econ 201 exam

if negative, the market quantity is larger than socially desireable

if positive, the market quantity is smaller tan socially desireable

When the market fails to allocate society's resources efficiently

self-interested buyers and sellers neglect the external costs of their actions

the effect of a market exchange on a third party who is outside to the exchange

if negative, the market quantity is larger than socially desireable

if positive, the market quantity is smaller tan socially desireable

Private MC + Marginal External Cost

altering incentives so people consider the external effects of their actions

What a good is worth to the buyer

the value of the positive impact on bystanders; difference between new demand curve and old demand curve

Private Value + external benefit

Command-and-Control
Market-Based
Corrective taxes/subsidies
Tradeble Pollution Permits

regulate behavior directly

provide incentives to private decision-makers to change behavior

issued with a face "pollution value"

if private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own

Transaction Costs
Stubbornness
Coordination Problems

costs incurred in the provess of agreeing to and following through on a bargain

even if a beneficial agreement is possible each part may hold out for a better deal

if # of partiees is very large, coordinating them may be costly, difficult, or impossible

income below that need for a "basic standard of living"

a #/\$

1963, Social Security Administration; looked at families that were poor and based findings on an important diet

%

based on estimates of the level of income needed to cover basic needs.

a distribution of income; measure by the Lorenz curve

inequal distribution of assets

the cumulative share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis

changing of households, changing of labor markets

either a buyer, or seller, or both, are less than 100% certain about the qualities of what is being bought and sold

both the parties involved in an economic transaction have an unequal amount of information (one part knows much more than the other)

refers to the problem in which the buyers of insurance have more information about whether they are high-rick or low-risk than the insurance company does

refers to the case when people engage in riskier behavior with insurance than they would if they did not have insurance

a person can be prevented from using resources

one person's use diminishes other people's use

"open-access resources"; not excludable, cannot prevent free riders

a person who receives the benefits of a good but does not pay for it

they provide goods and pay for them by taxing the people who benefit from it (i.e. gas tax for those that drive on roads and bridges)

study that compares the costs and benefits of providing a public good

ensuring they are not overused

due to an externality; allowing one's flock to graze on the land reduces its quality for other families; private incentives outweigh social incentives

"A parable"; 1986; Tragedy of the Commons

regulate use of resources (command-and-control), impose a corrective tax to internalize the externality, auction off permits allowing use of the resources, convert to a private good

a legal maximum; under equilibrium (i.e. rent controls)

a legel minimum; above equilibrium (i.e. minimum wage)

shortages

makes demand fall by the amount of tax

supply is flatter, or more elastic, and demand is more inelastic

demand is flatter, or more elastic, and supply is more inelastic

study of how the allocation of resources affects economic well-being

amount the buyer is willing to pay minus what the buyer actually pays; WTP-P

area below the demand curve and above equilibrium; Area = 1/2bh

amount a seller paid for a good minus seller cost, or P-Cost

PS=1/2bh

CS+PS

Can government raise a total surplus is a competitive market?

the notion that government should not interfere with market
In a graph with areas of A, B, C, D, E, and F:

C+E
In a graph WITH TAX with areas of A, B, C, D, E, and F:

A
In a graph WITH TAX with areas of A, B, C, D, E, and F:

F
In a graph with areas of A, B, C, D, E, and F:

B+D
In a graph WITH TAX with areas of A, B, C, D, E, and F:

A+B+D+F
Rival in Consumption Yes No


Excludable Yes x y

x= private goods (i.e. pizza, latte)
y= club good, natural monopoly (i.e. cable tv, fire protection)
z= common resource (i.e. fish in the ocean in the environment)
w= public good (i.e. natural defense, tornado siren)

limits on quantity of pollution emitted, technology requirements, , require immunizations

altering incentives

external benefits

are designed to internalize the externality, or alter incentives; differ from other taxes/subs which distort incentives and the effivient market; result in more efficient market; no dwl

firms with lowest abatement costs reduce the most costs; these cost solutions offer a role of incentives