unit 12 Flashcards
private property
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.
property rights
legal protection of ownership, including the right to exclude others and to benefit from or sell the thing owned
contracts
A legal document or understanding that specifies a set of actions that parties to the contract must undertake.
social norms
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.
market failure
When markets allocate resources in a Pareto-inefficient way.
external effect
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.
MPC
the cost for the producer of producing an additional unit of a good, not taking into accounts any costs imposed on others
MSC
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
why does MPC slope upwards
as the cost of producing an additional unit of a good increase as land is more intensively used
MEC
the cost of producing an additional unit of a good that is incurred by anyone other than the producer of the good.
coasean bargaining
firm owners negotiate a private bargain
transaction costs
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.
reservation option
A person’s next best alternative among all options in a particular transaction.
minimum acceptable offer
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.
reservation profit=
loss of profit
what does coasean bargaining still require
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
3 things governments can do
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
pigouvian tax
A tax levied on activities that generate negative external effects so as to correct an inefficient market outcome
external benefit / external economies
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.
limits of pigouvian taxes
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
external diseconomies / negative externalities
A negative effect of a production, consumption, or other economic decision, that is not specified as a liability in a contract.
tort law
the law of damages
why do markets fail with externalities?
because the external effects of a person’s actions are not owned by anyone, there are incomplete contracts