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Economics > Micro Book 3 > Flashcards

Micro Book 3 Flashcards

1
Q

What are free goods

A

A good that has no cost of production that can be produced at no opportunity cost

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2
Q

When is a good excludable

A

If someone else can be prevented from benefitting from it

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3
Q

What describes a good that when consumed by one person it affects someone else’s ability to benefit from it

A

Rivalrous

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4
Q

Is a private good non-rivalrous and non-excludable

A

No!

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5
Q

What is a public good

A

A good that is non-excludable and non-rivalrous

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6
Q

What does a public good have to be?

A

Non-excludable, non-rivalrous, non-rejectable

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7
Q

What can non-excludablitity lead to?

A

The free-rider problem (nobody has any incentive to buy the good, as they can benefit without paying)

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8
Q

What is the marginal cost for producing a public good

A

There is none!

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9
Q

What are goods that exhibit some of the characteristics of public goods

A

Quasi-public goods or non-pure public goods

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10
Q

When can a market fail?

A

When there is a misallocation of resources

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11
Q

What are the three functions of price

A

Signalling function
Incentive function
Rationing or Allocative function

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12
Q

What is the Signalling function of price

A

To give information to traders to enable them to plan their economic activity

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13
Q

What is the Incentive function of price

A

Economic agents will alter their behaviour based on signals

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14
Q

What is the Rationing/Allocative function of price

A

Deciding how resources are used

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15
Q

When do missing markets occur

A

When the incentive function of prices completely break down and a market fails to exist or disappears

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16
Q

What is the ‘tragedy of the commons’

A

The effect of individuals acting in a way where their own self-interest is contrary to what is best for society as a whole (overconsumption of public goods)

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17
Q

Are merit goods under consumed?

A

Yes! They are goods that are more beneficial for consumers than they realise.

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18
Q

What are Demerit goods?

A

Goods that are more harmful for consumers than they realise. They will likely be overconsumed in a market

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19
Q

What can be the cause of underconsumption of merit goods or the overconsumption of demerit goods

A

Information failure

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20
Q

What is the case where a buyer/seller knows more than the other party?

A

Asymmetric information

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21
Q

What is an externality

A

A cost or benefit to a third party

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22
Q

What are positive externalities

A

When there is benefit to a third party

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23
Q

What are negative externalities

A

When there is a cost to a third party

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24
Q

Marginal definition?

A

An increase of one unit

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25
Q

Who is “private” referring to

A

The supplier/consumer of a good

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26
Q

Who is “social” referring to

A

Third parties

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27
Q

Marginal Cost

A

The cost of one additional unit

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28
Q

Marginal Benefit

A

The benefit of one additional unit

29
Q

When does government failure occur

A

Government intervention in the economy results in a net loss of welfare

30
Q

What are the sources of government failure

A

Information failure
Unintended consequences
Excessive administration costs
Conflicting objectives
Distortion of price signals

31
Q

What are distortion of price signals

A

The government intervenes in a way that changes prices

32
Q

What are the 7 forms of government intervention

A

Indirect Taxes
Subsidies
Regulations
Information Provision
Price Controls
State Provision
Tradable Premits

33
Q

What are the 5 behavioural economics

A

Heuristics
Anchoring
Availability Bias
Social Norms
Altruism

34
Q

What are heuristics

A

A ‘mental shortcut’ or ‘rule of thumb’

35
Q

What is anchoring

A

A particular piece of information skews an agent’s perceptions and frame of reference that they base their valutions

36
Q

Why does choice architecture help with managing a market

A

It designs choices that economic agents face in such a way that the agents decisions are influenced by the way in which they are presented

37
Q

What are 5 types of choice architecture

A

Framing
Default Choice
Manadated Choice
Restricted Choice
Nudges

38
Q

How can conflicting objectives cause government failure

A

The government faces lots of different competing objectives

39
Q

How can information gaps cause government failure

A

The government fails to spot a potential problem in the intervention, the government rarely possess full information

40
Q

How can excessive administration costs cause government failure

A

The cost of correcting the market failure is greater than the benefit of the intervention

41
Q

How can unintended consequences cause government failure

A

Something that the government didn’t intend to happen happens

42
Q

What is Availability Bias

A

A tendency to give undue importance to the most recent or well-known example of something

43
Q

What are Social Norms

A

An accepted pattern of behaviour within a society

44
Q

What is Alturism

A

Acting entirely in the interest of others without regard to one’s utility

45
Q

What is an Indirect Tax

A

A tax on goods and services. Will increase a firms’ cost of production, often levied on goods that generate negative externalities

46
Q

What is a Subsidy

A

A sum of money given by the government in order to encourage the production of a good/service, often levied on goods that generate positive externalities

47
Q

What are Regulations that the government can impose

A

A regulation is a law passed and enforced by the government
Can either aim to make production more expensive for firms or reduce consumption on the good

48
Q

What is Information Provision

A

Seeking to provide information to consumers, either through education or by advertisements

49
Q

What are Price Controls that the government can impose

A

The government can either impose a floor/minimum price or a ceiling/maximum price

50
Q

What are State Provisions

A

Something is provided by the government, often free at the point of consumption (a reason taxes may be paid!)
Likely the only solution to missing markets and public goods

51
Q

What are Tradable Permits

A

Where the government may decide to impose a limit on the amount of negative externalities a firm can produce, then splits that limit into volumes of permits. The permits are then allocated through an auction

Over time the government reduces the supply of these permits as they start to expire

52
Q

What does the term “bounded rationality” mean

A

People may attempt to behave rationally but can’t due to:
*Limited ability to process information
*The information available is incomplete
*The time available is limited

53
Q

What does the term “bounded self-control” mean

A

A person lacking the self-discipline to pursue the best option

54
Q

What is Framing

A

A way to influence an individual by the context in which information is presented

55
Q

What is a Default Choice

A

A pre-set choice that an individual must make a conscious decision to change

56
Q

What is a Mandated Choice

A

Individuals are forced to make a choice without a default one being set

57
Q

What is a Restricted Choice

A

Giving individuals a limited number of options to prevent problems with the volume of information

58
Q

What are Nudges

A

Encouraging individuals to change their behaviour without removing their ability to choose, must be low cost.
Also referred to as “libertarian parternalism”

59
Q

An example of the Distortion of Price Signals

A

Guaranteeing income to farmers under the EU’s Common Argicultural Policy enables inefficient farms to stay in business, leading to overproduction

60
Q

An example of Conflicting Objectives

A

They may subsidise an industry producing demerit goods as they worry about unemployment

61
Q

An example of Information Gaps

A

The re-classification of cannibis in the 2000s (Class B drug to Class C drug back to Class B drug)

62
Q

An example of Excessive Administration Costs

A

A country estimates the damage done by rogue tradesmen at $150 million, the government then lauches a scheme costing $200 million

63
Q

An example of Unintended Consequences

A

“Use it or Lose it” budget lead to the consequence of departments spending recklessly at the end of a budget period

64
Q

An example of Framing

A

Gym memberships being qouted as X pence per day instead of annual fees

65
Q

An example of Default Choices

A

Having to opt out of organ donation or a pension scheme

66
Q

An example of Mandated Choices

A

Installing software

67
Q

An example of Restricted Choice

A

The government offerinf savers the option of the five “best” private pensions instead of thousands

68
Q

An example of Nudges

A

Displaying foods so that consumer are more likely to choose healthier food / removing impulse-buy chocolates from checkouts

Economics (12 decks)

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