The Blue Slides Flashcards
What is Opportunity Cost?
The opportunity cost is a net benefit of the most preferred option you must forgo when you choose something else.
Kosten van scenario A: Studeren kost 10k
Alrernatief scenario: Werken levert 20k op
Opportunity cost = 30k
What is GDP?
Gross domestic product (GDP): the market value of all final goods and services produced within the borders of a given country.
Gross domestic product measures the size (wealth) of an entire economy. However, if one is interested in knowing the wealth of an average citizen, then the GDP has to be divided by the population size, resulting in the GDP per capita measure
What is General Government?
When referring to general government expenditure, the economists refer to expenditure byall levels of government.
Note that we can typically differentiate between ‘central’, ’state’ and ‘local’ government expenditure. ‘General’ government aggregates across all these levels of government
You won a free ticket to see a SigurRós concert (which has no resale value). Ólafur Arnaldsis performing on the same night and is your next-best alternative activity. Tickets to see Ólafur Arnalds cost $30. On any given day, you would be willing to pay up to $50 to see Arnalds. Based on this information, what is the opportunity cost of seeing Sigur Rós?
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What is an allocative efficiency?
Allocative efficiency implies that preferences of consumers and producers align. It is the state that maximises the welfare of society.
Allocative efficiency is enabled by market transations and voluntary exchange, because such exchange guarantees that goods move to those who value them the most and, in doing so, makes both parties (the seller and the buyer) better off
What are negative externalities?
A negative exernality exists when the production or consumption of a product results in a cost to the third parties.
Criminal behaviour leads to a production of an activity which harms the victim (externalities imposed on the victim) and a broader community, e.g., because of the fear it creates (externalities spanning beyond the victim).
What does rationality mean?
Rational agents:
-Have well behaving preferences (complete, transitive)
*Completeness: ability to say which of the options one prefers,
*Transitivity: if A>B and B>C then it must be that A>C.
-Maximise their utility: Economists use numbers to represent strength of preferences. The assignment of numbers is done via a utility function. Maximising the utility means that an individual will chose an option with with greatest assigned number.
-Have full information.
This is what the rational choice theory prescribes.
What is a Cost and Benefit Analysis?
The cost and benefit analysisis a systematic process to analyze, which decision to make and which to forgo by comparing the costs and benefits of options where both (costs and benefits) are expressed in comparable units (typically monetary units).
What is the Law of Deterrence?
EXPECTED PUNISHMENT OMLAAG = CRIME RATE OMHOOG
The name is taken after the (First) Law of Demand, which is the proposition that the demand curve for goods slopes down. The more cheap the goods are, the more quantity of it is damanded.
The (First) Law of Deterrence, on the other hand, is the proposition asserting the the quantity of crime supplied increases as expected costs of punishment go down
What is Elasticity?
The elasticity of demand informs about the change in quantity demanded of a good due to a change in price.
When elasticity > 1 then the response in quantity demanded is more than proportional to changes in prices. Demand is elastic.
When elasticity < 1 then the response in quantity demanded is less than proportional to changes in prices. Demand is inelastic
What is Discount Rate?
Discount rate is a also known as a measure of impatience. The higher your individual discount rate the more impatience you are, which more technically means that you put a lesser weight on the future events and you more focus on the present.
Also very relevant for assessment of climate change policies whereby costs are felt immediately and benefits materialize in the future.
What are Marginal Benefits and Marginal Costs?
Economists think at the margin, i.e., the process of deciding whether to use or not one additional unit of some resource. Such a thinking assumes that the choice is optimised at the quantity at which marginal benefit is equal marginal cost. Why?
What is Endogeneity?
What is RCT?
An RCTi s a setup where a researcher/policymaker is able to randomly assign the treatment(X). Since the researcher/policymaker assigns treatment (X) at random, the treatment cannotbe influenced by Y and the correlation between treatment (X) and confounding variables (Z) is absent.
What is a natural/quasi-experiment?
A natural (quasi-) experiment follows the logic of an RCT such that atreatment is applied to some subjects but is withheld from others.
Importantly, in these designs the treatment is as-if randomly assigned by the force of nature or as a byproduct of policy reform
What are the risk preferences?
