Midterm revision

Question 1

Define externalities

Answer 1

externalities are when 1 person’s actions affect another person’s wellbeing and the relevant costs and benefits aren’t reflected in market prices. They’re considered to be market failures because they lead to inefficient resource allocation and can result in overproduction and underproduction of goods

Question 2

Give an example of an externality

Answer 2

1 example of an externality is air pollution, When individuals drive cars that run on gasoline or diesel, they release pollutants into the atmosphere like carbon dioxide which contribute to air pollution. The cost of this negative effect is borne by both drivers and the public, including those who don’t own cars. These costs are external to the car owner are aren’t considered when setting the cost of driving or fuel which means people don’t pay the full cost, resulting in market ineffiency.

Question 3

Define injustice

Answer 3

• An injustice refers to situations where the distribution of costs and benefits resulting from externalities is perceived as morally unacceptable or unfair, it implies that a certain individual or group bears a disproportionate share of the burdens or benefits generated by an economic activity without their consent or participation

Question 4

Define progressive taxation

Answer 4

• Progressive taxation is a utilitarian system where the tax rate increases as a person or entitys income or wealth increases. Policies maximise the aggregate utility in society and those with lower marginal utility from income pay a higher percentage of their income in taxes compared with lower income individuals.

Question 5

Define Pigouvian taxes

Answer 5

Pigouvian taxes are imposed by the government to address negative externalities in economic activities and are designed to correct market failures. They are a tax assessed against individuals or businesses for engaging in activities that create adverse side effects for society.

Question 6

Give an example of Pigouvian tax

Answer 6

• An example of a Pigouvian tax is a carbon tax that’s imposed on the emission of greenhouse gases that addresses the negative externalities associated with emissions like environmental degradation and climate change and aims to achieve a more efficient outcome.

Question 7

Define Median Voter Theorem

Answer 7

• Median Voter Theroem is a proposition relating to ranked preference voting that suggests in a 2-candidate election with 1-dimensional policy issues, the ideal position for a winning candidate is to target the median voter’s preferences.

Question 8

What are they key points of Median Voter Theorem?

Answer 8

• candidates must choose their positions along this dimension to attract voters and maximise electorability
  -the median voter is the voter whose preferred policy position is exactly in the middle of the dimension
  -idea behind the theorem is that candidates are incentivized to move their policy positions towards the centre of the dimension to capture the voters of the median voter and win the election

Question 9

What are the assumptions of Median Voter Theorem

Answer 9

1. • Theres a single policy dimension along which voters and candidates can be positioned;
2. assumes voters have perfect information about candidates policy positions and that they can accurately assess which candidate aligns best with their preferences;
3. assumes there are only 2 candidates competing for the median voters support
4. , assumes voters make their decisions independently and rationally and aren’t influenced by other factors;
5. assumes policy dimension is continuous and there’s an infinite no of policy position;
6. assumes voters don’t strategically vote, assumes candidates can freely choose their positions and there aren’t any barriers preventing them from choosing any position

Question 10

Define distribution of preferences

Answer 10

• Distribution of preference refers to how voters rank or prioritize the various options or candidates available in an election and reflects the diversity of opinions among voters

Question 11

Define office-seeking parties

Answer 11

• Office-seeking parties are political parties that primarily focus on winning elections and gaining access to gov offices or positions and political power. They prioritize electoral activities like campaigning to maximise their chances of winning and aim to secure highest number of voters or seats to gain political control.

Question 12

Define party ideology

Answer 12

party ideology refers to a set of core values, beliefs, principles and policy positions that define the fundamental identity of a political party. It represents the party’s overarching philosophy and serves as a framework for its stance on different issues and guides their policy proposals eg. liberalism and conservatism

Question 13

Define voter polarization

Answer 13

Voter polarization refers to the division and divergence of political beliefs and preferences among the electorate. It often results in voters aligning themselves with extreme positions or parties on various issues, leading to a more pronounced ideological or partisan divide within a society.

Question 14

Define citizen-candidate model of political competition

Answer 14

The citizen-candidate model is a concept in political science and economics. It describes a theoretical framework in which individuals from the general public, as “citizens,” decide to become candidates for political office. In this model, candidates are motivated by both policy goals and the desire for personal utility, such as prestige or influence.

The key idea is that candidates make rational decisions about whether to run for office based on their expected benefits and costs. They consider factors like their own policy preferences, the likelihood of winning, the costs of campaigning, and the potential rewards of holding office. The citizen-candidate model helps analyze how different factors influence the supply of political candidates and their behavior.

