Midterm 2 Study Guide Flashcards
1
Q
externality
A
the uncompensated impact of a person’s actions on the well-being of a bystander
2
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negative externality
A
markets produce a larger quantity than is socially desirable (social cost curve lies above supply curve), so governments internalize the externality by taxing goods
3
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positive externality
A
markets produce a smaller quantity than is socially desirable (social-value curve lies above demand curve), so governments subsidize goods
4
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command-and-control policies
A
regulations that directly seek to influence behavior; however, firms conceal adverse effects, exaggerate costs of regulation, and have no incentive to reduce below regulated levels
5
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market-based policies
A
response to externality that provides incentives so that private decision makers choose to solve the problem on their own, such as corrective taxes and tradable permits
6
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corrective taxes
A
policy designed to tax the right to engage in a negative externality; the higher the tax, the larger the reduction in negative externality – ideally, the tax is equal to the social cost
7
Q
Canada’s Pigovian tax
A
Canada has increased its tax on carbon emissions from $20 CA / ton in 2019 to $50 CA / ton in 2022; prices on main sources of carbon increase, so fewer consumers buy them
8
Q
tradable permits
A
form of taxation between firms where firms with lower levels of a negative externality (ex. pollution) have permits to sell to firms with higher levels
9
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Coase theorem
A
if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, regardless of the initial distribution of rights; reasons for failure include transaction costs, bargaining breakdowns, and bargaining coordination difficulty
10
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types of goods
A
people can be prevented from using excludable goods; a person’s use of a unit of a rival in consumption good reduces another person’s ability to use it
11
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private goods
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goods that are excludable and rival in consumption (ex. ice cream cones)
12
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public goods
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goods that are neither excludable nor rival in consumption (ex. tornado siren)
13
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common resources
A
goods that are rival in consumption but are not excludable (ex. clean air and water, congested roads, wildlife)
14
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club goods
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goods that are excludable but not rival in consumption (ex. satellite TV)
15
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free-rider problem
A
people receive the benefit of many public goods without paying for them
16
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Tragedy of the Commons
A
a common resource is used more than is desirable from the standpoint of society as a whole; governments tax/regulate usage or turn them into private goods
17
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Tuvalu and climate change
A
due to climate change, Tuvalu is experiencing increasing storms and land mass loss; struck a deal with Australia so that 280 people move to Australia per year (40 years for entire population) and Tuvalu receives assistance after natural disasters, but Australia does not have to restrict fossil fuel exports and must approve defense deals
18
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Prisoner’s Dilemma
A
a situation where individual decision-makers have an incentive to defect as opposed to cooperate and create a less optimal outcome for the entire group
19
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shadow of the future
A
– in a single interaction, both individuals have no incentive to cooperate and defect;
– in finite interactions, both cooperate until the penultimate interaction, then anticipate defection and thus defect;
– in indefinite interactions, cooperation can emerge
20
Q
costs of signals
A
actions taken in the prisoner’s dilemma must back up verbally sent signals; signals incur costs through actions
21
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Tit-for-Tat
A
strategy for the prisoner’s dilemma in which an individual initially cooperates to prevent unnecessary trouble and then repeats other actors’ decisions – retaliates to discourage defection and forgive to restore cooperation
22
Q
reputation
A
state reputations for lending are developed via repeat play with incomplete information and political change
23
Q
lemon
A
debtors who default in both good and bad economic times
24
Q
fair-weather
A
debtors who repay in good times but not in bad times
25
stalwarts
debtors the are most likely to repay, in both good and bad times
26
labor market
all transaction in which workers exchange their labor for a wage/salary from an employer
27
national level unions
heterogeneous in skills and professions; includes variety of economic sectors; prioritizes universal policies and public goods; difficult to maintain solidarity, which results in less wage coordination
28
industry level unions
prioritize the interests of an industry (ex. auto, steel, agriculture), such as employment protections such as unemployment insurance
29
enterprise/company level unions
bargain at the company level and prioritize job security and wage maximization
30
skilled vs. unskilled labor
skilled and unskilled workers may have competing interests; skilled workers may leave unions, weakening union cohesion and making unions less effective
31
unions and the social welfare state
