unit 6 Flashcards
Adverse selection problem
a market situation where one party, due to possessing more information than the other, exploits the situation to their advantage, potentially leading to inefficient outcomes and market failure
moral hazard
In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs associated with that risk, should things go wrong.
lorenz curve
perfect equality
gini index
how equitable your income is
area a / area a + area b
perfect equality
0
perfect inequality
1
Explain the difference between a production externality and a consumption externality.
A production externality arises from the production process, resulting in two cost curves. A consumption externality arises from the consumption process, resulting in two benefit curves.
Identify two policies that can mitigate the effects of a positive externality
A Per unit subsidy, regulation promoting more output
Identify two policies that can mitigate the effects of a negative externality
A Per unit tax, regulation limiting output, permits
Why are public goods considered a market failure?
Profit-seeking firms in the free market don’t provide enough public goods and services since they don’t generate profit. If society wants public goods, the government often needs to step in.
Define nonexclusion
It is impossible to exclude individuals or groups from enjoying the benefits of goods or services, regardless of whether or not they have paid for them.
Definenon-rivalry(sharedconsumption).
Multiple individuals can use or consume the goods or services simultaneously without diminishing its availability or quality for others
Anti-trust laws
Antitrust laws were designed to prevent monopolies and make markets more competitive.
What is the difference between a per-unit tax and a lump-sum tax?
A per-unit tax is a tax on each unit produced.If more units are made, the amount of the tax increases, but the tax is the same no matter how many units are made.
Whatisthedifference betweenincomeinequality andwealthinequality?
Income inequality involves annual earnings. Wealth inequality looks at how accumulated assets are distributed.
Identify three sources of inequality.
Abilities, human capital, inheritance, effects of discrimination, access to financial markets, mobility,etc.
What are progressive taxes?
Taxes that take a larger percentage of income from high-income groups. Takes morepercent fromrichpeople
What are proportional taxes?
Taxes that take the same percent of income from all income groups. Take the same percent from everyone
What are regressive taxes?
Taxes that take a larger percent of income from low-income groups.Takes more percent from poor people
externality in production
spill over cost or benifit by producers of ht product
exterrnality in consumption
spill over costs or benifits caused by the consumers of a product
rival goods
good that gets used up as it gets consumed
excludable good
can only be consumed for those who pay for it
free-rider probelm
when poeple enjoy benifits wihtout paying - non-exlcudable goods
so goods are underproduced - less incentive
public goods
non rival
non excludable
- market failure - will be underproduced in free market
per unit subsidy in production
Shifts supply curve to the right
per unit tax in production
Shifts supply curve to the left
Shifts marginal cost up, decreasing quantity
Lump sump tax on production
Shift ATC up, doesn’t change price or quantity in short run
how to regualte natural monoply
impose a price ceiling at socially optimal price
reasons for market failure
market power
asymetric information
externalities
free rider problem
Deadweight loss reasons
tax and trade barriers
asymetric information
Price floor/ceilings
imperfect competition
externalities
public goods
government policies to eliminate deadweight loss
taxes, subsidies, environmentla regulations, assignment of property rights, reassignment of property rights, public provisions
2 things are required to internalize an externality through coase theorem (no government intervention)
Well-defined property rights
Low/zero transaction costs
positive externality in consumption
MSB>MPB
Positive externality in production
MSC<MPC
Negative externality in consumption
MSB<MPB
Negative externality in production
MSC>MPC
Pigouvian tax
per unit tax
club goods
non rivralrous
excludable
common resources
non excludable
rivalrous
Tragedy of the Commons
a situation where individuals, acting in their own self-interest, exhaust or deplete a shared resource, leading to a negative outcome for everyone involved
Why do public goods result in inefficiency and underproduction
Consumers have no incentive to reveal their demand for public goods
Consumers have no incentive not to overconsume common resource
common resource solutions
government ownership
taxes
regulation
assigning property rights
non price regulation
rules to ensure competition, environmental protection or health and safety
The poverty threshold
is the annual
income below which a family is officially
considered poor.
The poverty rate
is the percentage of the
population with incomes below the poverty
threshold
Mean household income
is the
average income across all households.
Median household income
is the
income of the household lying in the
middle of the income distribution.
The Gini coefficient
is a number that
summarizes a country’s level of income
inequality based on how unequally
income is distributed across the quintiles.
A means-tested program
is available only
to individuals or families whose incomes fall
below a certain level.
An in-kind benefit
is a benefit given in the
form of goods or services.
A negative income tax
is a program
that supplements the income of
low-income workers.
Average cost pricing occurs when
regulators set a monopoly’s price equal to its
average cost to prevent the firm from
incurring a loss.
Marginal cost pricing occurs when
regulators set a monopoly’s price equal to its
marginal cost to achieve efficiency.
Artificially scarce good
is a good that is
excludable but nonrival in consumption.
A good is subject to a network externality
when
the value of the good to an individual
is greater when more other people also use
the good.
