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Microeconomics SEM 2 > Welfare > Flashcards

Welfare Flashcards

1
Q

What kind of questions is Welfare Economics interested in?

A

Normative Questions

Tries to Evaluate Outcomes in an Economy

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2
Q

What two things can Evaluation look at?

A

Efficiency + Equity

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3
Q

What can be used to distinguish between Efficiency + Equity?

A

Standard Efficiency benchmark

e.g. Pareto Efficiency

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4
Q

What is Pareto Efficiency?

A

Allocation/Outcome is Pareto efficient when No one can be Better Off without making someone else worse off

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5
Q

What is Pareto Gain?

A

Where a change makes at least One person Better Off without making anyone else Worse Off

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6
Q

Why does Pareto Efficiency often Conflict with Equity?

A

If one person owns ALL Resources- Pareto Efficient

–> BUT Pareto Gain Impossible- can’t move without making ‘Rich’ Worse off

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7
Q

In a Perfectly Competitive Economy, how much Pareto Gain is there?

A

NO Pareto Gain

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8
Q

If Pareto Gain is impossible, then what must the Original Equilibrium be?

A

Pareto Efficient

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9
Q

what are the 5 Main Market Failures?

A 
Information Failure
Public Goods
Externalities
Lack of Competition
Genuine Equity Concerns
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10
Q

What is Information Failure?

A

Adverse Selection + Moral Hazard

Market Participants can’t see each other- hard to price effectively

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11
Q

What are Public Goods?

A

Goods where there is NO Incentive to reveal True Willingness to pay- as others are also willing to pay
–> Demands, Pi = MUi- NOT Revealed
Free-Rider Problem

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12
Q

What are Externalities?

A

Where Private Costs & Benefits ≠ Social Costs & Benefits
MUi & MCi - NOT Accurate measures of Society’s True Preferences + Costs

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13
Q

Why is Lack of Competition a Market Failure?

A

Pi ≠ MCi

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14
Q

Why is Gov. Policy not always the answer to Market Failure?

A

Gov. Failure- makes situation worse

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15
Q

How do Externalities arise?

A

When Parties do NOT face Social Costs of their Actions

-OR Parties do NOT receive Social Benefits of their Actions

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16
Q

What are Positive Externalities?

A

Under-provided in the Market

  • Market provides the wrong incentives
    e. g. Education, Some Security Systems, Tech. Spillovers
17
Q

What are Negative Externalities?

A

Over-provided in the Market

  • Market provides wrong incentives
    e. g. Pollution, Cigarettes, Noise
18
Q

What does a Negative Externalities graph look like?

A

D = SMB = PMB
S = PMC
SMC > PMC
DWL- points to Socially Optimum point

19
Q

What does a Positive Externalities graph look like?

A

D = PMB
SMB > PMB
S = PMC = SMC
DWL- points to Socially Optimum point

20
Q

What two things can POSITIVE + NEGATIVE Externalities be found in?

A

Production + Consumption

21
Q

What are the 4 Main Solutions to Externalities?

A

Coase Theorem
Pigovian Taxes/Subsidies
Tradeable Pollution Permits
Standards + Regulations

22
Q

What is the main argument of Coase Theorem?

A

We don’t need Policy- People will bargain around Externalities
Assign Property Rights to One side of Market

23
Q

What is Coase Bargaining (1)?

A

Non-Smokers have Property Rights- Smoking Prevented

  1. Smokers can pay Sum, S, to smoke + Both Better off
  2. At E- Smokers Net Benefit = 40 = SMC
  3. Beyond E- Smokers Net Benefit > SMC- No scope to Bargain
24
Q

What is Coase Bargaining (2)?

A

Smokers have Property Rights- Smoking Allowed

  1. Non-Smokers can pay Sum, S, for Smokers to NOT smoke + Both Better off
  2. At E- Smokers Net Benefit = 40 = SMC
  3. Below E- Smokers Net Benefit > SMC- No scope to Bargain
25
Q

What is the Pigovian Tax Graph?

A

SMC > PMC
SMB = PMB
PMC + t > PMC
–> PMC + t Intersects SMC = SMB

26
Q

What are Tradeable Pollution Permits?

A
  1. Gov. decides quantity of Pollution allowed + give Firms a number of ‘Permits’- allow them to produce certain level of Pollution
  2. Firms can then Trade Permits with each other
    • Firms whose Pollution Reduction is more Costly–> Prepared to Buy extra Permits
      - Firms whose Pollution Reduction is Cheaper–> Prepared to Sell Permits
  4. Desired Pollution Reduction achieved at Lowest Possible Cost
27
Q

How do Standards work?

A

Gov. tells Firms quantity of Pollution allowed- individually (Qs)
–BUT- Gov. must also be Believed to be able to Detect + Punish Non-Compliance with Standards- Credibility matters

28
Q

What happens if Gov. does NOT have Info to set appropriate Standards?

A

Does NOT Guarantee Least-Cost Pollution Reduction

e.g. Same standard applied to Heterogenous Firms- Ignores different costs faced to hit Target

Microeconomics SEM 2 (12 decks)

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