Question 15

define sincere voting

Answer 15

Sincere voting, in the context of voting theory, refers to a situation in which voters cast their votes for their preferred candidates or choices based on their true and honest preferences. In other words, voters do not strategically manipulate their votes to achieve a specific outcome, but rather they express their genuine preferences when voting

Question 16

define strategic voting

Answer 16

Strategic voting occurs when voters do not cast their ballots for their true or preferred candidate but instead vote for a different candidate or choice with the intention of influencing the election’s outcome. This strategic behavior is employed to maximize the chances of a specific result that the voter perceives as more favorable, even if it goes against their sincere preferences. Strategic voting is often used when voters believe that their preferred candidate has little chance of winning, and they wish to prevent the election of a less-desirable candidate or party. It is a means of trying to achieve a more favorable overall result through calculated voting decisions

Question 17

define credible commitment to policy

Answer 17

credible commitment to policy refers to a situation in which a government or political entity makes a public pledge or promise to implement a particular policy and is viewed as both willing and able to follow through on that commitment. Credibility in this context is crucial because it ensures that the policy will be taken seriously and believed by the public, investors, and other stakeholders.

Question 18

define candidate quality

Answer 18

Candidate quality refers to the attributes, qualifications, and characteristics of an individual running for a political office. These attributes can include a candidate’s experience, education,and overall suitability for the role they are seeking.

Voters often assess candidate quality to make informed decisions when casting their votes.

Question 19

define market failures

Answer 19

Market failures are situations in which a free market, left to its own devices, does not efficiently allocate resources or produce an optimal outcome. They occur when the conditions for perfect competition and efficient resource allocation are not met. Market failures can result from various factors, including;
- externalities
- asymmetric information
- imperfect competition
- moral hazards

Question 20

define public goods

Answer 20

public goods are

Question 21

give an example of a public good

Answer 21

Classic examples of public goods include clean air, street lighting, national defense, and public parks

Question 22

define asymmetries in information

Answer 22

Information asymmetryrefers to a situation in which one party in a transaction or interaction has more or superior information compared to the other party. This disparity in information can create imbalances and affect the efficiency and fairness of the transaction.

Question 23

define incomplete markets

Answer 23

Incomplete markets refer to situations in which not all possible financial assets or securities are available for trading or investment. in an incomplete market, some risks and contingencies cannot be fully hedged or traded due to the absence of specific financial products.

Question 24

define incomplete information

Answer 24

Incomplete information refers to a situation where individuals or entities do not have access to all the relevant data, facts, or knowledge necessary to make well-informed decisions. It means that there are gaps in the information available to them.

When information is incomplete, decision-makers may not be able to predict all possible outcomes or assess all potential risks accurately. As a result, they may make suboptimal or uncertain decisions.

Question 25

define imperfect information

Answer 25

Imperfect information refers to a situation where individuals or entities have access to information, but that information may be inaccurate, asymmetric (different for different parties), or subject to manipulation.

Imperfect information can lead to situations where parties involved in transactions have unequal access to data, leading to information asymmetry. In such cases, one party may exploit its information advantage, potentially resulting in adverse selection or moral hazard.

Question 26

define moral hazard

Answer 26

Moral hazard is a situation in which one party, typically after a financial transaction or agreement, can take risks because it does not have to bear the full consequences of those risks. In essence, it refers to a scenario in which individuals or organizations may act more recklessly or engage in riskier behavior because they are protected from the negative outcomes or losses.
For example, an insured person may engage in riskier behavior knowing the insurer can’t monitor their actions closely.

Question 27

define adverse selection

Answer 27

Adverse selection occurs when individuals or entities with private information about their own characteristics or behavior selectively participate in a transaction, typically to their advantage, at the expense of the other party. This situation often arises in markets where there is information asymmetry, meaning one party (usually the seller) possesses more information than the other (usually the buyer).

Question 28

define regulation

Question 29

define regulatory capture

Answer 29

Regulatory capture occurs when regulatory agencies, which are established to serve the public interest by regulating industries or sectors, end up being heavily influenced or controlled by the very entities they are supposed to oversee. In other words, regulatory agencies become “captured” by the industries or businesses they are meant to regulate.

