Section9 Flashcards
1
Q
What are externalities?
A
- Externality: Cost or benefit of one person’s decision on a third party not considered by the decision-maker.
- Negative: Water/air pollution.
- Positive: Education, historic buildings.
- Externalities cause inefficiency in markets.
2
Q
What is a negative externality?
A
- Negative Externality: Cost imposed on a third party.
- Socially optimal output is less than market equilibrium.
- Example: Air pollution from cars.
3
Q
What is a positive externality?
A
- Positive Externality: Benefit to a third party without payment.
- Market produces less than socially desirable quantity.
- Example: Vaccinations, basic research.
4
Q
How can governments address externalities?
A
- Taxes: Reduce negative externalities (e.g., Pigovian taxes).
- Subsidies: Promote positive externalities.
- Regulations: Set limits or standards (e.g., emission caps).
5
Q
What is asymmetric information?
A
- One party knows more than the other (e.g., product quality).
- Leads to adverse selection (e.g., market for lemons).
- Creates inefficiency and market failure.
6
Q
What is moral hazard?
A
- Behaviour changes after insurance or protection.
- Example: Reckless driving with car insurance.
- Mitigated by deductibles and policy conditions.
7
Q
What is the Gini coefficient?
A
- Measures income inequality.
- 0 = perfect equality, 1 = all income by one household.
- Tool to assess societal inequality.
8
Q
What are merit goods?
A
- Goods under-consumed due to imperfect information.
- Example: Education, healthcare.
- Public sector support ensures equitable access.
9
Q
What are bounded rationality and willpower?
A
- Bounded Rationality: Limited decision-making due to complexity.
- Bounded Willpower: Preference for short-term rewards (e.g., over-eating).
10
Q
What is carbon pricing?
A
- Carbon taxes: Price per ton of emissions to reduce pollution.
- Emissions trading systems: Cap and trade system for allowances.
