Section 13

Question 1

Externality

Answer 1

An external benefit or cost that is enjoyed or imposed on a third party other than the buyer or seller of the good.

Question 2

Market Failure

Answer 2

When the market outcome differs from the outcome that society considers optimal.

Question 3

Negative Externality

Answer 3

AKA - Supply-side market failure.

Cost imposed on a third party not involved in the production or consumption of the good.

The market over provides the good.

Pollution, drunks, etc.

Question 4

Marginal Private Costs

Answer 4

Marginal cost of producing the good.

Question 5

Marginal Social Costs

Answer 5

Marginal private cost and externality costs.

Question 6

Tragedy of the Commons

Answer 6

When individuals only account for private marginal costs and fail to account for the impact of their actions on others.

Question 7

Positive Externalities

Answer 7

AKA - Demand-side market failure.

External benefit enjoyed by a third party other than the buyer or seller of the good.

Market under produces.

Education, immunizations.

Question 8

Command-and-control

Answer 8

Legislation limiting the amount of the activity along with regulatory bodies to monitor the behavior of the industry.

Are inefficient.

Increase private marginal cost and introduce limits.

Question 9

Pigouvian Tax

Answer 9

When you pay a tax equal to the negative externality. Decreases the equilibrium quantity and increase the price of the good. Less is produced that would cover the negative externality.

Question 10

Pigouvian Subsidy

Answer 10

When you pay a subsidy equal to the amount of the positive externality. Encourages the production and consumption, increasing demand. Shifts the supply curve, producing more goods.

Pell grants, school loans, etc.

Question 11

Tradable Permits

Answer 11

Allow firms to product a certain amount of pollution, firms can use, buy, sell those permits.

Question 12

Coase Theorem

Answer 12

Efficient solutions can be found to externalities if:

1. Transaction costs are low
2. Property rights are assigned to one of the parties
3. They are allowed to negotiate.

Question 13

Properties of Private Goods

Answer 13

Rival: Consumption by one person prevents another from consuming it.
Excludable: Those who don’t pay for the good can’t consume it.
Divisible: Production of the goods can be divided among those who are consuming it.

Shoes, tacos.

Question 14

Calculating Private Goods

Answer 14

Sum up all individual demands - horizontal.

Question 15

Properties of Public Goods

Answer 15

Non-rival: One person consumption does not diminish it for another person.
Non-excludable: Regardless if you pay for it, you can still enjoy it.
Non-divisible: We can’t divide it up among everyone.

Military, light houses.

Question 16

Free Riders

Answer 16

Consuming a good without paying for it.

Question 17

Calculating Public Goods

Answer 17

Sum up individual willingness to pay at each quantity level - vertical. Since one persons consumption doesn’t diminish another’s ability to consume it.
Find collective willingness to pay.

Question 18

Properties of Common Resource

Answer 18

Non-excludable: You can still enjoy it even if you don’t pay for it.
Rival: Consumption by one will affect others.

Ocean fishing, public lands.

Question 19

Properties of Quasi-Public

Answer 19

Excludable: Can you restrict it to those who pay for it.
Non-Rival: Consumption wont’ affect others who consume it as well.

Toll-road, cell phones.

Question 20

Cost/Benefit Analysis

Answer 20

When MC = MB

Present value = future value / (1+r)^t

Future value = present value * (1+r)^t

r = interest rate
t - number of years

Question 21

Asymmetric Information

Answer 21

Imbalance of information between parties.

Question 22

Adverse Selection

Answer 22

Information is known to one party but not the other when the contract is being made.

Question 23

Moral Hazard

Answer 23

When the behavior of one changes after the contract is made.

Question 24

Solving Market Failures - Private

Answer 24

1. Require medical history or exam before signing the contract.
2. Credit scores used to determine interest rates.
3. Deductibles required to make them bar part of the cost.
4. Product reports to help people make informed decisions.
5. Warranties or money back guarantees.
6. Franchises to keep consistency in all cities

Question 25

Solving Market Failures - Government

Answer 25

1. Standards on quality - training requirements - licenses.
2. Inspections to promote confidence.
3. Laws restrict activities like insider trading.
4. Published reports disclosing industry information like accidents.

Question 26

Failed Government Intervention

Answer 26

1. Principle-agent problem
2. Don’t account for unintended consequences of actions
3. Increased bureaucracy
4. Regulatory Capture - when the agency acts in interest of those they are assigned to regulate.

Question 27

Principle Agent

Answer 27

Conflicts that arise when tasks are delegated by principles to agents - agents then don’t act in the best interest of the principles.

Question 28

Consumer Surplus

Answer 28

The extra value that a consumer gains above what he was willing to pay for a product.

Consumer surplus and price are inversely related - Lower prices increase surplus.

Question 29

Producer Surplus

Answer 29

The extra value that a producer gains when the actual price for a product is higher then the minimum acceptable price.

Producer surplus and equilibrium price have a direct relationship, lower prices reduce producer surplus.

Question 30

Productive Efficiency

Answer 30

Minimizes the per unit cost by using the best combination of resources.

Question 31

Allocative Efficiency

Answer 31

When the correct quantity is produced.

Question 32

Public Choice Theory

Answer 32

Analysis of government decision making, politics, and elections.

Question 33

Logrolling

Answer 33

Trading of votes to secure desired outcomes.

Question 34

Paradox of voting

Answer 34

Society may not be able to rank its preferences consistently through paired-choice majority voting.

Question 35

Special-interest Effect

Answer 35

Small number of people get a government policy that is not in the interest of the general population.

Question 36

Earmarks

Answer 36

Projects that only benefit a local constituents.

Question 37

Rent Seeking

Answer 37

Special benefits at taxpayers expense.