This capture can take various forms, including undue influence from industry lobbyists, regulatory officials having close ties with the regulated industry, or the agency’s staff developing a bias in favor of the industry’s interests. Regulatory capture can lead to policies and regulations that favor industry objectives over the broader public interest, potentially resulting in market distortions, reduced competition, and insufficient protection of consumers or the environmen

Question 30

define strong capture

Answer 30

Strong regulatory capture typically refers to a situation where regulatory agencies are profoundly and effectively controlled or dominated by the interests of the industry they are meant to oversee. In cases of strong regulatory capture, the influence of the regulated industry is pervasive and can significantly impact the regulatory decisions and policies made by the agency.

This form of regulatory capture can result in a regulatory environment that strongly favors the industry’s objectives and may lead to a lack of meaningful oversight or effective regulation to protect the public interest.

Question 31

define weak capture

Answer 31

Weak regulatory capture” typically refers to a situation where regulatory agencies exhibit some influence from the industry they oversee, but this influence is not as pervasive or effective as in cases of strong regulatory capture. In other words, weak regulatory capture implies that the industry’s interests have some impact on regulatory decisions, but the agency still maintains a degree of independence and the ability to act in the public interest.

In cases of weak regulatory capture, there may be instances of regulatory policies or decisions that appear to favor the industry, but the agency’s overall regulatory function is not completely dominated by industry interests.

Question 32

define corrosive regulatory capture

Answer 32

Corrosive capture occurs if organized firms render regulation less robust than intended in legislation or than what the public interest would recommend
The consequence of corrosive capture could potentially take the form of reduced entry but would far more commonly be observed in the reduction of costly rules and enforcement actions that cut into profits

Question 33

define interest groups

Answer 33

an interest group is an organization which have some autonomy from government or political parties and try to influence public policy

Question 34

define exclusive groups

Answer 34

Exclusive interest groups advocate for the specific interests of a particular, often narrow, segment of society. These groups focus on advancing the concerns and goals of their members or a specific industry, profession, or issue, rather than the broader public interest. They have membership criteria that restrict participation to a particular demographic, profession, or industry because they’re trying to provide themselves with a rival public good and therefore are better off when fewer beneficiaries of the public good belong to the group.

Question 35

give an example of an exclusive group

Question 36

define inclusive groups

Answer 36

Inclusive groups welcome new members because new members do not detract from the ability of existing members to consume the public good and they can help defray the costs of providing it. Thus, inclusive groups are providing a pure public good

Question 37

give an example of an inclusive group

Question 38

define sectional groups

Answer 38

Sectional interest groups are organizations that represent and advocate for the specific interests / private goods, and concerns of a particular segment or section of society or the economy. sectional interest groups focus on the needs and issues relevant to a particular sector, industry, or group within society. Membership is restricted.

Question 39

give an example of a sectional group

Answer 39

chemical industry association farmers

Question 40

define cause groups

Answer 40

cause interest groups are organizations that fight for a specific belief or principle, and are interested in public goods, membership open to anyone

Question 41

give an example of a cause group

Answer 41

environmental / human rights groups

Question 42

define a pure public good

Answer 42

A pure public good is both non-rival and non-excludable

Non-Excludability: This means that it is difficult or costly for a producer to exclude individuals from using the good. Once the good is provided, it is typically available for anyone to use, and people cannot be easily prevented from benefiting from it. For example, if a public park is created, it is challenging to charge admission to ensure that only paying individuals can use it.
Non-Rivalrous Consumption: Public goods are non-rivalrous, which means that one person’s use of the good does not diminish its availability to others. The consumption of the good by one person does not reduce its availability or utility for others. For example, clean air is a public good because one person breathing clean air doesn’t reduce its availability for others.

Question 43

give an example of a pure public good

Answer 43

National defence, such as a country’s military and defence systems, is a pure public good. It is non-excludable because it is challenging to prevent any citizen from benefiting from the protection provided by the military. Additionally, it is non-rivalrous because one person’s safety and security do not reduce the safety and security of others. If a country invests in national defence, it benefits all its citizens collectively, even those who do not directly contribute to its funding.

Question 44

what is the logic of collective action?

Answer 44

The logic of C.A explains that if the members of some group have a common interest or objective, and if they would all be better off if that objective were achieved, it has been thought to follow logically that the individuals in that group would, if they were rational and self-interested, act to achieve that objective.
This explains the formation of groups such as trade unions.