more collective solidarity within labor results in greater support for government intervention to reduce income inequality, which is vital to building a supportive welfare state; welfare states protect less privileged workers and provide equity for higher earners
32
benefits of unions
unions aim to decrease the wage gap via lobbying and direct contributions; union effects are strongest in bottom half of incomes
33
decline of unions
unions have declined due to
1) electoral losses of Left-wing parties and adoption of neo-liberal policies
2) revisions to historically strong social safety nets, such as the Ghent system, which allowed unions to administer unemployment protections
3) technological innovations have led to the rise of knowledge economies, which demand high-skilled workers but no longer need as much unskilled labor
34
wage determination institutions
-- in decentralized settings, institutions "leapfrog" by seeking wage settlements that exceed pay increments in other unions, which often leads to high unemployment; institutions are limited in market power
-- in centralized settings, there are more negotiations and institutions focus on internalizing consequences of wage demands, leading to lower unemployment and inflation
35
labor market policies
taxes on labor may increase unemployment, as they affect supply and demand for labor; pay-roll taxes decrease hiring and increase the gap between pre- and post-tax incomes
36
central bank independence
central banks are responsible for setting monetary policy, independent of the government's policies and goals
37
presidential executive
single, popularly elected chief executive who is independent of legislature (separation of powers) and has a fixed term (difficult to remove)
38
parliamentary executive
prime minister or chancellor (Germany and Austria) who typically comes from the legislative party and continues to hold a legislative seat; checked by legislature through vote of no confidence
39
perils of presidentialism
-- legislature and president are independently elected, so there is potential for continuous conflict between branches; the legislature is unlikely to shape executive agenda
-- elections are zero-sum, so there is no incentive for a majority; this may polarize the electorate
-- chosen cabinet members cannot also be in the legislature, so they are unlikely to offer push back against the president
-- fixed terms make it difficult to remove presidents
40
majority parliamentary government
one party wins a majority of the seats in the legislature
41
majority coalition
a coalition of two or more parties that have over 50% of the seats in the lower chamber of the parliamentary legislature
42
minority coalition
a coalition of two or more parties that have less than 50% of the seats in the lower chamber of the parliamentary legislature
43
single-party minority government
parliamentary government formed by largest party despite not having a majority
44
economic effects of presidential systems
public goods are underfunded due to smaller government, separation of powers, lack of legislative cohesion, and limits on public spending and taxes; multiple veto players adversely affect economic growth, unemployment, and inflation
45
economic effects of parliamentary systems
higher GDP per capita and growth, lower inflation, higher taxes to benefit the majority due to larger governments with more centralized power and legislative cohesion
46
bicameral legislatures
-- large lower chamber with more power
-- small upper chamber that can either only delay, not stop legislation (weak) or introduce and stop legislation (strong/equal)
47
unicameral legislature
contain only a lower chamber and are generally more majoritarian and accountable in decision-making
48
plurality electoral system
winner is whoever receives the most votes
49
majoritarian electoral system
winner must receive over 50% of the votes; includes two-round election systems and alternative vote system
50
two-round elections
-- in the first round, all candidates are on the ballot; if a candidate receives 50% of the vote, the election ends
-- in the second round, the top two vote getters are on the ballot
51
alternative vote system
voters rank all candidates; until a majority is reached, the last place candidate is eliminated and votes are reassigned to second preference votes
52
proportional representation
seats are assigned in proportion to the number of votes a party wins; constituencies are represented by multiple members; there may exist
53
party list proportional representation
voters choose parties among a party list of candidates; candidate lists and list orders are determined by parties
54
closed party list
in closed party lists, voters can only vote for a party and parties have complete control over lists
55
open party list
in open party lists, voters can choose "preference" candidates and influence who gets selected from the list
56
economic effects of PR systems
PR systems have higher government spending, revenue, and social spending (transfers and redistribution) due to greater party cohesion and the formation of party coalitions
57
economic effects of plurality/majoritarian systems
plurality/majoritarian systems have less social spending and lower inflation rates/inflation volatility due to smaller governments and more specific legislator projects
58
government formation and the Netherlands
-- Geert Wilders and far-right Party For Freedom (PVV) won most votes (37 of 150 seats) in the recent Dutch parliamentary election
-- VVD and Christian Democrats (center-right parties w/ 24 and 20 seats, respectively) do not want to join coalition with PVV
-- Stable governmental option would be a four-party coalition of PVV, VVD, Christian Democrats, and BBB (88 of 150 seats)
59
veto player
an individual or collective actor whose agreement is required for a change in policy
60
institutional veto player
arise from division of powers and have constitutional means of checks and balances; more institutional veto players results in less public spending
61
partisan veto player
political actors whose consent is needed to change policy; more partisan veto players result in more public spending