In economics we distinguish between three risk profiles:
*Risk neutral: individualis indifferent between certain and risky reward, holding constant expected reward100% ×100 ∽50% ×200 + 50% ×0
*Risk averse: individual prefers certain reward over risky reward, holding constant expected reward; compenstation for risky reward100% ×100 ≽50% ×200 + 50% ×0
*Risk seeking individual prefers risky reward over certain reward, holding constant expected reward; compensation for certain reward100% ×100 ⋞50% ×200 + 50% ×0
What is Prospect Theory and its element?
Probability weighting: tendency for individuals to over-weight low probability events while also under-weighting high probability outcomes.
Simplification of options: very small probabilities may be rounded to zero and eliminated from consideration.
Both of these elements are parts of the famous prospect theory
What is Overconfidence?
People tend to be overconfident,i.e., the certainty that people express in their judgments tends to exceed the frequency with which those judgments are correct.
Translating this to criminal behaviour, criminals may display overconfidence about :
-Their abilities (“I can get away with any crime”)
-Their chances (“At this hour the house will be empty
What is Hedonic Adaptation?
What is hedonic adaptation?Hedonic adaptation means that people quickly adapt to changes. They return to their defaults. E.g., people tend to return to their default “happiness” after winning a lottery or facing an accident.
Thus, criminals may also do not perceive the severity of crime as harsh as they adapt to it.
What is Duration Neglect?
Duration neglect is people’s tendency to remember an event through how it ended rather than how long it lasted or how intense where the peaks.
What is mental accounting?
Mental accounting: broadly speaking it means that the outcomes are perceived and evaluated depending on the context.
Like ordinary citizens, the criminals may fail to correctly consider opportunity costs of punishment if they think about the outcomes in terms of ratios.
For example, think about an increase of imprisonment from 1 to 2 years versus an increase from 5 to 6 years. By the same token, consider an increases of fine from 100 to 200 versus from 2,000 to 2,100
What is a Conjunction Fallacy?
One commits the conjunction fallacy when they overestimate the probability of a conjunction
Example the “Linda Problem”
The chance of Linda being a bank teller and a feminist is sometimes thought to be higher than the chance of her being a bank teller. This would violate the conjuction rule (the “And” rule in probability
What is the dual process theory?
What is a real GDP?
Recall (from lecture 1) that gross domestic product(GDP) was defined as the market value of all final goods and services produced within the borders of a given country.
We distinguish between a nominaland realGDP. The nominal GDP might be higher from one year to another purely because of higher prices (inflation), even though in real terms no more goods are produced. Real GDP explicitly removes the effect of inflation. It expresses the value of final goods in terms of some specific base year prices.
Inflation is a rate at which price level of a representative basket of goods change
What are the two sources of growth in the Neoclassical Ecoomic growth model?
When analysing real GDP growth per capita, aspects related to labour productivity are more relevant
How to calculate external effects?
Example: Pesticides use (cont’d)
*Marginal private cost(MPC) = marginal cost to decision-maker
*Marginal external cost (MEC) = costs imposed by decision-maker on society
*Marginal social cost (MSC) = MPC + MEC (full cost to society)
*Negative external effects (MSC>MPC)
Plantation sproduce where Price = MPC (denoted Q)*
Society would choose the production where Price = MSC (denoted QS)
Negative external effect leads to overproductionand overuse of pesticides (Q > QS) and to environmental damage
The example (model) just presented refers to a local environmental problem. However, the same logic applies to global environmental problem such as CO2 emissions
What are public goods?
Non-rival: use by one person does not reduce its availability to others
Non-excludable: impossible to exclude anyone from having acces
*Non-rivalgoods have a marginal cost of zero, so it is not possible to set price = MC.
*It is impossible to set a price for non-excludable goods because the provider cannot exclude those who haven’t paid
Example: If one farmer invests in a community irrigation project, other farmers receive external benefits, but it is difficult to make them pay for the benefits or write contracts. They can free ride. Free-riding means that only one person bears the costs while everyone benefits.The same applies to an investment in a clean air.
What is an abatement cost curve?
The abatement cost curve shows the per-unit cost of abating greenhouse gas emissions using abatement policies, ranked from the most cost-effective to the least (the marginal cost curve)
What are indifference curves?
Indifference curves show a combination of two “goods” in various quantities that provide equal satisfaction to an individual.
An individual will always want to enjoy more satisfaction,thus they will always want to be on a “higher” indifference curve.
