Exam 3

Question 1

two characteristics of goods

Answer 1

1. rivalness

2. excludability

Question 2

rivalness

Answer 2

property of a good whereby one persons use diminished other peoples use

Question 3

excludability

Answer 3

property of a good whereby a person can be prevented from using it

Question 4

what is excludable and a rival

Answer 4

private goods

Question 5

what is excludable and non-rival

Answer 5

club goods

Question 6

what is rival and non-excludable

Answer 6

common resources

Question 7

what is non-rival and non-excludable

Answer 7

public goods

Question 8

externalities

Answer 8

the uncompensated impact of ones persons actions on the well-being of a bystander

Question 9

positive externality

Answer 9

impact on bystander is beneficial

Question 10

negative externality

Answer 10

impact on bystander is adverse

Question 11

information asymmetry

Answer 11

A difference in two or more parties’ access to relevant knowledge

Question 12

hidden actions

Answer 12

One person knows more than another about an action he or she is taking.

Question 13

hidden characteristic

Answer 13

One person knows more than another about the attributes of a good he is selling.

Question 14

moral hazard

Answer 14

Tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior

Question 15

agent

Answer 15

A person who is performing a task on someone else’s behalf (e.g., a worker)

Question 16

principal

Answer 16

The person for whom this action is being performed (e.g., an employer)

Question 17

the principal-agent problem

Answer 17

When the principal cannot perfectly monitor the agent’s behavior, there is a risk (“hazard”) that the agent may do something undesirable (“immoral”).

Question 18

how principals may respond to the principal-agent problem

Answer 18

• better monitoring
• higher wages
• delayed payment

Question 19

command and control policies

Answer 19

regulate behavior directly

Question 20

market-based policies

Answer 20

incentives so that private decision-makers will choose to solve the problem on their own.

Question 21

corrective taxes

Answer 21

induce private decision-makers to take account the social cost that arse from negative externality

Question 22

private solutions to externalities

Answer 22

• moral codes and social sanctions
• charities
• the self-interest of the relevant parties

Question 23

adverse selection

Answer 23

arises when the seller knows more than the buyer about the good being sold.

Question 24

signaling

Answer 24

actions taken by an informed party to reveal private information to an uninformed party

Question 25

screening

Answer 25

actions taken by the uninformed party to induce informed party to reveal private information

Question 26

two mechanisms to overcome asymmetric information problems

Answer 26

- signaling | - screening

Question 27

political economy

Answer 27

applies the methods of economics to study how government works

Question 28

the Condorcet voting paradox

Answer 28

the failure of majority rule to produce transitive preferences to society

Question 29

transitivity

Answer 29

if A is preferred to B, and if B is preferred to C, then A should be preferred to C

Question 30

lessons from the Condorcet paradox

Answer 30

- democratic preferences are not always transitive\ - the order on which things are voted can affect the result - majority voting does not always reveal what society really wants-results are typically median voter

Question 31

arrows impossibility theorem

Answer 31

a mathematical result showing that, under certain assumed conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences.

Question 32

the median voter theorem

Answer 32

a mathematical result showing that majority rule will always pick the outcome most preferred by the median voter

Question 33

implications of the median voter theorem

Answer 33

- in a two-party or two-candidate race, each party will move its position toward that median voter - minority views are not given much weight

Question 34

behavioral economics

Answer 34

Subfield of economics that integrates the insights of psychology