Question 45

what is the importance of large groups

Answer 45

• In collective action problems, large groups can have a significant impact due to their numbers. When a large number of individuals or entities come together to address a common issue or goal, their combined efforts can lead to more substantial and visible results. This can be particularly powerful in situations where the scale of the problem is extensive, such as environmental issues or public health crises. Large groups can generate more resources, manpower, and influence to tackle complex challenges
• Large groups are more susceptible to the free-rider problem, where some participants may benefit from collective action without contributing their fair share. This is because in a large group, individual contributions may have less visibility or impact, and some participants may feel that their contribution won’t significantly affect the overall outcome.

Question 46

what is the importance of small groups

Answer 46

• Small groups are essential when the problem is more localized or specialized. They can work efficiently and effectively on specific issues that may not require a massive collective effort. Small groups often have a higher degree of cohesion and can make decisions more rapidly, making them suitable for addressing niche problems or issues that don’t require a broad coalition.
• Smaller groups are often better equipped to monitor and enforce contributions from their members, reducing the free-rider problem. Each member’s contribution tends to be more critical in a small group context, making it less likely for individuals to free-ride.

Question 47

define collective action problems

Answer 47

A collective action problem is a situation in which individuals or groups face a dilemma when deciding whether to cooperate for the common good or act in their self-interest. In this situation, its in the collective interest for individuals to work together to achieve a shared goal or address a common issue, but each individual has an incentive to shirk their responsibility or ‘free-ride’ and let others do the work, hoping to benefit from the collective effort without personally contributing.

Question 48

define structural power

Answer 48

structural power refers to the inherent advantage that businesses have in market economies. In market-driven systems, businesses invest capital, create products and services, and provide jobs. This activity is the backbone of economic growth and employment and as a result, businesses hold a significant amount of power in these systems because their decisions and actions can profoundly impact the economy, job market, and overall prosperity. This power arises from the very structure of market economies, where private enterprise and investment are essential components for growth.

Question 49

define union density

Answer 49

Union density is defined as the proportion of workers within a specific labour market, industry or country who are members of trade/labour unions. Its usually expressed as a percentage by calcualting: Union Density = (Number of Union Members / Total Number of Wage and Salary Workers) * 100

It’s a key metric for assessing the level of unionization or labour union influence within a given workforce.

Question 50

what does high union density suggest

Answer 50

indicates that a significant portion of the workforce is unionized, which may give labor unions substantial bargaining power and influence over labor-related issues, such as wages, working conditions, and labor rights

Question 51

what does low union density suggest

Answer 51

low union density suggests that a smaller proportion of workers are members of labor unions, which can limit the collective bargaining power of unions in that labor market.

Question 52

define union coverage

Answer 52

Union coverage refers to the proportion of workers in a specific labor market, industry, or country who are covered by collective bargaining agreements or labor union contracts. In other words, it measures the percentage of the workforce that benefits from the terms and conditions negotiated by labor unions, even if they are not necessarily union members themselves.

Union coverage typically includes not only union members but also non-union workers who are covered by the same employment terms, conditions, and benefits that have been established through negotiations between the union and the employer. These collective bargaining agreements often cover matters such as wages, working hours, workplace safety, and employment benefits.

Question 53

define union concentration

Answer 53

union concentration is the extent to which a specfic labour union or group of unions hold a significant share of the total union membership within a particular industry, sector or country. Its a measure of the dominance of one or a few unions in representing workers in a given field.

Question 54

define wage bargaining centralisation

Answer 54

wage bargaining centralization refers to a labor relations system in which wage negotiations and collective bargaining are coordinated or centralized at a higher level, often at the industry or national level, rather than being conducted on a decentralized basis at the individual firm or workplace level. This centralization typically involves labor unions, employer associations, or government bodies playing a role in setting wage levels, standards, or guidelines that apply across a broader segment of the economy.

Question 55

define structural sources of business power

Answer 55

structural sources of business power are factors inherent to an organization or industry that contribute to its influence, dominance, and competitive advantage in the business world. These sources of power are often related to the organization’s structure, resources, or position within the marketplace

Business interests have a privilege in market economies, which rely on the private investment decisions of business actors to sustain growth and employment.

Question 56

give an example of structural sources of business power

Answer 56

Large technology corporations like Apple, Google, and Amazon wield structural power. In a market economy, these companies have substantial influence because of their dominant positions in the technology sector. Their size and impact on various industries make them influential stakeholders in the economy. Their decisions regarding product launches, investments, and expansion can significantly affect economic growth and job opportunities, demonstrating their structural source of power.

