Midterm 2 Study Guide Flashcards
externality
the uncompensated impact of a person’s actions on the well-being of a bystander
negative externality
markets produce a larger quantity than is socially desirable (social cost curve lies above supply curve), so governments internalize the externality by taxing goods
positive externality
markets produce a smaller quantity than is socially desirable (social-value curve lies above demand curve), so governments subsidize goods
command-and-control policies
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
market-based policies
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
corrective taxes
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
Canada’s Pigovian tax
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
tradable permits
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
Coase theorem
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
types of goods
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
private goods
goods that are excludable and rival in consumption (ex. ice cream cones)
public goods
goods that are neither excludable nor rival in consumption (ex. tornado siren)
common resources
goods that are rival in consumption but are not excludable (ex. clean air and water, congested roads, wildlife)
club goods
goods that are excludable but not rival in consumption (ex. satellite TV)
free-rider problem
people receive the benefit of many public goods without paying for them
Tragedy of the Commons
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
Tuvalu and climate change
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
Prisoner’s Dilemma
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
shadow of the future
– 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
costs of signals
actions taken in the prisoner’s dilemma must back up verbally sent signals; signals incur costs through actions
Tit-for-Tat
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
reputation
state reputations for lending are developed via repeat play with incomplete information and political change
lemon
debtors who default in both good and bad economic times
fair-weather
debtors who repay in good times but not in bad times
stalwarts
debtors the are most likely to repay, in both good and bad times
labor market
all transaction in which workers exchange their labor for a wage/salary from an employer
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
industry level unions
prioritize the interests of an industry (ex. auto, steel, agriculture), such as employment protections such as unemployment insurance
enterprise/company level unions
bargain at the company level and prioritize job security and wage maximization
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
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
benefits of unions
unions aim to decrease the wage gap via lobbying and direct contributions; union effects are strongest in bottom half of incomes
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
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
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
central bank independence
central banks are responsible for setting monetary policy, independent of the government’s policies and goals
presidential executive
single, popularly elected chief executive who is independent of legislature (separation of powers) and has a fixed term (difficult to remove)
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
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
majority parliamentary government
one party wins a majority of the seats in the legislature
majority coalition
a coalition of two or more parties that have over 50% of the seats in the lower chamber of the parliamentary legislature
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
single-party minority government
parliamentary government formed by largest party despite not having a majority
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
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
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)
unicameral legislature
contain only a lower chamber and are generally more majoritarian and accountable in decision-making
plurality electoral system
winner is whoever receives the most votes
majoritarian electoral system
winner must receive over 50% of the votes; includes two-round election systems and alternative vote system
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
