Topic 7 Flashcards
(30 cards)
Rival Product
Your consumption means someone else cannot
3 Categories of rival products
- Consumed by only one person
- Consumed by more than one person, not at the same time
- Consumed by more than one person at same time, not by another person at same time, non-rival
Excludable product
Prevemted consumption if you don’t pay
2 Categories of excludable products
- Non-payers could be and are excluded
- Non-payers could be but aren’t excluded, non-excludable
Free Rider
Person who receives benefit of a good but doesn’t pay
What does the Free-Rider problem do to market supply?
Causes product to be underproduced, despite social value>cost of providing
How is the government able to make up for under-supply in market and what issues may they face?
Recoup costs through taxes. May not provide efficient level due to limited information about MSC and MSB. May spend on what wins votes
Government Failure
When government doesn’t set at MSB=MSC
Common Resources
Non-excludable and rival
Tragedy of the commons and causes
Unregulated common resources tend to be overused
Caused by differing social and private incentives, neglecting external cost, no incentive to reduce consumption
Main components of whether something is socially desirable
Efficiency and Equity
Productive Efficiency
Each firm produces at lowest cost, meaning total output amongst firms should be produced at lowest cost
Allocative Efficiency
No gain should be made by reallocating resources, gains are maximised
Pareto Optimal
Not possible to make one person better off without making another worse off
Private Efficiency
MPB=MPC
Social Efficiency
MSB=MSC
If MSB>MSC
Pareto improvement from increasing activity
Pareto improvement left of equilibrium because
Buyer can be made better off without worsening seller
Characteristics of externalities
- Positive or Negative
- Created in production or consumption
- Not desirable to ban all products with negative externalities
Pigovian Tax
Tax that corrects effects of a negative externality
Why are Pigovian Taxes better than Regulation (for pollution)
Tax reduces pollution more efficiently
Tax is better for environment
Tax raises money for government
Unravelling Principle
Firms can have incentives to provide information to uninformed consumers, sometimes full information
Unravelling Principle holds when
There are differences between products which consumers care about
Firms can make costless, credible statements about products
Why should firms disclose information?
When no information, consumers assume all are average and purchase at random. However, firm with best terms is better than average
