FOR THOUGH)

Question 29

Efficiency

Answer 29

relationship between the aggregate benefits of a situation and the aggregate costs of the situation; when all goods and factors of production in an economy are distributed or allocated to their most valuable uses and waste is eliminated or minimized

Question 30

Negative Externality

Answer 30

SMC=MB

Question 31

Positive Externality

Answer 31

MC=SMB