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
