econ final elzenga 15

Question 1

Market Failure:

Answer 1

a situation in which the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes

Question 2

Sources of Market Failure:

Answer 2

Externalities, Public goods, Imperfect information

Question 3

Government Failure:

Answer 3

when the government intervention in a market to improve the market failure actually makes the situation worse

Question 4

Externalities:

Answer 4

the effects of a decision on a third party that are not take into account by the decision maker; can be positive or negative; when these exist, the marginal social cost differs from the marginal private cost

Question 5

Negative Externalities:

Answer 5

when the effects of a decision not take into account by the decision maker are detrimental to others

Question 6

Positive Externalities:

Answer 6

when the effects of a decision not take into account by the decision maker are beneficial to others; make the marginal private benefit below the marginal social benefit

Question 7

Pareto Optimal:

Answer 7

a position from which no person can be made better off without another being made worse off

Question 8

Marginal Social Cost:

Answer 8

includes all the marginal costs that society bears - or the marginal private cost of production plus the cost of the negative externalities associated with that production

Question 9

Marginal Social Benefit:

Answer 9

the marginal private benefit of consuming a good plus the benefits of the positive externalities resulting from consuming that good

Question 10

Methods to deal with externalities:

Answer 10

Direct regulation, Incentive policies (tax/market), Voluntary solutions

Question 11

Effluent fees:

Answer 11

charges imposed by government on the level of pollution created

Question 12

Market Incentive Plan:

Answer 12

a plan requiring market participants to certify that they have reduced total consumption—not necessarily their individual consumption—by a specific amount; If individuals choose to reduce consumption more than required, they will be given a marketable certificate that they can sell to someone

Question 13

Free Rider Problem:

Answer 13

individuals’ unwillingness to share in the cost of a public good; Economists believe that a small number of these individuals will undermine the social consciousness of many in the society and that eventually a voluntary policy will fail; exceptions include times of war and extreme crisis

Question 14

Public good:

Answer 14

a good that is nonexclusive (no one can be excluded from its benefits) and nonrival (consumption by one does not preclude consumption by others); sum demand curve vertically

Question 15

Adverse Selection Problem:

Answer 15

a problem that occurs when buyers and sellers have different amounts of information about the good for sale and use that information to the detriment of the other

Question 16

Moral Hazard:

Answer 16

a problem that arises when people don’t have to bear the negative consequences of their actions

Question 17

Signaling:

Answer 17

an action taken by an informed party that reveals information to an uninformed party that offsets the false signal that caused the adverse selection problem in the first place

Question 18

Screening:

Answer 18

an action taken by the uninformed party that induces the informed party to reveal information

Question 19

Why government failures occur:

Answer 19

Gov’t doesn’t have an incentive to correct the problem; Gov’ts don’t have enough information to deal with the problem; Intervention in markets is more difficult than it initially appears; Bureaucratic nature of gov’t intervention does not allow fine-tuning; Gov’t intervention leads to more gov’t intervention

Question 20

Incentive Effect:

Answer 20

how much a person will change his or her hours worked in response to a change in the wage rate; determined by the value of supplying one’s time to legal market activities relative to supplying one’s time to nonmarket activities