Econ Exam 2
What does the social value of a positive externality include?
Private value and External benefit.
Near-poor
Those who have incomes just above the poverty line.
Free Rider
Those who want others to pay for the public good and then plan to use the good themselves.
Market-based policies
Provide incentives to private decision makers to change behaviors.
In Public Goods if the benefit is > cost, what should the government do?
Provide the good.
Common Resource
Provides users with tangible benefits.
Garret Hardin
Put the tag "Tragedy of the Commons" on the problem of over harvesting common resources in 1968.
Command-and-control policies
Regulate behavior directly.
What are the Policy Options to Prevent Overconsumption of Common Resources?
Regulate use of resource, Impose a corrective tax to internalize the externality, Auction off permits allowing use of the resource, Convert to a private good.
What is the role of Compare and contrast policies?
Regulation.
Externalities
Uncompensated impact on a market exchange on the well-being of a bystander.
What is the Private value in regards to the social value of a positive externality?
WTP (benefit).
Can the government raise the total surplus in a competitive market?
No.
Mollie Orshanksy
1963, Social Security Administration; looked at families that were poor and based findings on an important diet.
How many Policy Options to Prevent Overconsumption of Common Resources did we discuss in class?
4.
What is the formula for an area of a triangle?
A = H*B/2
What is a Public Good?
A commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization.
Tax
A compulsory contribution to state revenue, levied by the government on workers' income and business profits or added to the cost of some goods, services, and transactions.
Medicaid
A federal-state joint program enacted in 1965 that provides medical insurance for certain low-income people.
Supplemental Nutrition Assistance Program (SNAP)
A federally funded program started in 1964 in which each month poor people receive SNAP cards they can use to buy food.
Income
A flow of money received, often measured on a monthly or annual basis.
Lorenz Curve
A graph that compares the cumulative income actually received to a perfectly equal distribution of income.
Risk group
A group that shares roughly the same risks of an adverse event occurring.
Earned Income Tax Credit (EITC)
A method of assisting the working poor through the tax system.
Allocation of Resources
A process and strategy involving a company deciding where scarce resources should be used in the production of goods or services.
Money-back guarantee
A promise that the buyer's money will be refunded under certain conditions.
Warranty
A promise to fix or replace the good for a certain period of time.
Market Power
A single buyer or seller has substantial influence on market price.
Positive externality
A situation where a third party, outside the transaction, benefits from a market transaction by others.
Negative Externality
A situation where a third party, outside the transaction, suffers from a market transaction by others.
Imperfect Information
A situation where either the buyer or the seller, or both, are uncertain about the qualities of what is being bought and sold.
Additional External Cost
Additional costs incurred by third parties outside the production process when a unit of output is produced.
The imposition of a price floor or a price ceiling will prevent a market from what?
Adjusting to its equilibrium price and quantity.
Corrective tax/subsidies
Aligns private and social interests (incentives).
Internalizing the externality
Altering incentives so people consider the external effects of their actions.
Deductible
An amount that the insurance policyholders must pay out of their own pocket before the insurance pays anything.
Health maintenance organization (HMO)
An organization that provides health care and is paid a fixed amount per person enrolled in the plan - regardless of how many services are provided.
Cosigner
Another person or firm who legally pledges to repay some or all of the money on a loan if the original borrower does not do so.
Poverty trap
Antipoverty programs set up so that government benefits decline substantially as people earn more income.
Price Changes Affect Consumer Surplus
As the price of a good rises the consumer surplus decreases, as the price of a good falls the consumer surplus increases.
Price Changes Affect Producer Surplus
As the price of a good rises the producer surplus increases, as the price of a good falls the producer surplus decreases.
What are in-kind transfers?
Assistance to the poor.
When is it impossible to produce greater consumer surplus without reducing producer surplus and impossible to produce greater producer surplus without reducing consumer surplus?
At the efficient level of output.
Temporary Assistance to Needy Families (TANF)
Attempts to avoid the poverty trap by requiring that welfare recipients work and by limiting the length of time they can receive benefits.
Supplemental Poverty Measure
Based on estimates of the level of income needed to cover basic needs.
Minimum wage
Based on the normative view that someone working full time ought to be able to afford a basic standard of living.
Positive externalities
Beneficial spillovers to a third party or parties.
Can tax be collected from a buyer or a seller?
Both.
Price floors are like a _______ on a market.
