Micro Book 3 Flashcards
What are free goods
A good that has no cost of production that can be produced at no opportunity cost
When is a good excludable
If someone else can be prevented from benefitting from it
What describes a good that when consumed by one person it affects someone else’s ability to benefit from it
Rivalrous
Is a private good non-rivalrous and non-excludable
No!
What is a public good
A good that is non-excludable and non-rivalrous
What does a public good have to be?
Non-excludable, non-rivalrous, non-rejectable
What can non-excludablitity lead to?
The free-rider problem (nobody has any incentive to buy the good, as they can benefit without paying)
What is the marginal cost for producing a public good
There is none!
What are goods that exhibit some of the characteristics of public goods
Quasi-public goods or non-pure public goods
When can a market fail?
When there is a misallocation of resources
What are the three functions of price
Signalling function
Incentive function
Rationing or Allocative function
What is the Signalling function of price
To give information to traders to enable them to plan their economic activity
What is the Incentive function of price
Economic agents will alter their behaviour based on signals
What is the Rationing/Allocative function of price
Deciding how resources are used
When do missing markets occur
When the incentive function of prices completely break down and a market fails to exist or disappears
What is the ‘tragedy of the commons’
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)
Are merit goods under consumed?
Yes! They are goods that are more beneficial for consumers than they realise.
What are Demerit goods?
Goods that are more harmful for consumers than they realise. They will likely be overconsumed in a market
What can be the cause of underconsumption of merit goods or the overconsumption of demerit goods
Information failure
What is the case where a buyer/seller knows more than the other party?
Asymmetric information
What is an externality
A cost or benefit to a third party
What are positive externalities
When there is benefit to a third party
What are negative externalities
When there is a cost to a third party
Marginal definition?
An increase of one unit
Who is “private” referring to
The supplier/consumer of a good
Who is “social” referring to
Third parties
Marginal Cost
The cost of one additional unit
Marginal Benefit
The benefit of one additional unit
When does government failure occur
Government intervention in the economy results in a net loss of welfare
What are the sources of government failure
Information failure
Unintended consequences
Excessive administration costs
Conflicting objectives
Distortion of price signals
What are distortion of price signals
The government intervenes in a way that changes prices
What are the 7 forms of government intervention
Indirect Taxes
Subsidies
Regulations
Information Provision
Price Controls
State Provision
Tradable Premits
What are the 5 behavioural economics
Heuristics
Anchoring
Availability Bias
Social Norms
Altruism
What are heuristics
A ‘mental shortcut’ or ‘rule of thumb’
What is anchoring
A particular piece of information skews an agent’s perceptions and frame of reference that they base their valutions
Why does choice architecture help with managing a market
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
What are 5 types of choice architecture
Framing
Default Choice
Manadated Choice
Restricted Choice
Nudges
How can conflicting objectives cause government failure
The government faces lots of different competing objectives
How can information gaps cause government failure
The government fails to spot a potential problem in the intervention, the government rarely possess full information
How can excessive administration costs cause government failure
The cost of correcting the market failure is greater than the benefit of the intervention
How can unintended consequences cause government failure
Something that the government didn’t intend to happen happens
What is Availability Bias
A tendency to give undue importance to the most recent or well-known example of something
What are Social Norms
An accepted pattern of behaviour within a society
What is Alturism
Acting entirely in the interest of others without regard to one’s utility
What is an Indirect Tax
A tax on goods and services. Will increase a firms’ cost of production, often levied on goods that generate negative externalities
What is a Subsidy
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
What are Regulations that the government can impose
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
What is Information Provision
Seeking to provide information to consumers, either through education or by advertisements
What are Price Controls that the government can impose
The government can either impose a floor/minimum price or a ceiling/maximum price
What are State Provisions
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
What are Tradable Permits
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
What does the term “bounded rationality” mean
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
What does the term “bounded self-control” mean
A person lacking the self-discipline to pursue the best option
What is Framing
A way to influence an individual by the context in which information is presented
What is a Default Choice
A pre-set choice that an individual must make a conscious decision to change
What is a Mandated Choice
Individuals are forced to make a choice without a default one being set
What is a Restricted Choice
Giving individuals a limited number of options to prevent problems with the volume of information
What are Nudges
Encouraging individuals to change their behaviour without removing their ability to choose, must be low cost.
Also referred to as “libertarian parternalism”
An example of the Distortion of Price Signals
Guaranteeing income to farmers under the EU’s Common Argicultural Policy enables inefficient farms to stay in business, leading to overproduction
An example of Conflicting Objectives
They may subsidise an industry producing demerit goods as they worry about unemployment
An example of Information Gaps
The re-classification of cannibis in the 2000s (Class B drug to Class C drug back to Class B drug)
An example of Excessive Administration Costs
A country estimates the damage done by rogue tradesmen at $150 million, the government then lauches a scheme costing $200 million
An example of Unintended Consequences
“Use it or Lose it” budget lead to the consequence of departments spending recklessly at the end of a budget period
An example of Framing
Gym memberships being qouted as X pence per day instead of annual fees
An example of Default Choices
Having to opt out of organ donation or a pension scheme
An example of Mandated Choices
Installing software
An example of Restricted Choice
The government offerinf savers the option of the five “best” private pensions instead of thousands
An example of Nudges
Displaying foods so that consumer are more likely to choose healthier food / removing impulse-buy chocolates from checkouts
