Section 13 Flashcards
Externality
An external benefit or cost that is enjoyed or imposed on a third party other than the buyer or seller of the good.
Market Failure
When the market outcome differs from the outcome that society considers optimal.
Negative Externality
AKA - Supply-side market failure.
Cost imposed on a third party not involved in the production or consumption of the good.
The market over provides the good.
Pollution, drunks, etc.
Marginal Private Costs
Marginal cost of producing the good.
Marginal Social Costs
Marginal private cost and externality costs.
Tragedy of the Commons
When individuals only account for private marginal costs and fail to account for the impact of their actions on others.
Positive Externalities
AKA - Demand-side market failure.
External benefit enjoyed by a third party other than the buyer or seller of the good.
Market under produces.
Education, immunizations.
Command-and-control
Legislation limiting the amount of the activity along with regulatory bodies to monitor the behavior of the industry.
Are inefficient.
Increase private marginal cost and introduce limits.
Pigouvian Tax
When you pay a tax equal to the negative externality. Decreases the equilibrium quantity and increase the price of the good. Less is produced that would cover the negative externality.
Pigouvian Subsidy
When you pay a subsidy equal to the amount of the positive externality. Encourages the production and consumption, increasing demand. Shifts the supply curve, producing more goods.
Pell grants, school loans, etc.
Tradable Permits
Allow firms to product a certain amount of pollution, firms can use, buy, sell those permits.
Coase Theorem
Efficient solutions can be found to externalities if:
- Transaction costs are low
- Property rights are assigned to one of the parties
- They are allowed to negotiate.
Properties of Private Goods
Rival: Consumption by one person prevents another from consuming it.
Excludable: Those who don’t pay for the good can’t consume it.
Divisible: Production of the goods can be divided among those who are consuming it.
Shoes, tacos.
Calculating Private Goods
Sum up all individual demands - horizontal.
Properties of Public Goods
Non-rival: One person consumption does not diminish it for another person.
Non-excludable: Regardless if you pay for it, you can still enjoy it.
Non-divisible: We can’t divide it up among everyone.
Military, light houses.
Free Riders
Consuming a good without paying for it.
Calculating Public Goods
Sum up individual willingness to pay at each quantity level - vertical. Since one persons consumption doesn’t diminish another’s ability to consume it.
Find collective willingness to pay.
Properties of Common Resource
Non-excludable: You can still enjoy it even if you don’t pay for it.
Rival: Consumption by one will affect others.
Ocean fishing, public lands.
Properties of Quasi-Public
Excludable: Can you restrict it to those who pay for it.
Non-Rival: Consumption wont’ affect others who consume it as well.
Toll-road, cell phones.
Cost/Benefit Analysis
When MC = MB
Present value = future value / (1+r)^t
Future value = present value * (1+r)^t
r = interest rate
t - number of years
Asymmetric Information
Imbalance of information between parties.
Adverse Selection
Information is known to one party but not the other when the contract is being made.
Moral Hazard
When the behavior of one changes after the contract is made.
Solving Market Failures - Private
- Require medical history or exam before signing the contract.
- Credit scores used to determine interest rates.
- Deductibles required to make them bar part of the cost.
- Product reports to help people make informed decisions.
- Warranties or money back guarantees.
- Franchises to keep consistency in all cities
Solving Market Failures - Government
- Standards on quality - training requirements - licenses.
- Inspections to promote confidence.
- Laws restrict activities like insider trading.
- Published reports disclosing industry information like accidents.
Failed Government Intervention
- Principle-agent problem
- Don’t account for unintended consequences of actions
- Increased bureaucracy
- Regulatory Capture - when the agency acts in interest of those they are assigned to regulate.
Principle Agent
Conflicts that arise when tasks are delegated by principles to agents - agents then don’t act in the best interest of the principles.
Consumer Surplus
The extra value that a consumer gains above what he was willing to pay for a product.
Consumer surplus and price are inversely related - Lower prices increase surplus.
Producer Surplus
The extra value that a producer gains when the actual price for a product is higher then the minimum acceptable price.
Producer surplus and equilibrium price have a direct relationship, lower prices reduce producer surplus.
Productive Efficiency
Minimizes the per unit cost by using the best combination of resources.
Allocative Efficiency
When the correct quantity is produced.
Public Choice Theory
Analysis of government decision making, politics, and elections.
Logrolling
Trading of votes to secure desired outcomes.
Paradox of voting
Society may not be able to rank its preferences consistently through paired-choice majority voting.
Special-interest Effect
Small number of people get a government policy that is not in the interest of the general population.
Earmarks
Projects that only benefit a local constituents.
Rent Seeking
Special benefits at taxpayers expense.
