Week 3 - Rationale for Government Intervention Flashcards
Key Outcome: What is meant by positive economic analysis?
Economic analysis is OBJECTIVE, value free argument.
Show two different stakeholders information, and they will come up with the same conclusion.
Key Outcome: What is an externaility?
An externality is a consequence of a free-market. It is the additional cost faced by society and is not reflected in the marginal cost of production.
The additional cost to society is not factored in by the producer.
Key Outcome: How can a tax achieve a social optimum in the face of an externaility?
A tax or levy increases the marginal cost of supplying each unit, shifting supply to the left. The taxation enables MSC = MSB, by redeploying revenue earned to support people affected by the externailtiy.
Key Outcome: What is a public good?
A public good is a good that is in the interest of the public to be provided; parks, beaches, statutes etc. However, due to their nature, the PRIVATE SECTOR will not provide it.
Key Outcome: Why do public goods have to be provided collectively?
Public goods must be provided collectively, through systems such as government tax, as no individual is incentivised to produce public goods. The dominant strategy for each individual when ask voluntarily provide a public good is not to provide. Hence, the government must mandate all individuals to contribute - through taxation.
Key Outcome: Under what circumstances is a cap and trade system preferable to a tax?
x
Key Outcome: How does a cap and trade achieve efficient abatement?
x
The short-run is defined as what?
A period of time where prices remain unchanged.
What is the QUANTITY ADJUSTMENT MODEL?
In the short-run, prices are slow to change. The major change is observed in quantity. We see large changes i the quantity demanded, but small changes in price.
John Maynard Keynes stated “all the adjustment is happening on the quantity side” - what does this mean?
Prices were not moving, and the quantity produced/sold changed.
What is the NATURAL RATE OF UNEMPLOYMENT comprised of?
- Frictional Unemployment
2. Structural Unemplyment
What does OKUN’S LAW DEMONSTRATE?
Okun’s Law demonstrates an inverse relationship between OUTPUT GAP and CYCLICAL UNEMPLOYMENT.
True or False: OKUN’S LAW suggests that if cyclical unemployment increases, the output gap will decrease?
TRUE - the more people that are unemployed, the less productive an economy is.
What is the OKUN COEFFICIENT?
The BETA in the OKUN formula; typically 1.8 for US economy.
True or False: Cyclical unemployment can be less than 0?
True.
If u
What is meant by the GREAT MODERATION?
What are the 3 probable causes?
A phenomenon since 1990, where volatility in GDP has stabilised. Bernanke hypothesises due to the following reasons:
1 - Structural Change
2 - Better Policy Making
3 - Luck
What is meant by NORMATIVE?
Perceived benefit changes based on individuals values; and individuals value different things differently.
How is a PUBLIC GOOD GENERATED?
There is not an incentive for the PRIVATE SECTOR to provide a public good. Hence, GOVERNMENTS will generate appropriate resources (through TAX) to provide “public goods”.
What is SOCIAL WELFARE?
The combined PRODUCER and CONSUMER SUPLUS
What is CONSUMER SURPLUS?
The difference between the perceived value (demand curve) and the market price of the good.
What is PRODUCER SURPLUS?
The difference between the COST OF PRODUCTION (supply curve) and the market price of the good.
What happens to PRODUCER and CONSUMER SURPLUS with a FIXED-PRICE MODEL?
Overall there is a NET LOSS in SOCIAL WELFARE.
What is the FREE RIDER PROBLEM?
The fact that individuals will not voluntarily provide PUBLIC GOODS
How does the CAP and TRADE system work?
CAP AND TRADE works on a fundamental scientific justification, that shows by reducing X by some proportion increases SOCIAL WELFARE.
CAP AND TRADE turns science into economics by enabling/forcing the market to efficiency meet the scientific target. It does this by allocating ABATEMENTS to firms, which then in-turn trade between themselves.
If MC,A,abatement > MC,B,abatement: then firm A will buy abatement from firm B.
What is ABATEMENT/ABATE mean?
The process of reducing something; abate pollution.
