47 Cards in this Set
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1. Explain the concept of efficiency.
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Demand = Supply
Consumer surplus and producer surplus is maximized
Economic efficiency tells us nothing about equity
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2. Explain equity.
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Equity = the fair distribution of economic benefits
Economic efficiency tells us nothing about equity. For example: under perfect price discrimination, surplus is maximized but all of it goes to producers
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3. How are efficiency and equity related?
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Economic efficiency tells us nothing about equity.
Example: under perfect price discrimination, surplus is maximized but all of it goes to producers
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4. What are the market characteristics of a monopoly?
How does a monopoly market differ from perfectly competitive markets?
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Deadweight loss = market failure
no close substitute
one seller
barriers to entry and exit
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5. What is a market
failure? Give an example when market failure occurs
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Market failure = inefficient market outcomes
Types: Monopoly has deadweight loss, Externalities (positive or negative), Public goods, Imperfect information can lead to either excess demand or supply such vitamin supplements
Ex: negative extern - cigarette smokers
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6. What is an externality? Why does it cause market failures?
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Externality is a cost or benefit to a 3rd party not directly involved in the production or consumption
Negative: pollution, barking dogs, cigarette smokers, do not pay
Positive: immunizations, not compensated for
**Lack of clear property rights**
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7. Explain the differences between positive and negative externalities of consumption and production. Draw a diagram for each showing the MSC, MPC, MPB, and MSB.
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positive shifts demand to the right
negative shifts supply to the left
social value = positive benefits
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8. What is the tragedy of the commons? When does it occur? hint: think of common property resources
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Each individual does not have an incentive to limit his or her consumptions but we all need to limit consumption in order for resource availability to continue.
Occurs with externalities when firms/ppl do not have to pay or when firms/ppl are not compensated.
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9. Draw a graph for a monopoly market. Indicate the profit-maximizing quantity the monopoloist should select. Is this socially efficient?
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10. Define deadweight loss. Where does it appear on the diagram you drew in #14 ?
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deadweight loss - the reduction in economic surplus resulting from a market not being in competitive equilibrium
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11. Define public goods. What are the 2 key criteria for a true public good? What if those criteria each are relaxed? Provide the terminology for each of the 4 possible types of goods.
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public goods - (national defense) no exclusion, others' consumption does not diminish your own consumption
quasi public - (internet) cannot consume if don't pay for it, others' consumption does not affect availability
private - (big mac, shoes) no pay no good, if a unit is consumed, no …
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12. In the graph identify the market efficient and socially optimal outcomes.
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13. Explain how a negative externality relates to the graph in 12.
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negative externality shifts supply to the left
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14. In the graph, identify the market efficient and socially optimal outcomes.
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15. In #14's graph, how does a positive externality relate?
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positive externality shifts demand to the right
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16. What mechanisms are used to correct market failure?
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Command and control - tell the firm exactly what to do
incentive compatible - correct the underlying market failure but let the market determine as much of the outcome as possible
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17. In a market failure situation what is the purpose of government intervention? In what ways does the government intervene in market failures?
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Purpose = correct market failures
Price controls
Quantity controls
Control of entry and exit
Control of other variables (quality, safety, advertising, investment)
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18. Graph a market where a monopoly exists and the government uses price controls to correct the market failure.
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19. Graph a market where a monopoly exists and the government uses quantity controls to correct the market failure.
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20. Besides direct regulation of price or quantity, what other methods does government have for correcting market failures?
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21. How does perfect competition avoid market failure?
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22. Explain how taxation affects consumer surplus, producer surplus, and government revenue where a negative externality exists. Graph
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23. Explain how quantity controls affect consumer surplus, prodeucer surplus, and government revenue where a negative externality exits. Graph
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24. Graph the price change when a tax is imposed and supply is relatively elastic.
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Slide 17 of powerpoint 21. ELASTIC SUPPLY leads to BUYERS bearing most of the tax burden
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25. Graph the price change when a tax is imposed and supply is relatively inelastic. Who bears the burden of the tax in this case? How does that differ from #24?
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Slide 17 of powerpoint 21. INelastic SUPPLY leads to SELLERS bearing most of the burden of the tax
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26. Graph the price change when a tax is imposed and demand is relatively elastic.
