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Ep1 > unit 12 > Flashcards

unit 12 Flashcards

1
Q

private property

A

the right and expectation that one can enjoy one’s possessions in ways of one’s own choosing, exclude others from their use, and dispose of them by gift or sale to others who then become their owners.

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2
Q

property rights

A

legal protection of ownership, including the right to exclude others and to benefit from or sell the thing owned

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3
Q

contracts

A

A legal document or understanding that specifies a set of actions that parties to the contract must undertake.

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4
Q

social norms

A

an understanding that is common to most members of a society about what people should do in a given situation when their actions affect others.

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5
Q

market failure

A

When markets allocate resources in a Pareto-inefficient way.

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6
Q

external effect

A

A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in a contract. It is called an external effect because the effect in question is outside the contract.

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7
Q

MPC

A

the cost for the producer of producing an additional unit of a good, not taking into accounts any costs imposed on others

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8
Q

MSC

A

the cost of producing an additional unit of a good, taking into account the cost to the producerand the costs incurred by others affected in the production of the good
=MPC+MEC

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9
Q

why does MPC slope upwards

A

as the cost of producing an additional unit of a good increase as land is more intensively used

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10
Q

MEC

A

the cost of producing an additional unit of a good that is incurred by anyone other than the producer of the good.

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11
Q

coasean bargaining

A

firm owners negotiate a private bargain

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12
Q

transaction costs

A

Costs of bargaining.
Costs that delay the bargaining process or the agreement of a contract. They include costs of acquiring information about the good to be traded, and costs of enforcing a contract.

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13
Q

reservation option

A

A person’s next best alternative among all options in a particular transaction.

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14
Q

minimum acceptable offer

A

in the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. Generally applied in bargaining situations to mean the least favourable offer that would be accepted.

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15
Q

reservation profit=

A

loss of profit

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16
Q

what does coasean bargaining still require

A

a legal framework for enforcing contracts so that property rights are tradable and each party stick to the bargaining they negotiate. but obstacles mean that private bargaining cannot address market failure alone

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17
Q

3 things governments can do

A

regulation of output that is causing external effect -
taxation on production of goods causing external effect
enforcing compensation to the external party affected for the costs imposed on them

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18
Q

pigouvian tax

A

A tax levied on activities that generate negative external effects so as to correct an inefficient market outcome

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19
Q

external benefit / external economies

A

a positive external effect: that is, a positive effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit in a contract.

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20
Q

limits of pigouvian taxes

A

1- gov may not know the degree of harm suffered by each person effected
2- hard to measure MSC even if MPC is well-known
3- gov may favour the more powerful group and so impose an unfair pareto-efficient outcome

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21
Q

external diseconomies / negative externalities

A

A negative effect of a production, consumption, or other economic decision, that is not specified as a liability in a contract.

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22
Q

tort law

A

the law of damages

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23
Q

why do markets fail with externalities?

A

because the external effects of a person’s actions are not owned by anyone, there are incomplete contracts

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24
Q

incomplete contracts

A

the external effects of a person’s actions are not governed by contracts

25
Q

missing markets

A

A market in which there is some kind of exchange that, if implemented, would be mutually beneficial. This does not occur due to asymmetric or non-verifiable information
no market within which these external effects can be compensated

26
Q

verifiable information

A

Information that can be used to enforce a contract.

27
Q

why there are uncompensated external costs and benefits

A

some info that is of concern to someone other than the decision-maker is non-verifiable therefore there can be no contract or property rights ensuring that external effects are compensated and so the social costs or benefits of the decision-makers actions will not be included in theire decision-making process

28
Q

public good

A

A good for which use by one person does not reduce its availability to others. non-rival and non-excludable

29
Q

copyright

A

ownership rights over the use and distribution of an original work.

30
Q

artificially scarce goods/ club goods

A

A public good that it is possible to exclude some people from enjoying

31
Q

private good

A

A good that is both rival, and from which others can be excluded.

32
Q

common-pool resource

A

A rival good that one cannot prevent others from enjoying. rival but non-excludable

33
Q

public bad

A

the negative equivalent of a public good. It is non-rival in the sense that a given individual’s consumption of the public bad does not diminish others’ consumption of it. eg air pollution

34
Q

hidden action

A

this occurs when some action taken by one party to an exchange is not known or cannot be verified by the other. For example, the employer cannot know (or cannot verify) how hard the worker she has employed is actually working

35
Q

moral hazard

A

this term now refers to any situation in which one party to an interaction is deciding on an action that affects the profits or wellbeing of the other but which the affected party cannot control by means of a contract, often because the affected party does not have adequate information on the action. It is also referred to as the ‘hidden actions’ problem.

