Topic 2

Question 1

What is the first welfare theorem?

Answer 1

In the absence of market failures, markets will be socially optimal.

Question 2

What is social optimality?

Answer 2

Maximizing net social benefits, MB=MC

Question 3

When do market failures occur?

Answer 3

information asymmetry
imperfect competition
externalities
imperfect property rights

Question 4

What is the framework for efficient property rights?

Answer 4

exclusive - all costs and benefits accrue only to the owner
transferable - market for voluntary exchange
enforceable - secure from involuntary seizure

Question 5

What is an externality?

Answer 5

added/unaccounted for costs/benefits that accrue to a third party who wasn’t involved in the production/consumption decisions

when one’s welfare depends on others’ activities

graphically - divergence between social MC curve and private MC curve

Question 6

What is private property?

Answer 6

high exclusivity, high divisibility

where markets usually work well

Question 7

What are public goods?

Answer 7

low exclusivity, low divisibility
markets aren’t good at providing the correct amount, free rider problem
often provided by gov’t through taxes
i.e. roads, charity

Question 8

What are common pool resources?

Answer 8

low exclusivity, high divisibility
overuse problem, can be exploited
i.e. fisheries, grazing land

Question 9

What are club goods?

Answer 9

high exclusivity, low divisibility
“semi-public” goods
restrict access in order to collect money to meet fixed costs and prevent free-rider problem
i.e. toll roads, National parks, gym membership

Question 10

What are property rules?

Answer 10

specify the initial allocation of the entitlement

Question 11

What are liability rules?

Answer 11

award monetary damages to the injured party

Question 12

What is own-price elasticity?

Answer 12

how a price change for a good effects the quantity demanded of the good

percent change in Q demanded/percent change in price

inelastic between 1 and 0
elastic above 1 (negative)
unit elastic at 1

describes how steep the demand curve is

Question 13

What is cross-price elasticity?

Answer 13

how demand for good will change when the price of another good changes

positive - substitutes
negative - complements

Question 14

What is a pecuniary externality?

Answer 14

an externality that arises when the external effect is transmitted through altered prices (not a true externality)

Question 15

What is rent seeking?

Answer 15

use of resources in lobbying and other activities directed at securing protective legislation

Question 16

What is the difference between private property, state property and common property regimes?

Answer 16

private - individuals hold entitlements
state - governments own and control property
common - jointly owned and managed by a specific group

Question 17

What is the Coase Theorem?

Answer 17

private negotiations can remedy externalities if property rights are well defined and transaction costs are low

Question 18

What are res nulls or open access regimes?

Answer 18

no one owns or controls the resources

leads to tragedy of the commons