Topic 3 Flashcards
Define and describe opportunity cost.
What you have to give up to get something else. Forgone opportunties.
Define and describe marginal costs and benefits.
marginal cost - cost to produce one additional unit
represented by supply curve
marginal benefit - cost to consume one additional unit, represented by demand curve
Define and describe Pareto principle and Pareto improvements.
Pareto principle - a program improves social welfare if it makes at least one person better off without making anyone else worse off
Pareto improvement - an policy that satisfies the Pareto principle
Pareto optimal - no other allocation can benefit someone without harming someone else (equilibrium)
Define and describe static efficiency.
Maximizing net benefits at a certain point in time.
No one can do any better.
MC = MB
Define and describe dynamic efficiency.
Time is crucial aspect of allocation. Maximize present value of net benefits.
What are production and consumption externalities?
ask Sean
What is marginal external cost?
additional damage done for every additional unit of production
What are the steps of normative analysis?
- identify optimal outcome
- determine how well institutions produce optimal outcomes
- design appropriate policy solutions
What is present value?
Compare net benefits received in different time periods. Incorporates time value of money.
What are some issues with benefit estimation?
primary vs. secondary effects
accounting stance (geographic scale)
with and without principle
tangible vs. intangible benefits
What is the discount rate?
social opportunity cost of capital
higher rate = less value on future
lower rate = more value on future
What is benefit-cost analysis?
ranking of choices in monetary terms
