test 3 microeconomics with blackstock latech Flashcards
define externalities
when one pays the costs, or receives the benefits, of a production process with which they had nothing to do
welfare economics formula
consumers’ surplus + producers’ surplus
define welfare economics
the study of how the allocation of resources affects economic well-being
how can the government correct an externality? 3 things
1) command and control- make the externality illegal
2) corrective taxes and subsidies- aka Pigouvian taxes after the economist Arthur Pigou
3) tradable pollution permits
who was A.C. Pigou?
-a British economist
-externalities should be mitigated through direct government coercion or through taxes
-not efficient to tax the output, but rather to tax the externality
Problems with the Pigou approach. 2 things
1) pollution taxes are used to enrich government coffers, not to compensate those who were harmed by the pollution
2) pollution taxes enacted through political process are likely to reflect political priorities rather than the environmental ones.
who was Ronald Coase?
-“Pigouvian tax was unnecessary”
-that a market would develop and automatically generate the optimal output of the externality
-this optimal level would be reached regardless of to whom property rights were assigned
problems with the Coase theory. 4 things
1) coase assumes that transactions cost are close to zero
2) pollution could become a cash cow
3) what about psychic benefits/damages
4) the courts are NOT fair
the 4 types of goods.
1) private goods
2) public goods
3) common resources
4) club goods
define private goods
both excludable and rival in consumption, ex. food you buy for yourself
define public goods
neither excludable nor rival in consumption, ex. lighthouse producing light for everyone to use
define common resources
not excludable, but rival in consumption, ex. ocean fishing
define club goods
excludable, but do not rival in consumption, ex. dish satellite
what is a free rider problem
a person who receives the benefit of a good, but avoids paying for it
define tragedy of the commons
not having proper ownership
what is the common property regime
an arrangement whereby the property rights to a resource are nonexistent or poorly defined; be default, anyone may use of consume the resource
what is the public interest theory of regulation
-regulations are passed to correct a market failure
-it doesn’t explain where regulations come from in the first place
how to know if something is a market failure. 2 things
1) externality
2) natural monopoly
define natural monopoly theory
if a second firm enters a market where there is limited demand, because of high fixed costs, both firms will fail
define capture theory
regulations are passed not to benefit the public, but the industry being regulated
-many regs are passed which industry abhors
-doesn’t explain where the regulations came from
define economic theory of regulation
it’s all about decreasing competition and increasing profit
-the key player is the politician, his goal is to be re-elected, all he wants is money and votes
baptist and bootleggers theory
two different groups will often work together to have a regulation passed, but for two VERY different reasons
define antitrust
laws and regulations meant to preserve business competition
who regulates the antitrust?
the FTC and DOJ
define concentration ratios
a ratio that indicates a firm’s total sales in relation to their industry as a whole
problems with concentration ratios (4 things)
1) two firms in an industry can switch places and the CRs will remain unchanged
2) CRs ignore the impact of foreign firms selling within this country
3) because CRs rely on NAICS (North American industrial classification) codes, they ignore substitutes
4) because CRs use national sales data, they ignore regional issues
define price discrimination
charging 2 different prices to 2 different groups where the difference in price is not based on a difference in cost
define arbitrage
buying and reselling a good specifically to make a profit
define tying arrangement
customer allowed to leave or buy a desired product (tying product) only if he also leases or buys another product (tied product)
define exclusive dealings
agreement which buyer commits itself to deal only with specific seller, thus cutting competing sellers out of share of market
define territorial restraints
an arrangement between the supplier and the dealer that the supplier will not allow any other dealer to locate within a certain area
what are the 3 types of mergers
1) horizontal
2) vertical
3) conglomerate
define horizontal merger
two firms in the same industry that merge, always challenged by the FTC/DOJ (ford and chevy combine)
define vertical merger
firm merges with supplier, sometimes challenged by the FTC/DOJ (ford and Michelin)
define conglomerate merger
two firms that have nothing to do which each other and this happened for diversification, never challenged (apple and KFC)
5 steps to allowing a merger
1) define the market
a. product
1. demand - if the merger occurs and firm A raises the price, can consumers substitute good B
2. supply - if the merger occurs and firm A raises the price, can firm B supply good A
b. geographic
1. demand - if the merger occurs and firm A raises the price, can consumers go to area B to buy good A
2. supply - if the merger occurs and firm A raises the price, can firms in area B supply area A
2) find the pre and post merger concentration ratios
HHI=Σs^2
3) look at the entry conditions (committed vs uncommitted)
-the more committed an entry is, the less likely the judge will allow a merger
4) look at all other factors (factors that facilitate collusion)
5) “Can firms increase efficiency without the merger?” this is what judges will ask
Sherman antitrust act (1890)
section 1 - price fixing is illegal, per se
-Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.