Question 57

define instrumental sources of business power

Answer 57

instrumental sources of power involves more overt and direct actions taken by businesses to influence political and policy outcomes. Examples include lobbying efforts where businesses hire individuals or firms to advocate for their interests in front of government officials. Additionally, businesses may make campaign contributions to political candidates who support policies that are favorable to their interests. These actions are instrumental in the sense that they are specific, deliberate strategies employed by businesses to achieve particular goals, such as shaping regulations, tax policies, or trade agreements in their favor.

Question 58

give an example of instrumental sources of business power

Answer 58

The pharmaceutical industry is known for its instrumental source of power. Pharmaceutical companies often engage in extensive lobbying efforts to shape healthcare policy in their favor. They make campaign contributions to political candidates who support policies that are beneficial to their interests. Through these actions, they aim to influence drug pricing, regulatory approvals, and intellectual property protection to maintain profitability and market dominance.

Question 59

define institutional sources of business power

Answer 59

institutional power is derived from a business’s involvement in providing essential public goods and services. Public goods are those that benefit society as a whole, such as education, healthcare, infrastructure, and environmental services. When a business plays a significant role in delivering these essential services, it can gain institutional power. The control or influence over these services allows the business to have a substantial impact on the well-being of the community and can, in turn, grant it political and societal influence.

Question 60

give an example of institutional sources of business power

Answer 60

Private prison corporations derive institutional power from their involvement in the provision of key public goods and services, specifically corrections and incarceration. These companies run and manage private prisons, detention centers, and other correctional facilities. Their control over these essential services gives them institutional power because they have a direct impact on the criminal justice system, and their actions can influence policies related to sentencing, prison populations, and immigration enforcement, thus affecting the broader society.

Question 61

define class

Answer 61

a social class is a group of people who share similar socioeconomic status, income, education, and occupation. Societies are often divided into different social classes, such as the working class, middle class, and upper class. Social class can impact an individual’s access to resources, opportunities, and social mobility.

Question 62

define class compromise

Answer 62

A class compromise refers to an agreement or understanding reached between different socioeconomic classes within a society or between labor and capital. Such compromises are typically aimed at finding a balance between the interests and demands of different social or economic groups and can lead to policies, laws, or agreements that promote social stability and address economic disparities.

Class compromises often involve negotiations and trade-offs between various groups, such as labor unions representing workers and employers representing business interests. The compromises may include agreements on wages, working conditions and tax policies. The goal is to balance the interests of different classes.

Question 63

why is class compromise good for both capitalists and workers?

Answer 63

compromises can lead to fair wage and benefits structures, ensuring that workers receive reasonable compensation, job security, and access to essential benefits. For workers, this means a higher standard of living and economic security. For employers, it can contribute to a stable and loyal workforce, reducing turnover and training costs.

Question 64

define income inequality

Answer 64

Income inequality refers to the unequal distribution of income among individuals or households within a specific society, region, or country. It is a measure of the disparity in earnings, wages, profits, and other forms of income among different segments of the population. Income inequality is typically expressed in terms of the income gap between the highest earners and the lowest earners in the given population

Question 65

give an example of moral hazard

Answer 65

Moral hazard can arise in various contexts. For example:

Insurance: When individuals or entities are insured against certain risks, they may be less cautious or take greater risks because they know that the insurer will cover the losses.
Banking and Finance: In the context of banking, moral hazard can occur when financial institutions believe that they will be bailed out by the government if they make risky investments, leading to irresponsible behavior.

Question 66

give an example of adverse selection

Answer 66

An example of adverse selection can be found in the market for used cars.

If an individual is in the market to buy a used car, and encounters 2 sellers offering cars of the same make and model:

Seller A is selling a used car for a reasonable price. The car looks well-maintained, and there are no visible issues.

Seller B is also selling the same make and model, but the price is significantly lower than the market average. The car appears to be in good condition, but there are no maintenance records or a detailed history provided.

In this scenario, adverse selection occurs when you have incomplete information about the cars, and the sellers know more about their respective vehicles than you do. The issue is that Seller B’s lower price may be a signal of a hidden problem with the car, such as a history of accidents, mechanical issues, or poor maintenance. Since you can’t easily distinguish between the cars based on your limited information, you might be inclined to choose Seller B’s cheaper option.

Adverse selection arises because the market for used cars is characterized by information asymmetry, with sellers having more information about the quality and condition of their vehicles than buyers. This information gap can lead to a situation where low-quality cars are more likely to be sold because their sellers can price them attractively to attract buyers, while high-quality cars may be underrepresented in the market because their owners know they are worth more but can’t easily signal their quality.