Bottom.
Taxes
Buyers or sellers pay a specific amount on each unit bought or sold.
What does Willingness to Pay measure?
Buyers value (satisfaction utility)
What is the equation for consumer surplus?
CS = WTP - P.
What are explanations for rising inequality?
Changing households, Changing labor markets, Comparisons over time, Globalization.
What is Technology requirements an example of?
Command-and-control policies.
What is limits on quantity of pollution emitted an example of?
Command-and-control policies.
What is the requirement of immunization an example of?
Command-and-control policies.
What are Public Policies Toward Externalities?
Command-and-control, Market-based.
What items are involved in welfare economics?
Consumer surplus, Producer surplus, Total surplus.
Who will bear the burden of a tax?
Depends on how responsive the buyers and sellers are to a price change.
Quintile
Dividing a group into fifths, a method often used to look at distribution of income.
What does a tax do?
Drives a wedge between the price buyers pay and the price sellers receive.
What is Social Surplus also referred to as?
Economic Surplus or Total Surplus.
Are competitive markets efficient or inefficient?
Efficient.
In Tax Incidence, what does the responsiveness equal for economists?
Elasticity.
Nonrivalrous
Even when one person uses the good, others can also use it.
What are the Important Characteristics of Goods?
Excludability and Rivalry in Consumption.
Ideal corrective subsidy equals...
External benefit.
Ideal corrective tax equals...
External cost.
International Externalities
Externalities that cross national borders and that cannot be resolved by a single nation acting alone.
True or False: All goods and services with positive externalities are public goods.
False.
True or False: Binding price ceilings create surpluses.
False.
Command-and-control-regulation
Laws that specify allowable quantities of pollution and that also may detail which pollution-control technologies must be used.
Occupational license
Licenses issued by government agencies, which indicate that a worker has completed a certain type of education or passed a certain test.
Price ceilings are like a _______ on the market.
Lid.
What strategies are used in the Rationing Mechanism?
Long lines, Lottery, Discrimination according to sellers biases.
Who does medicaid focus on?
Low-income families with children, low-income elderly, and the disabled.
What are the causes of market failure?
Market Power and Externalities.
If negative externality
Market quantity larger than socially desirable.
If positive externality
Market quantity smaller than socially desirable.
What is corrective taxes and subsidies an example of?
Market-based policies.
Whats another name for a pollution charge?
Pollution Tax.
If you love country music and are having it waft into your house every night in a way that amounts to a series of free concerts would be a.....
Positive Externality.
What kind of externalities do Public Goods have?
Positive.
What are the two flavors that Price Controls come in?
Price Ceiling and Price Floor.
What does Consumer Surplus measure?
The benefit to the buyer.
What does Producer Surplus measure?
The benefit to the sellers.
Intellectual Property
The body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions.
Service contract
The buyer pays an extra amount and the seller agrees to fix anything specified in the contract that goes wrong for a set time period.
Social benefits
The dollar value of all benefits of a new product or process invented by a company that can be captured by other firms and by society as a whole.
Private Benefits
The dollar value of all benefits of a new product or process invented by a company that can be captured by the investing company.
Biodiversity
The full spectrum of animal and plant genetic material.
Why are Rationing Mechanisms inefficient?
The goods go to the highest valued user and not to everyone.
Safety net
The group of government programs that provide assistance to the poor and the near-poor.
What does the deadweight loss from a tax reflect?
The inefficiency in resource allocation because the tax distorts the market.
Property Rights
The legal rights of ownership on which others are not allowed to infringe without paying compensation.
Deadweight Loss
The loss in social surplus that occurs when the economy produces at inefficient quantity.
In regards to responsiveness with Tax Incidence, what doe the elasticity curve look like?
The more inelastic (ie steep) curve will bear the greater burden.
Laissez Faire
The notion that government should not interfere with the market.
Tragedy of The Commons
The problem of over harvesting common resources.
What does the Lorenz Curve show?
The share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis.
What is the role for the government in Common Resources?
To ensure they are not overused.
What is the key insight in paying for public goods?
To find a way of assuring that everyone will make a contribution and to prevent free riders.
True or False: A public good is consumable by additional users without reducing consumption by other users.
True.
True or False: Consumer surplus is the difference between what a consumer is willing to pay for a product and what they actually pay for a product.
True.
Cost
Value of everything a seller must give up to produce a good (i.e. opportunity cost).
