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zMicroeconomics > Week 11 > Flashcards

Week 11 Flashcards

1
Q

what is an externality?

A

impact of one agent’s actions on the wellbeing of a bystander

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2
Q

what is a negative externality?

A

an externality with an adverse impact on the wellbeing of a bystander

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3
Q

what is the market outcome?

A

MB= private MC

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4
Q

what is the efficient outcome?

A

MB= Social MC

Social MC = private MC + Marginal External Cost

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5
Q

show social MC and private MC on a graph and DW loss

A
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6
Q

what is a positive externality?

A

an externality that has a beneficial impact on the welfare of bystanders

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7
Q

what is the market outcome for positive externalities?

A

MC = private MB

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8
Q

efficient outcome for positive externalities where

A

MC = social MB

social MB = Private MB + marginal external benefit

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9
Q

show social MB and private MB on a graph and deadweight loss

A
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10
Q

how do you remedy externalities?

A

internalize externalities by

  1. mergers
  2. pigouvian tax or subsidy
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11
Q

what is pigouvian emissions tax?

A

levy unit tax on polluter equal to MEC at the efficient output level

A tax levied on each unit of a polluter’s output in an amount just equal to the marginal damage it inflicts at the efficient level of output

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12
Q

what are issues with tax?

A
  1. informational problem
  2. ignores reciprocal nature of externalities
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13
Q

what are other remedies for externalities?

A
  1. command and control regulations
  2. tradable permits
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14
Q

describe command and control regulations as a way to remedy externalities

A

can come in the form of government-imposed standards, targets, process requirements, or outright bans. Such measures make certain behaviors either required or forbidden with the goal of addressing the externality . For example, the government may make it illegal for a company to dump certain chemicals in a river

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15
Q

what is the purpose of market-based policies such as taxes and subsidies?

A

provides incentives for producers to change their behavoiur

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16
Q

why may regulations be difficult to implement?

A

It requires the regulator to have in-depth knowledge of a certain industry or sphere of economic activity. If done incorrectly, regulation can introduce inefficiency. For example, if the government makes it illegal to dump in the river, the companies and their customers may suffer because the products must be produced using less efficient methods

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17
Q

show graph that internalizes negative externalities

A
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18
Q

what is coarse theorem

A
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19
Q

what does this example show?

A
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20
Q

what are the different combinations? what is the most efficient outcome?

A
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21
Q

Assignment of property rights

if fishery has right to clean water, what happens?

A
  1. S installs filter
  2. efficient outcome results

Profit for S = 300k, profit for F= 500k

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22
Q

assignment of property rights

if steel factory has the right to pollute, what happens?

A
23
Q

Assignment of property rights

describe bargaining case

assuming cost of filter to S is 200k

and Cost of treatment plant to F is 300k

A
24
Q

what is the bargaining outcome?

Given if S pollutes, makes profits of $500k

and F with higher catch makes profit of $500k

A
25
Q

efficient outcome is reached no matter

A

efficient outcome is reached no matter who is assigned property rights

26
Q

what is bargaining assumed to be?

A

priceless

27
Q

what does bargaining effect?

A

distribution of income. That is even though an efficient outcome is achieved, bargaining will affect distribution of income

28
Q

what are limitations/complications of coase theorem

A

Transactions costs are almost never 0

29
Q

what is a rival good?

what is non-rival?

A

one person’s consumption of a good does limits its availability to others

vice versa

30
Q

what is an excludable good?

non-excludable good?

A

prevents another person from using the good

non excludable: impossible or very costly to prevent another person from using the good

31
Q

distinguish between private and public goods

what about common resources?

A

private goods are rival and excludable

public goods are non-rival and non-excludable

common resources are rival but non-excludable

32
Q

for private goods, market demand is

A

the HORIZONTAL summation of all individual demand curves

33
Q

what is the efficient provision of public goods?

A

MB = MC

34
Q

what is MB of public good?

