109 Cards in this Set
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Environmental
Standards
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norms that impose limits on the amount of pollutants or emissions produced
inefficient even when correctly administered
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Pigouvian Tax
prevent negative externalities
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marginal social cost =socially optimal quantity
Social Marginal Benefit = Social Marginals cost. (instead of producers). Aka includes externalities.
-corrects efficiency loss created by production externalityl
-forces firms to internalize negative externality
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Emission tax
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-is efficient = social marginal cost
reduces external cost(pigouvian)
more effective for environment
internalizes externality
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Coase theorem
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- transaction costs are low and property rights are clearly defined,
-private bargains will ensue that the market equilibrium is efficient even when there are externalities
-more likely that private solutions to externality problems will succeed?smll number of firms in situation
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socially optimal quantity
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where marginal benefit equals marginal cost
-results in maximum surplus from producing and consuming good
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Tradable emissions permits
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-tradable
-licenses to emit limited quantities of pollutants that can be bought and sold by polluters
-cap and trade program
provide polluters with an incentive to take the marginal social cost of pollution into account
-same cost-minimizing advantage as emissions taxes
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cap and trade
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a market based system to manage environmental pollutants where a total limit is placed on all emissions in a jurisdiction
cheaper and more flexible than regulatory approaches
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MSB - Marginal Social Benefit
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The sum of the marginal private benefit and the marginal external benefit of production or consumption
MPB+positive externalities
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Pigouvian Subsidy
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Subsidy given to producers not to produce at the level that us causing the externality.
-subsidy=marginal benefit
-shift marginal cost curve just enough to reach social optimum.
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technology spillover
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-external benefit
-positive externality
-when firms research and production not only benefits the firm, but society
-subsidy =value of spillover
-gov internalize with subsidies
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Network Externality
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number of customers who purchase a good influences the quantity demanded.
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positive feedback
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success breeds greater success and failure breeds further failure.
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Positive Externality
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Causes the MSB curve to be higher than the demand curve, by the amount of the externality.
=> The efficient quantity (MSC= MSB) is larger than the equilibrium quantity (S=D)
-society would prefer more of the good to be produced.
-shift in demand
-social benefit > private benefit
…
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negative externality
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a situation where a third party, outside the transaction, suffers from a market transaction by others
-imposes a cost
social cost > private cost
MSC=S+ marginal external cost
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marginal social cost
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horizontal
MSC=MC + marginal external cost
-marginal cost of production as viewed by society as whole
- second supply curve
- sum of firms marginal private cost and marginal external cost
MSC=MC + marginal external cost
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MSB - Marginal Social Benefit
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The sum of the marginal private benefit and the marginal external benefit of production or consumption
MPB+positive externalities
MPB + MEB=MSB
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socially optimal quantity
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the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good
marginal cost and marginal benefit are the same
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External cost
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MC curve shows the marginal prive cost borne by the factories that produces a chemical
MSC curve shows the sum of marginal private cost and margianl external cost
efficient when marginal benefit =marginal social cost
uncompensated cost
MSC=MC + External
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external benefit
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an uncompensated benefit that an individual or firm confers on
- positive externalities
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Internalize an Externality
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Negative: Tax
Positive: Subsidy
-individuals take external costs or benefits into account, they
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Excludable
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if it is possible to prevent somebody from consuming a good if they do not pay for it.
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Rival in consumption
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one person's use of a good decreases the quantity available for someone else (coffee, fish in the ocean)
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Private Good
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excludable and rival in consumption, like wheat
Rival in Consumption- "i eat, you can't"
Excludable- can be prevented from consuming
- marginal social benefit of a unit of the good is equal to the sum of the individual marginal benefits enjoyed by all consumers of that unit.
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nonexcludable
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-supplier cannot prevent consumption by people who do not pay for it.
-inefficiently low production
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nonrival in consumption
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-public goods
more than one person can consume the same unit of the good at the same time.
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public good
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nonexcludable and nonrival in consumption-sewar system
Provided by
-voluntary contributions
-individual self-interest
-the government
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common resources
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rival and nonexcludable
eg clean water
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Artificially scarce goods are...
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excludable and nonrival
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free-rider problem:
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-occurs in common resources
individuals have no incentive to pay for their own consumption and instead will take a “free ride” on anyone who does pay.