36
Q

moral hazard insurance

A

This term originated in the insurance industry to express the problem that insurers face, namely, the person with home insurance may take less care to avoid fires or other damages to his home, thereby increasing the risk above what it would be in absence of insurance. problem of actions

37
Q

adverse selection

A

the problem faced by parties to an exchange in which the terms offered by one party will cause some exchange partners to drop out. problem of types

38
Q

hidden attributes

A

occurs when some attribute of the person engaging in an exchange is not known to the other parties

39
Q

too big to fail

A

Said to be a characteristic of large banks, whose central importance in the economy ensures they will be saved by the government if they are in financial difficulty. The bank thus does not bear all the costs of its activities and is therefore likely to take bigger risks

40
Q

merit goods

A

Goods and services that should be available to everyone, independently of their ability or willingness to pay.

41
Q

examples of merit good

A

primary education financed by taxation
basic healthcare
legal representation at trial
criminal assault - protection provided by police

42
Q

obstacles to bargaining

A

1- may be impossible if lots of firms on either side of the external effect - need one person on each side to negotiate for everyone-different interests of firms
2-missing information - need to measure cost to each person affected and measure who has caused the external effects in what capacity
3- bargain involves trading property rights and the contract must be enforceable
4- one party may have limited funds to pay the other to change output for both to benefit

43
Q

WHAT IS THE PARETO-EFFICIENT LEVEL OF OUTPUT - draw diagram including gains

A

where MSC=p
y-costs
x-quantity
MSC + MPC and P curves by producing at A good is being overused so causing market failure

44
Q

what is the maximum the fishing industry can pay depend on

A

their reservation option = sum of both areas

45
Q

what does the compensation they agree on determined by

A

the bargaining power of the two groups

46
Q

in a bargained allocation, who will be better off

A

those who have the legal rights to start with as they will receive a payment and have the result from the legal right in their favour

47
Q

evaluate regulation

A

gov could cap output at pareto-efficient amount- hard to enforce due to different sizes and output of firms involved - reduces costs to one party and reduces profits for the other

48
Q

draw effect of taxation by gov

A

y- costs
x - quantity
MSc, mpc and price
tax is placed between MPc and msc at point b pareto-efficient outcome
tax means the firm producing external effect face the full MSC of their decisions

49
Q

evaluate compensation

A

so firm pays compensation to other firm = MSC-MPC. produce where MSC=p
total compensation=area between new q and mpc and msc

50
Q

example of positive externalities

A

firm trains a worker who quits for a better job so that previous firm cannot ask new firm to pay.
farmer contributes to cost of irrigation project and others free ride

51
Q

why are owners of banks unlikely to bear the full costs of bankruptcy

A

because banks have typically borrowed from other banks so bankruptcy will be borne by other banks who have no repaid
banks are too big to fail - if important in economy then gov is likely to bail them out to prevent financial loss

52
Q

how do banks make markets fail

A

because they are unlikely to bear the full costs of bankruptcy they take more risks as others bear the cost which causes negative externalities and thus market failure

53
Q

arguments for limiting markets

A

distasteful markets ie marketing some goods and services like vital organs undermines the dignity of those involved and may not be truly voluntary
merit goods - goods and S that should be available to everyone, independent of their willingness to pay - provided by governments eg primary ed nad basic healthcare

54
Q

wy should merit goods be provided free of charge

A

because in most countries these goods and services are considered the right of every citizen

55
Q

3 examples of negative externalities

A

1- firm uses pesticide that runs into water ways - causes downstream damage - private benefit from profits from increased production but external cost to other firms from dmaaged water - market failure is the overuse of pesticide and overproduction of crop for which it is used - remediees are taxes, bargaining, common ownership to internalise cost
2- international flight increases global emissions, private benefit and external cost of pollution. the market faiulre is overuse of air travel- reduce by taxes or quotas
3- travel to work by car - creates congestion for other road users - private cost and external cost - overuse of cars- tolls quotas, public transport

56
Q

positive externality example

A

firms investment into R and D - other firms expolit innovation so private cost and external benefit- market failure is that there is too little R&D. result may be too publically finance R and D or introduce patents

57
Q

moral hazard examples

A

employee on fixed wage. more effort gives more profits for firm but this comes as a private cost for worker and external benefit. result is that there is too little effort- remedy would be to have more effective monitoringor performance related pay
banks that are too big to fail make risky loans which tax payers bear the cost so private benefit and external cost- fix by regulation of bank practices

58
Q

adverse selection example

A

someone with serious illness buys insurance - loss for insurance company was will have to pay out- private benefit and external cost- market failure is that there is too little insurance offered and insurance premiums are too high - remedy would be to have mandatory health insurance

59
Q

evaluate policy of bargaining, regualtion tax and compensation

A

bargaining, party affected pays for other firm to reduce Q and firm who reduces Q is no better or worse off as gets paid
regulation, party affects benefits as Q reduced, party causing problem reduces Q and profits
tax - reduces q and reduces profits by more for firm causing problems
compensation is best for firm affected as q reduced and get paid
bargaining is best for firm causing the external effect

Ep1 (14 decks)

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