62
traditional electoral cycle
assumes that politicians control fiscal and monetary policies and asserts that vote maximizing politicians manipulate the economy to win re-election
63
traditional electoral model expectations
-- pre-election, governments pursue policies of economic expansion, including increasing public spending and lowering interest rates and taxes
-- post-election, governments pursue restrictive policies
64
cause of electoral cycles
voters evaluate politicians retrospectively and expansionary policies have delayed negative externalities, so distant past and future events aren't as important
65
rational electoral cycle
election manipulations occur but are less frequent; incumbents vary in competence; ability to use fiscal and monetary policy is dependent on context
66
competence
the ability to solve problems and handle the economy efficiently; competence is private information, so voters view government actions to determine competence
67
monetary policy
central banks set monetary policy; independent central banks can offset government policies by setting opposite monetary policy to fiscal policy
68
capital mobility
ability of money to move around the world; this can restrict government actions and can signal firms' intent to leave
69
reverse electoral business cycles
businesses and households postpone major investments during elections
70
traditional partisan cycles
changes in economic policies are influenced by government partisanship, so change in party control results in a change of economic policy preferences
71
bank debt holders
-- banks are small in number and have limited mobility
-- due to high exposure, more likely to provide financial support to prop up the economy
-- economic backing increases the likelihood of political budget cycles
71
bondholder debt holders
-- bondholders are large in number and have high mobility
-- due to low exposure, less likely to provide financial support to prop up the economy
-- economic backing decreases the likelihood of political budget cycles
71
political budget cycles
cycles in some component of the government budget induced by the electoral cycle; dependent on debt composition (banks vs. bondholders)
72
logic of economic voting
if the economy is doing well, the incumbent vote share increases; if the economy is doing poorly, the incumbent vote share decreases
73
central assumptions of economic voting
voters are rational and will try to advance individual or collective interests; contextual factors are compounding factors
74
reward-punishment voting
voters evaluate politicians based on their handling of the economy and use retrospective decision-making; however, the principal agent-problem (representatives cannot be monitored) persists and politicians do not need to appeal to voters' wants
75
selection approach
voters select the politicians who are most likely to provide good economic performance; they do so by forecasting economic outcomes using rational expectations and macroeconomic conditions
76
institutions and economic voting
strong bicameralism, minority coalitions, and/or weak party cohesion hinder reward-punishment since voters do not know who is at fault (limited effect of economic indicators); on the other hand, single-party governments and strong party cohesion have strong effect of economic indicators
77
accountability and economic voting
education allows a population to better acknowledge the government's influence; globalization has caused governments' control over macroeconomic performance to decline
78
pocketbook voting
decisions are based on recent personal economic outcomes (self-interest); for politicians to remain in office, they implemented targeted policies
79
sociotropic voting
decisions based on trends in macroeconomic outcomes
80
elite manipulation in economic voting
include blame avoidance, gimmickry, and election timing
81
blame avoidance
politicians divert responsibility for the domestic economy by using factors such as globalization
82
gimmickry
political actors manipulate voters by concealing or spinning factual information
83
election timing
political actors strategically time new elections when they are in an advantageous position
84
Duverger's Law
single-member plurality elections tend to produce two-party ystems
85
Duverger's proposition
two-round and proportional representation elections tend to produce multi-party systems
86
vote-seeking parties
largest parties in a country, generally Social Democrats, Christian Democrats, or Conservatives
87
office-seeking parties
small parties who value coalition formation, such as Germany's Free Democratic Party
88
policy-seeking party
parties that seek to influence policy, such as the Green Party
89
trade policies
tariffs and non-tariff barriers (subsidies, quotas) countries utilize to raise revenue, improve terms of trade (price of exports vs. imports), pursue a trade surplus, protect domestic producers and other domestic groups
90
incentives for trade protection
trade protection provides monetary benefits to domestic, politically important groups
91
Smoot-Hawley Tariff Act
U.S. policy passed in 1930 to raise import duties with the goal of protecting American farmers and other industries from international competition; as a result, U.S. trading partners followed a beggar-thy-neighbor policy of increasing their own tariffs as a response
92
lock-in mechanism
explicit rules and informal norms for state actions established by international institutions to make backtracking more difficult and restrict domestic pressures
93
General Agreement on Tariffs and Trade (GATT)
-- international institution designed to interconnect countries via trade by preventing new trade barriers, reducing existing trade barriers, and establishing rules for negotiations and post-negotiations; replaced by the World Trade Organization (WTO) in 1995, which has more institutional structure
-- aspects of the GATT include reciprocity, most-favored nation, national treatment, transparency, flexibility, and accountability