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ELASTIC DEMAND = SELLER burden
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27. Graph the price change when a tax is imposed and demand is relatively inelastic. How does this differ from #26?
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INELASTIC DEMAND = BUYER tax burden
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28. Explain how imperfect information affects the market for used cars.
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The buyer and/or seller has market power - restrict product offerings or increase amount of information
Buyers assumes the average quality in the market
Owners of "cherries will not sell their cars in the used car market because buyers won't pay a high enough price.
Only "lemons" are …
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29. What is the difference between public choice theory and public interest theory?
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Public choice theory - each participant in the public sector is trying to maximize his or her utility, governments may not be trying to maximize economic efficiency.
Public interest theory - up until now, we've assumed the government wants to increase economic efficiency. interest gr4oup…
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30. What are property rights?
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rights to exclusive use of their property, including the right to buy or sell it.
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31. How are property rights related to market failure and externalities?
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externalities and market failures result from incomplete property rights or from the difficulty of enforcing property rights in certain situations
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32. Explain the Coase Theorum. How is it related to property rights?
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Coase Theorum - argument that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities
Related to the process of agreeing to and carrying out an exchange of goods or services
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33. What are the differences between command-and control and incentive-compatible solutions to market failures.
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CC - government specifies how much or by what method a firm must adjust
IC - Taxes charged per unit of emissions, clear incentive, allows certain permits
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34. Explain how moral suasian attempts to fix market failure?
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Appeal to people's moral values - recycle to help the environment
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35. What is the purpose of antitrust laws?
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Protect competition, not competitors
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36. Which type of market failure does antitrust legislation attempt to correct?
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monopoly
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37. What are the types of mergers?
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Mergers generally reduce competition
Horizontal - between rivals
Vertical - with potential or acutal buyer seller relationships (ex: crude oil and refiner)
Conglomorate - merger of two or more firms that have no obvious relationship (noncompeting)
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1. A characteristic of public goods is that:
A) people pay for them in proportion to the benefits received.
B) the costs of producing them are less than if they were private goods.
C) their benefits cannot be withheld from anyone, regardless of whether the person pays for them.
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C) their benefits cannot be withheld from anyone, regardless of whether the person pays for them.
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2. The best example of a private good, exchanged in competitive markets and for which exclusion is possible, is:
A) an automobile.
B) public education.
C) national defense.
D) law enforcement.
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A) an automobile.
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3. The tendency of people or firms to consume a public good without paying for it is the ________ problem.
A) free-cost
B) free-rider
C) free-goods
D) free-market
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B) free-rider
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4. When the market does not result in an efficient allocation of scarce resources, economists call this:
A) market dropout.
B) normative economics.
C) market disincentives.
D) market failure.
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D) market failure.
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5. Private firms would be unlikely to attempt to produce the service of fending off incoming asteroids because:
A) it would be expensive.
B) no one cares about asteroids.
C) such a service would be a public good.
D) asteroids are protected by international law.
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C) such a service would be a public good.
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6. The following are all examples of market failure EXCEPT:
A) Perfect Competition
B) Monopoly
C) Externalities
D) Incomplete information
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A) Perfect Competition
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7. Command-and-Control approaches to correcting market failure
A) tell the firm exactly what to do.
B ) assign property rights.
C) tax goods whose production creates negative externalities.
D) subsidize production and/or consumption of goods which create positive externalities…
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A) tell the firm exactly what to do.
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8. Public interest theory assumes that politicians act to:
A) maximize political power
B) get enough votes for re-election
C) maximize economic efficiency
D) have as high a standard of living as possible
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C) maximize economic efficiency
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9. Consumers will pay most of the cost of a tax if:
A) Demand is inelastic
B) Demand is elastic
C) Supply is inelastic
D) The social cost outweighs the private cost
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A) Demand is inelastic
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10. Government intervention can improve economic efficiency but often does not because:
A) Politicians seek to maximize their own utility
B) Outcomes are hard to measure
C) Government intervention can have unintended consequences
D) All of the above
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D) All of the above
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ECON 106: EXAM 2