micro def(orange) Flashcards
Ad-valorem tax
a tax levied on a commodity set as a percentage of the selling price
Adverse selection
a situation in which a person at risk is more likely to take out insurance
Allocating function of prices
prices can ultimately help to allocate scarce resources amongst competing uses
Allocative efficiency
achieved when consumer satisfaction is maximised where demand equals supply and price is equal to marginal cost of production
Asymmetric information
a situation in which some participants in a market have better information about market conditions that others
Competition policy (Y13)
policies that aim to promote competition based upon the idea that competitive markets are central to investment, efficiency, innovation, and growth
Consumption externality
an externality that affects the consumption side of a market, which may be either positive or negative
Cost efficiency
the appropriate combination of inputs of factors of production, given the relative prices of those factors
Demerit good
a good that brings less benefit to consumers than they realise (such that too much will be consumed by individuals in a free market as MSC>MSB)
Direct tax
one that taxes the income of people and firms and must be paid ( income and corporation tax)
Economic efficiency (static efficiency)
a situation in which both productive efficiency and allocative efficiency have been achieved
External benefit
the benefits that are the consequences of externalities to third parties
External cost
the costs that are the consequences of externalities to third parties
Externality
a cost or a benefit that is external to a market transaction, borne by a third party and is thus not reflected in market prices
Free-rider problem
when an individual cannot be excluded from consuming a good, and this has no incentive to pay for its provision
Government failure
a missalocation of resources arising from government intervention leading to a decline in economic welfare
Incentive function of prices
prices incentivise firms to supply more or less goods and services
Indirect tax
a tax levied on goods or services (as opposed to a direct tax, which is a tax charged directly to an individual based on a component of income)
Information failure
a lack of information resulting in consumers and producers making decisions that do not maximise welfare
Information provision
the supply of information to address market failure caused by asymmetric information or information failure
Internalising an externality
an attempt to deal with an externality by bringing an external cost or benefit into the price system
Law of unintended consequences
actions of consumers, producers and government always have effects that are unanticipated and unintended
Marginal social benefit (MSB)
the benefit to society of producing an extra unit of a good. MPB + MEB.
Marginal social cost (MSC)
the cost to society of producing an extra unit of a good. MPC + MEC.
Market failure
a situation in which the free market mechanism does not lead to an optimal allocation of resources, e.g. where there is a divergence between marginal social benefit and marginal social cost
Maximum price
a maximum price is the highest price that can legally be charged and to be effective should fall below the free market equilibrium
Merit good
a good that brings unanticipated private benefits to consumers, such that society believes it will be under-consumed in a free market as MSB > MSC
Minimum price
a minimum price is the lowest price that can legally be charged and to be affective should fall above the free market equilibrium price
Moral hazard
a situation in which a person who has taken out insurance is prone to taking more risk
Nationalisation / renationalisation (Y13)
the process of transforming privately owned assets into state-owned public assets
Negative externality
a spill over cost to a third party where the social cost of an activity is greater than the private cost (negative externality of production) and where the private benefit is greater than the social benefit (negative externality of consumption)
Non-excludability
a situation that exists where individual consumers cannot be excluded from consumption
Non-rivalry
a situation that exists where consumption by one person does not prevent simultaneous consumption by others
Polluter pays principle
any measure , such as green tax, whereby the polluter pays explicitly for the pollution caused by
Positive externality
a spill over benefit to a third party where the private cost of an activity is greater than the social cost ( positive externality of production) and where the social benefit is greater than the private benefit (positive externality of consumption)
Public good
a good that is non-excludable and non-rivalrous - consumers cannot be excluded from consuming the good and consumption by one person does not affect the consumption of the good by another person
Quasi-public good
goods that have at least one but not all of the characteristics of a public good
Rationing function of prices
prices can ration scarce resources by increasing or decreasing demand through willingness and ability to pay
Regulation
rules and controls which ‘restrict market freedom’ but provide minimum standards
Signalling function of prices
prices signal where there are scarcities and surpluses. prices signal where resources are required and where they are not
Social benefits
the total benefits of a particular action (private benefits + external benefits)
Social costs
the total costs of a particular action (private costs + external costs)
Specific tax (per unit tax)
a tad of a fixed amount imposed on purchases of a commodity
State provision
the act of providing or supply by the government, free at the point of consumption
Subsidy
a grant given by the government to producers to encourage production of a good or service by lowering firms’ costs of production
Technical efficiency
attaining the maximum possible output from a given set of inputs
Third party
those not directly involved in a decision or transcription
Tradable (pollution) permit
a permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter
Tragedy of common
a situation where individuals act through self-interest and behave contrary to the common good of all users, by depleting or spoiling common access resources
Private benefits
Benefits directly accruing to those taking a particular action
Private cost
Costs incurred by those taking a particular action
Private good
A good that is excludable and rivalrous (it’s exclusive) -consumers can be excludable from consuming the good and consumption by one person affects consumption of the good by another person
Production externality
An externality that affects the production side of a market which may be either positive or negative