What's in a Price?
Value to buyers and cost to sellers.
What is cost a measure of?
Willingness to sell.
What is a result of the Poverty Trap?
Working provides little financial gain.
Can Price Ceilings have consequences?
Yes.
Do Common Resources include rival in consumption?
Yes.
Binding Price Floor
Price floor is above the equilibrium price.
Non-binding Price Floor
Price floor is under the equilibrium price.
How are the goods we don't pay for provided?
Government.
Progressive tax system
A tax system in which the rich pay a higher percentage of their income in taxes, rather than a higher absolute amount.
Marketable permit program
A permit that allows a firm to emit a certain amount of pollution; firms with more permits than pollution can sell the remaining permits to other firms.
Excludability
A person an be prevented from using a good.
What is the concept of a free rider?
A person who receives the benefit of a good but does not pay for it.
Asymmetric Information
A situation where the seller or the buyer has more information than the other regarding the quality of the item being sold.
Rationing Mechanism
A system for choosing who gets how many goods during a shortage.
Pollution charge
A tax imposed on the quantity of pollution that a firm emits.
Estate Tax
A tax imposed on the value of an inheritance.
What is the role of Market based policies?
Corrective tax.
Social Costs
Costs that include both the private costs incurred by firms and also additional costs incurred by third parties outside the production process, like costs of pollution.
True or False: Government can not put tax on many different goods.
False.
True or False: Government does not levy taxes on many goods and services to raise revenue.
False.
True or False: Government solutions to negative externalities are preferred to private solutions.
False.
True or False: Tax can not be a percentage of the goods price but only an additional amount added to each unit sold.
False.
What is the result of Free-riders?
Good is not produced - even if buyers collectively value the good higher than others.
Public Good
Good that is nonexcludable and nonrivalrous, and thus is difficult for market producers to sell to individual consumers.
Prices as signals
Guide the allocation of society's resources.
Tax Incidence
How the burden of tax is shared.
Evaluating the Market Equilibrium with respect to efficiency
If buyers WTP is higher or equal to the price, then efficient. If sellers cost is lower/equal to price then efficient.
The Coase Theorem
If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own.
Why is measuring the benefits of a public good difficult in cost-benefit analysis?
Imprecise.
How many "flavors" do Price Controls come in?
Two.
The imposition of a price floor or a price ceiling will prevent a market from adjusting to its equilibrium price and quantity therefore creating what?
Inefficient outcome.
With unclear property rights , or in the presence of externalities; what do private decisions look like?
Inefficient outcomes.
Are Rationing Mechanisms efficient or inefficient?
Inefficient.
Wealth Inequality
Inequal distribution of assets.
Price Ceilings are enacted in an attempt to do what?
Keep prices low for those who demand the product.
Price Floor
Keeps a price from falling below a certain level.
Price Ceiling
Keeps a price from rising above a certain level.
Price Controls
Laws that government enacts to regulate prices.
What is tradable pollution permits an example of?
Market-based policies.
Willingness to Pay
Maximum amount the buyer will pay for a given quantity.
Insurance
Method of protecting a person from financial loss, whereby policy holders make regular payments to an insurance entity.
How do Price Floors affect market outcomes?
Minimum wage and Surplus.
What is the best-known example of a price floor?
Minimum wage.
What are Private solutions to externalities?
Moral codes and social sanctions, Charities, Contracts between market participants and the affected bystanders, The Coase Theorem.
What do corrective tax and subsidies result in?
More efficient market (no DWL).
If you hate country music, then having it waft into your house every night would be a....
Negative Externality.
Are Price Ceilings always a good thing?
No.
Are Rationing Mechanisms fair?
No.
Are common resources excludable?
No.
Can Common Resources prevent free-riders?
No.
What are the two defining characteristics of Public Goods?
Nonexcludable and Nonrivalrous.
Rivalry in Consumption
One person's use of a good diminishes other peoples use of the good.
What are Common Resources?
Open access resources.
When will a seller produce and sell a good?
P >or= cost.
What is the equation for producer surplus?
PS = P - COST.
Premium
Payment made to an insurance company.
Poverty rate
Percentage of the population living below the poverty line.
Effective Income Tax
Percentage of total taxes paid divided by total income.
What are Government Policies that Alter Private Market Outcome?
Price Controls and Taxes.
Non-binding Price Ceiling
Price ceiling is above the equilibrium price.