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nonrival in consumption
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inefficiently low consumption
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Common Resource
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a resource that is nonexcludable and rival in consumption
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overuse
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individuals ignore the fact that their use depletes the amount of the resource remaining for others
- common resources
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3 fundamental ways to induce people who use common resources to internalize the costs they impose on others
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-tax or otherwise regulate the use of the common resource
-create a system of tradable licenses for the right to use the common resource
-make the common resource excludable and assign property right to some individuals
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Artificially Scarce Good
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Excludable but non-rival
high input prices, but marginal cost is essentially 0
EX: digital music file, software, pharmaceutical products
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Market provision of a public good will lead to..?
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Inefficiently low production of the good
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The Welfare Cost of Monopoly
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In the monopoly equilibrium, P > MR = MC
The value to buyers of an additional unit (price) exceeds the cost of the resources needed to produce that unit (MC)
The monopoly Q is too low (less than optimum), at a price higher than MC
Thus, monopoly results in a deadweight loss
producer s…
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dealing with natural monopoly
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1. public ownership (in public ownership of a monopoly, the good is supplied by the gov or by a firm owned by the gov, usually poorly run)
2. price regulation (price ceiling imposed on a monopolist does NOT create shortages as long as it is not set too low)
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natural monopoly
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-arises when there are economies of scale over a range of output that only one company has reached
-ATC is lower if there is only one firm in market
-gov uses price regulation
economies of scale
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regulated natural monopoly most efficient bc
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MC always decreasing, so cost of production will b less if one firm produces x instead of two each producing .5x since their MC would not always be downward sloping
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Regulated Monopoly
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-Monopoly Price: MR=MC
-Fair-return Price: P=ATC, break even point, normal profit
-Socially optimal Price: P=MC, allocatively efficient
Dillema of Regulation: when price is most efficient, monopoly will have losses
-very hard to regulate
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In regulated monopoly
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output produced in less than the output at the socially optimal price, but it is greater than the output of an unregulated monopoly
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Antitrust policy
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-gov.policy to prevent oligopoly industry to behave like monopoly
-prevent concentrations of market power
First policies due to
-growth of the railroad industry
the emergence of the Standard Oil Company
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tacit collusion
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-normal state of an olig
- limit production and raise prices in order to raise indusry profits
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4 factors that make ithard for an industry to coordinate on high prices (tacit collusion)
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1. large numbers of competing producers in an industry
2. Complex products and pricing schemes
3. Differences in interests
4. Bargaining power of buyers
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price war
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tacit collusion breaks down and aggressive price competition causes prices to collapse.
-Cuts prices- good for consumer
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Product differentiation
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attempt by a firm to convince buyers that its product is different from the products of other firms in the industry.
-instead of being price take- firm faces downward sloping demand curve
-competitive advantage
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Price Leadership
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- one firm (price leader) in an oligopy announces a price change and the other firms in the industry match the change
-implicit collusion
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nonprice competition
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- advertising and other means to try to increase their sales.
factors other than price
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first federal legislation against cartels passed
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1890
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trust
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when shareholders of companies in an oligopolistic industry give over decision making to a board of trustees.
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Which of the following make it easier for firms to tacitly collude?
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-similarities in interests
-few buyers in market
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mechanism by which oligopolists can maintain tacit collusion and avoid price wars
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-price leadership
-nonpricecompetition
-product differentiation
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Product differentiation is most likely to occur when firms
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have tacit agreements not to engage in price wars.
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market structure that is most prevalent
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oligopoly
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price wars
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They occur when tacit collusion breaks down.
Aggressive price competition causes prices to collapse
.Sellers try to put each other out of business.
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welfare state
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government programs designed to alleviate economic hardship.
transfer wealth from rich to poor
hybrid of capitalism & socialism
gov takes responsibility for basic physical and economic well- being
eg. public housing, public health, unemployment
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government transfer
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government payment to an individual or a family.
redistribution of income
eg. welfare, social security
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poverty program
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government program designed to aid the poor.
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3 reasons for the creation of the welfare state
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1. alleviating income inequality
2. alleviating economic insecurity
3. reducing poverty and providing access to health care
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social insurance program
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designed to provide protection against unpredictable financial distress
social secuirty and medicare
you put money in
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poverty threshold
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the level of income below which the federal government classifies a family as poor
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poverty rate
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percentage of people living below the poverty line
-about 14.% or 44 million
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Mean household income
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average income across all households
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Median Household Income
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The midpoint of all households ranked by income.
