Unit 5 Flashcards

0
Q

Positive Externality

A

Underproduction of output and therefore under-allocation of resources

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1
Q

Negative Externality

A

Overproduction of output and therefore overallocation of resources

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2
Q

Ways to correct negative externality

A

1) Private bargaining
2) Liability rules and lawsuits
3) Tax on producers
4) Direct controls
5) Market for externality rights

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3
Q

Ways to correct positive externality

A

1) Private bargaining
2) Subsidy to consumers
3) Subsidy to producers
4) Government provision

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4
Q

Moral Hazard Problem

A

the tendency of one party to a contract or agreement to alter his or her behavior

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5
Q

Adverse selection

A

One person knows something that the other does not

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6
Q

Assymetric information

A

Buyers and sellers do not have the same information

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7
Q

The study of market failures helps us

A

understand how regulating markets may help with the allocation of resources

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8
Q

study of government failure may help us to

A

understand how changes in the way the government functions may help to operate more efficiently

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9
Q

Demand-side market failures

A

demand curves do not reflect consumers full willingness to pay

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10
Q

Supply-side market failures

A

Supply curves do not reflect full cost of production

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11
Q

Allocation efficiency

A

mb=mc
Total surplus is at a maximum
Maximum willingness to pay=minimum acceptable price

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12
Q

Private goods

A

Cars, clothes, computers, etc.

  • Rivalry-when one person buys and consumes a product it is no longer available for another person
  • Excludability- sellers can keep people who do not pay for a service from obtaining the benefits
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13
Q

Public goods

A

Nonrivalry and nonexcludability

-leeds to a free rider problem- once a producer has provided a public good, everyone obtains the benefit

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14
Q

The more free riding the

A

less the demand

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15
Q

Cost benefit analysis

A

Comparison of mb and mc to figure out whether or not to provide or how much to provide of a service

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16
Q

Quasi-public good

A

exclusion is possible ie. education, streets, libraries etc.
(provided by the government through taxes)

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17
Q

Demand or MB for a public good is found by

A

vertically adding prices that all members of society are willing to pay for the last unit of output

18
Q

Direct control

A

limit activity—raise MC of production

19
Q

Coase Theorem

A

Individuals can negotiate their own mutually agreeable solutions to externality problems through private bargaining
(the fable of bees)

20
Q

Subsidies

A

taxes in reverse

21
Q

Provision

A

give free to all ie. flue shots

22
Q

Optimal reduction of an externality

23
Q

Public choice theory

A

economic analysis of government decision making, politics, and elections

24
Taxes should be
Simple, efficient, certain and fair
25
Benefits received principle
those who pay get the benefits | ie. if you have kids you pay for public schools
26
Ability to pay principle
more money=more taxes
27
Progressive taxes
Follows the ability to pay higher income=higher tax rate -federal income taxes are progressive
28
Proportional taxes
Flat tax, everyone pays the same RATE | -corporate taxes tend to be proportional
29
Regressive taxes
Tax rates increase as your income decreases | "everyone pays $100"
30
When a supplier is taxed, who pays?
Producers and consumers each pay half
31
The market system fails to produce public goods because
private firms cannot restrict the benefits of such goods only to consumers who are willing to pay for them
32
What are the economic functions of government
enforcing laws and contracts, providing public goods, correcting market failures
33
In a market economy, the distribution of income is
primarily determined by the prices of scarce resources people own
34
if the production of a good creates positive externalities, the private market will produce
too little of the good at too low a price
35
If the production of a good creates negative externalities, the private market will produce
too much of the good at too low a price
36
public choice theory is based on the idea that
self interest motivates participants in both the public and private sectors of the economy You cannot expect the gvnmt to fix anything
37
Federal income tax is based on
ability to pay
38
Excise tax on gasoline is based on
benefits received
39
Sales tax is
regressive
40
An excise tax will generate the most revenue for government if
demand is inelastic
41
Moral hazard problem
after getting insurance, people act more recklessly
42
Adverse selection
people who actually need insurance will get it