A

sum of MB to all customers of that good

determine by VERTICAL summation of individual demand curves

35
Q

show demand curve for private goods

A
36
Q

show how vertical summation of individual demand curves form demand curve for public gods

A
37
Q

describe how the non-excludable aspect of public goods create the free-rider problem

A

because invdividuals cannot be prevented from using the good, individuals receive the benefit of the good without having to pay for its upkeep/cost

38
Q

why is efficient public provision difficult?

A

due to problems in determining willingness to pay of customers

39
Q

when property rights are assigned

A

invididuals may respond to the externality by bargaining with each other

40
Q

property rights figure out

A

Property rights figure out which way the distribution is going. Property rights determine WHO bears the cost

41
Q

technology standard

A

command and control regulation that requires polluters to install a certain technology to clean up their emissions.

42
Q

what is a performance standard

A

A regulation that sets an emissions goal for each polluter. The polluter frequently has the flexibility to meet this standard in any way it chooses.

43
Q

deadweight loss from positive externality

A
44
Q

deadweight loss from negative externality

A
45
Q

when there are no externalities, then

A

MPB=MSB and MPC=MSC

46
Q

what is asymmetric information

A

A situation that occurs when some partcipants in a market have better information about market conditions than others
eg: healthcare, education

47
Q

example of coase theorem

A

Firm in a small town plans on opening a factory
-factory will emit pollution (negative externality)
-expected economic profit from factory: $4000 per month
-citizens of town collectively value fresh air at all $5000 per month
Efficient outcome: no factory is built. From societal perspective the costs of building the refinery ($5000 per month) are greater than the benefits ($4000 per month)

If Townspeople own the property rights:

  • Townspeople want at least $5000 per month, but factory owners are willing to pay up to $4000 per month
  • If townspeople own the property rights then the factory owners would be unable to pay a sufficiently high amount. Factory will not be built: efficient outcome

If firm owns the property rights then the townspeople would have to pay to prevent the factory from being built. Townspeople could pay $4001 which is more than $4000 that the firm would receive if they opened the factory. Factory will not be built: efficient outcome

48
Q

pigouvian tax

how much tax should be imposed

A

impose tax equal to the damages that the firm imposes on bystanders: eliminates dead weight loss

49
Q

If the government levies a tax on pollution

A

The private cost of pollution to a polluter is less than its social cost. If the government levies a tax on pollution, it increases the polluter’s private cost. The polluter now has an incentive to generate less pollution.

50
Q

another example of coase theorem

A

Take another example. The Jones family plants pear trees on their property which is adjacent to the Smith family. The Smith family gets an external benefit from the Jones family’s pear trees because they pick up the pears that fall on the ground on their side of the property line (see ). This is an externality because the Smith family does not pay the Jones family for the utility received from gathering fallen pears. As a result, the Jones family plants too few pear trees. In response, the Jones family can put up a net that will prevent pears from falling on the Smith’s side of the property line, eliminating the externality. Alternatively, the Jones could impose a cost on the Smith family if they want to continue to enjoy the pears from the pear trees. Both parties will be better off if they can agree to the second scenario, as the Smith family will continue to enjoy pears and the Jones family can increase the production of pears.

51
Q

what is the efficient number of pears to be produced

A

for positive externality, society’s MB> jones’s MB

here efficient number of pears where MSB=MC so 4 pears

52
Q

what is a private good

A

A private good is a scare economic resource, which causes competition for it. Generally, people have to pay to enjoy the benefits of a private good. Because people have to pay to obtain it, private goods are much less likely to encounter a free-rider problem than public goods. Thus, generally, the market will efficiently allocate resources to produce private goods.

53
Q

what are common goods

A

This means that anyone has access to the good, but that the use of the good by one person reduces the ability of someone else to use it. A classic example of a common good are fish stocks in international waters; no one is excluded from fishing, but as people withdraw fish without limits being imposed, the stocks for later fishermen are potentially depleted.

zMicroeconomics (19 decks)

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