94
reciprocity
no unilateral trade liberalization; minimizes free-riding during negotiations and concessions
95
most-favored nation
prevents favoritism in liberalizations -- tariff concessions must be offered on like products to all members of the GATT/WTO
96
national treatment
international goods must receive the same treatment as domestic goods
97
transparency
members know private information about other members in the GATT
98
flexibility
members can walk-back offers if needed
99
accountability
dispute-settlement mechanisms to ensure compliance with agreements
100
Trans-Pacific Partnership (TPP) creation
U.S. negotiated rules on transparency, labor, and environment to join the P4 (Singapore, New Zealand, Chile, and Brunei); Vietnam, Malaysia, Australia, Peru, Canada, Mexico, and Japan joined the P4
101
U.S. Domestic Politics and TPP
-- Congress gave Trade Promotion Authority to TPP (2015)
-- U.S. regulatory agencies disapproved because the TPP limited their policy space and were concerned programs would be covered by state-owned enterprises
-- Congress never passed and anti-trade sentiment followed after 2016 presidential election
102
Indo-Pacific Economic Framework for Prosperity
Designed as 21st century economic framework with four pillars: trade, supply chain resilience, clean economy, fair economy
103
trade pillar
strong, enforceable trade standards
104
supply chain resilience
more geographic diversification for critical inputs and final products for supply chain resilience
105
clean economy
cooperation on research and development and best sharing practices for a clean economy
106
fair economy
transparency and cooperation to take on corruption and tax evasion
107
International Monetary Fund (IMF)
international financial institution that serves as a lender-of-last resort; works to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world
108
World Bank
international financial institution originally created after WWII to rebuild the economies of postwar Europe
109
motivations for international financial governance
-- market failures occur when items are under-supplied by private actors
-- availability of global public goods is determined by state or other private actors
-- private actors and national governments may be unwilling or unable to provide globally desired outcomes
110
argument for international governance
international financial institutions provide financial stability through public goods and lender-of-last resort role, eliminate differences through enforced regulations
111
market-oriented FDI
foreign direct investment directed toward production focused within a country
112
export-oriented FDI
foreign direct investment directed toward production to be exported
113
FDI restrictions
ownership requires partnership with local firms; operation requires local content requirements and representation
114
domestic policies and FDI
electoral accountability makes governments more responsive to labor preferences; greater support for FDI occurs during economic downturns
115
preferential trade agreements (PTAs)
PTAs reduce trade barriers and include regulatory policies
116
bilateral investment treaties (BITs)
international agreements that require binding third-party arbitration, multiple dispute-settlement venues, and arbitration by a standing body
117
FDI in India
long-term FDI in India has declined from $40 billion to $13 billion because it lacks the overall economic development and discourages firms because Prime Minister Modi's government intervenes heavily in the economy and red tape/bureaucracy still exists
118
Laos and Chinese investment
-- China invested $5 billion across 700+ projects in Laos, including building a high-speed train and constructing hydroelectric dams
-- Laos's total debt is 120% of GDP and is struggling to repay Chinese loans, instead allowing China greater control over the economy and security
119
firms as sponsors
act as main sponsors of neo-liberal policies to reduce trade barriers, expand reach of markets, reduce government interference, protect intellectual property, shift policy making from legislative to executive branch (ex. NAFTA expanded access of firms to cheap labor in Mexico)
120
firms set global preferences
-- group of 30 brings firms together with policy decision-makers to recommend best practices
-- harmonize various national or regional rules and regulations
-- increase regulations on less regulated competitors
121
firms as inhibitors
-- firms often oppose rules that limit their autonomy (ex. binding penalties and legal liabilities) through lobbying and threats to leave via mobility under globalization
-- firms seek to extend their domestic rules to constrain competitor firms
-- firms may oppose extension of domestic rules since they reduce their ability to be mobile and empower local actors
122
firms provide standards
firms may set standards without the intervention of domestic governments or international institutions (ex. financial debt reporting, food standards)
123
BP, global shipping, and firms
-- In response to BP halting shipping through the Red Sea due to attacks by Houthi militants, U.S. formed a coalition to respond to the attacks and ensure shipping through the Red Sea
-- alternative route is to circumnavigate around Africa, which incurs 14 additional shipping days and potential supply chain disruptions
-- oil and natural gas prices are increasing and insurance costs have doubled to cover the cost of sunken ships
124
U.S. Steel
-- Nippon Steel has agreed to purchase U.S. Steel, making it the third largest steel manufacture and giving it access to U.S. markets while avoiding high tariffs through domestic plants and manufacturing
-- Sale is despite U.S. government attempts to prop-up steel industry via trade protection and quota restrictions
-- U.S. Steel continued to struggle due to competition from low-priced, subsidized foreign steel
-- Issues with the deal include 1) national security concerns and opposition from domestic political actors, 2) labor union must agree to the sale and prefers a domestic buyer
