Part 4 (ch 11 - 13)

Question 1

External cost (negative externality)

Answer 1

A cost of an activity that falls on people other than those who are not directly involved the activity

Question 2

External benefit (positive externality)

Answer 2

A benefit of an activity received by people other than those who are not directly involved the activity

Question 3

The Coase Theorem

Answer 3

if, at no cost, people can negotiate their process and sale of the right to perform activities that caused externalities, they can always arrive at the efficient and solutions to the problems caused by externalities.

Question 4

Tragedy of the Commons

Answer 4

the tendency for a resource that has no price to be used until its marginal benefit falls to 0

Question 5

Positional externalities

Answer 5

this occurs when an increase in one person’s performance reduces the expected reward of another’s in situations in which reward depends on relative performance.

Question 6

How should the cost be distributed among firms?

Answer 6

The most efficient and hence the best distribution of effort is the one for which each pollution’s marginal cost of abatement (minskning) is exactly the same.

Question 7

The cost benefit test

Answer 7

tells us that a rational consumer will continue to gather information as long as it’s marginal benefit exceeds its marginal cost.

Question 8

asymmetric information describes

Answer 8

situations in which buyers and sellers are not equally well informed about the characteristics of products or services

Question 9

Statistical discrimination

Answer 9

the practice of making judgments about the quality of people, goods, or services based on the characteristics of the groups to which they belong.

Question 10

Value of marginal product, or VMP

Answer 10

VMP = worker’s marginal product x the net price for which each unit of the product sells

VMP the dollar value of the additional output a firm gets by employing one additional unit of labor. The general rule in quantitative labor markets is that workers pay in long run equilibrium will be equal to his or her VMP - the net contribution he or she makes to the employers revenue.

Question 11

human capital theory

Answer 11

which holds that an individual’s VMP /wage is proportional to his or her stock of human capital - an amalgam of factors such as education experience, training, intelligence ect.

Question 12

compensating wage differentials

Answer 12

Wage differences associated with differences in working conditions

Question 13

MinimumMethods of income redistribution

Answer 13

Minimum wage, earned-income tax credit, in-kind trnsfers e.g. food stamps and aid to families and negative income tax (similar to earned-income tax)