section 2 - makes monopolies or the attempt to monopolize a felony
define per se
in, or of, itself (latin)
section 1 US vs. Trenton potteries (1927)
they did price fixing to prevent “ruinous, cutthroat competition”
section 2 Clayton act (1914)
makes price discrimination illegal where the effect of such may be to substantially decrease competition or tend to create a monopoly
define price discrimination
charging 2 different prices to 2 different groups where the difference in price is not based on a difference in cost
Characteristics of price discrimination 3 things
1) there must be at least 2 separate and easily identifiable groups (movies have different prices based on age of buyer)
2) the firm must have some form of monopoly power (I can’t go to Taco Bell and sell my own tacos there)
3) there can be no arbitrage
define arbitrage
buying and reselling a good specifically to make a profit (ex. a kid can’t go buy 20 kid tickets and sell them to adults for a cheaper price than the adult ticket because there are ticket checkers)
section 3 Clayton act (1914)
-make illegal
~tying arrangement
~requirement contracts
~exclusive dealings
~territorial restraints
define derived demand
labor services rather than being final goods and services, are often inputs into the production of other goods and services
reasons the labor demand curve will shift 3 reasons
1) change in the output price
2) technological change
3) supply of other factors
define utility
the amount of satisfaction received from consuming a good or service
-it’s measured in utils (you-dulls)
-an ordinary ranking (opinion), not a cardinal ranking (numbers)
define marginal utility
the change in TU divided by the change in quantity ΔTU/ΔQ
define budget constraint
the limit on the consumption bundles that a consumer can afford
define slope
equals the relative price; the price of one good compared to the price of the other
slope formula
m = (Y2-Y1)/(X2-X1)
define indifference curve
a curve that shows consumption bundles that give the consumer the same level of satisfaction
-it’s like a trade off
-there is an infinite number of indifference curves
-based off of income
marginal rate of substitution (MRS)
the rate at which a consumer is willing to trade one good for another
4 properties of indifference curves
1) higher ICs are preferred to lower ones (more is always better)
2) ICs are downward sloping (always)
3) ICs do not cross
4) ICs are bowed inward
why is it like this? utility
the MRS (slope of IC) equals the MU of one good divided by the MU of the other good. TF
t
define tangent
would maximize your utility given your budget restraint
define equi-marginal principle
the marginal utility per dollar spent on good X must equal the marginal utility per dollar spent on good Y
-perfect substitutes (1 dime = 2 nickels) and perfect complements (1right shoe goes with one left shoe) are the only exceptions
define income effect
the change in consumption that results from the movement to a higher indifference curve (jumps to a higher and lower curve)
define substitution effect
the change in consumption that results from being at a point on an indifference curve with a different marginal rate of substitution (moves along the curve)
what would the income effect say
now that beer is cheaper, my income can buy more and I am, in effect, richer! therefore, I can buy more beer and more pizza
what would the substitution effect say
“Now that beer is cheaper, I can buy more beer for every pizza that I give up. Since pizza is relatively more expensive, I should buy less pizza and more beer.”
pre merger rules
If HHI lies between:
0-100, it’s unconcentrated, so the case continues forward
100-1800, it’s moderately concentrated, so more info is needed
1800-10K, it’s concentrated, so the merger is denied
post merger rules
the change in HHI, due to the merger is 2AB if the change in the HHI is:
0-50, it’s unconcentrated, so the case continues forward
50-100, it’s moderately concentrated, so more study is required
>100, it’s concentrated, so the merger is halted