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Gini Coefficient
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income inquality
Measures the gap between the richest and poorest members of society on a scale of 0 (perfectly = to 1 (all income goes to 1)
US has highest inequality
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Give Examples of Economic Insecurity
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-Loss of Income (retirement, job, disability)
-Additional Expenses (healthcare, school, cars)
-Insufficient Income (layoff)
-Uncertainty of Income
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Income Inequality Trends
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Unequal distribution of income between genders, races and the population in general in the United States
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means-tested
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families whose incomes fall below a certain level.
social welfare
income insecurity program
eg. food stamps
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in-kind benefit
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given in the form of goods or services *not cash
food stamp
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negative income tax
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program that supplements the earnings of low-income workers.
collects from high income- gives to low income
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Goals of Welfare State
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help the poor,
protect everyone from financial risk,
and ensure that people can afford essential health care
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U.S. poverty rate
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fell in the 1960s
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2011, approximately what percentage of the U.S. population lived in poverty?
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15%
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Average household income in the United States in 2012 was approximately
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$70,000
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If a country has a perfectly equal distribution of income, its Gini coefficient equals
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0
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transfer payment?
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A senior citizen receives a Social Security payment.
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reasons for income inequality to rise
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technological progress
increased imports of labor-intensive products
increased immigration
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most important cause of the increase in income inequality in recent years is:
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rapid technological change
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The age group in the United States with the highest poverty rate after taxes and transfers is
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< 18 y/o
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Children in low-income families that can't afford insurance, but are above the poverty threshold, are covered by:
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SCHIP (State Children's Insurance Health Program).
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The poverty line is adjusted each year to reflect
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changes in the cost of living.
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Private Information
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Problems arise in markets when people on one side of the transaction have private information
Such situations are referred to as problems of asymmetric information
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Adverse selection
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mutually beneficial trades go unexploited
-occurs when one person knows more about the way things are than other people do.
asymetric info
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screening
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adverse selection can be reduced
observable information about people to make inferences about their private information
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signaling
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reduse adverse selection
private information through actions that credibly reveal what they know.
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Adverse selection can be reduced through
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screening
signaling
reputation
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Moral hazard
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individual knows more about his or her own actions than other people do.
leads to a distortion of incentives
dishonesty
increases chance of loss
eg insurance companies and claims
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deductible
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reduce moral Hazard
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Moral hazard is the result of
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private information.
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How does the US compare to other countries when looking at health care expenditures
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spends 2.5 times more in total & outofpocket spending
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reasons for high health care costs
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health insurance
expensive tests-
number of uninsured
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medical demand is inelasic
co-payments
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fixed amount insured must pay
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deductibles
co-insurance
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% insured must pay after exceeding deductible
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Acid rain
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coal-burning power plants
does not harm asphalt
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marginal social benefit due to pollution is greater than the marginal social cost of pollution, then
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the level of pollution should increase to get to the socially optimal amount of pollution.
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Coase theorem
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when externalities are present, an economy can reach an efficient solution as long as transaction costs are not too high.
two parties can internalize an externality, provided the transaction costs are sufficiently low.
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If an emissions tax is imposed but it is less than the optimal Pigouvian tax, then
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the marginal social cost of pollution is greater than the marginal social benefit of pollution
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An emissions fee equal to the optimal Pigouvian tax on coal has the effect of _____________ the externality associated with the burning of coal while ensuring that the marginal benefit of pollution _________ the marginal cost of pollution.
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internalizing; equals
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An emissions tax equal to the marginal social ____ induces polluters to internalize the externality and leads to the socially optimal quantity of pollution.
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cost of pollution at the socially optimal quantity of pollution
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The optimal Pigouvian tax equals:
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the marginal social cost of pollution at the socially optimal quantity of pollution.
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When an emissions tax is imposed on production of a good, then the price will be ________ than it would be in the absence of the tax, and the equilibrium quantity will be _________
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higher; lower
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Tradable emissions permits are used to
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encourage firms to reduce sulfur dioxide emissions by allowing the sale of excess permits
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A system of tradable emissions permits ensures that:
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those who can reduce pollution most cheaply will do so
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Tradable emissions permits:
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provide polluters with an incentive to take the marginal social cost of pollution into account.
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A subsidy is a legitimate policy option when
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there are external benefits arising from an activity
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In some countries, motorists pay an extra fee to travel on congested highways at peak times. This extra fee serves to:
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internalize the externality.
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The marginal social benefit of a flu shot would be:
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the reduction in the individual and society's likelihood of catching the flu.
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Given that education generates positive externalities, without government action:
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the marginal social benefit of education is greater than the marginal social cost.
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network externality?
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Twitter, the social networking site
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ECON 202: STUDY GUIDE