Binding Price Ceiling
Price ceiling is below the equilibrium price.
How can externalities be positive or negative?
Self-interested buyers and sellers neglect the external costs or benefits of their actions so the market outcome is not efficient.
How can Price Ceilings affect market outcomes?
Shortages and Rationing.
When market participants must consider social costs or benefits, the market equilibrium equals what?
Social optimum.
Collateral
Something valuable - often property or equipment - that a lender would have a right to seize and sell if the loan is not paid.
Cost-benefit analysis
Study that compares the costs and benefits of providing a public good.
Price floors do what?
Support a price by preventing it from falling below a certain level.
What are some policies used to assist those in poverty?
TANF, SNAP, In-Kind transfers, Tax policy/EITC.
What is the equation for Total surplus?
TS = CS + PS.
Redistribution
Taking income from those with higher incomes and providing income to those with lower incomes.
In Public Goods, how does the government pay for the good?
Taxing people who benefit.
What is required in Compare and contrast policies?
Technology.
Producer Surplus
The amount that a seller is paid for a good minus the seller's actual cost.
Consumer Surplus
The amount that individuals would have been willing to pay, minus the amount that they actually paid.
On a graph, consumer surplus is what?
The area above the market price and below the demand curve.
On a graph, producer surplus is what?
The area between the market price and the segment of the supply curve below the equilibrium.
What happens when many people act as free riders?
The public good may never be provided.
Poverty
The situation of being below a certain level of income needed for a basic standard of living.
Poverty line
The specific amount of income needed for a basic standard of living.
Welfare Economics
The study of how the allocation of resources affects economic well-being.
Social Surplus
The sum of consumer surplus and producer surplus.
Wealth
The sum of the value of all assets, including money in bank accounts, financial investments, a pension fund, and the value of a home.
What does Total Surplus measure?
The total gains from trade in a market.
What is the External benefit in regards to the social value of a positive externality?
The value of positive impact on bystanders.
What are externalities in regards to market failure in efficient markets?
Third party effects.
What is the Role for the government in Public Goods?
To provide the good.
What do competitive markets maximize?
Total surplus.
What is required in Market based policies?
Tradable pollution permits.
Along with creating inefficiency, price floors and ceilings will also do what?
Transfer some consumer surplus to producers, or some producer surplus to consumers.
True or False: Equilibrium quantity will always be less when a tax is put on an item as compared to the equilibrium.
True.
True or False: Externalities can be negative or positive.
True.
True or False: Government can put tax on many different goods.
True.
True or False: Government can sometimes improve market outcomes.
True.
True or False: Government levies taxes on many goods and services to raise revenue.
True.
True or False: In cost-benefit analysis, measuring the benefits of a public good is particularly difficult.
True.
True or False: Social Surplus is larger at equilibrium quantity and price than it would be at any other quantity.
True.
True or False: Supply is flatter than demand? (more elastic)
True.
True or False: Tax can be a percentage of the goods price or an additional amount added to each unit sold.
True.
True or False: Tax can be a percentage of the goods price.
True.
True or False: Tax can be an additional amount added to each unit sold.
True.
True or False: The market provides most goods.
True.
True or False: We consume most goods without paying.
True.
Copayment
When an insurance policyholder must pay a small amount for each service, before insurance covers the rest.
Coinsurance
When an insurance policyholder pays a percentage of a loss, and the insurance company pays the remaining cost.
Adverse Selection
When groups with inherently higher risks than the average person seek out insurance, thus straining the insurance system.
Nonexcludable
When it is costly or impossible to exclude someone from using the good, and thus hard to charge for it.
Fee-for-service
When medical care providers are paid according to the services they provide.
Income inequality
When one group receives a disproportionate shore of total income or wealth than others.
Moral hazard
When people have insurance against a certain event, they are less likely to guard against that event occurring.
Dead weight loss and elasticity
When supply is inelastic the tax only reduces Q a little and DWL is small. The more elastic, great Q falls, bigger DWL. Same with demand curve.
Private rates of return
When the estimated rates of return go primarily to an individual; for example, earning interest on a savings account.
Social rate of return
When the estimated rates of return go primarily to society; for example, providing free education.
Market Failure
When the market fails to allocate society's resources efficiently.
When does a shortage occur with Price Ceilings?
When the market price is not allowed to rise to the equilibrium level, quantity demanded exceeds quantity supplied.
