Micro Final

Private benefit

A benefit received by" a party to a transaction.

Externality

A consequence of an economic activity that is experienced by unrelated third parties. An externality can be either positive or negative

Occupational licensing

A form of government regulation requiring a license to pursue a particular profession or vocation for compensation. Most developed countries require occupational licenses for professions, such as physicians and lawyers. Licensing creates a regulatory barrier to entry into licensed occupations, and this results in higher income for those with licenses and usually higher costs for consumers. Licensing advocates argue that it protects the public interest by keeping incompetent and unscrupulous individuals from working with the public. However there is little evidence that it has an impact on the overall quality of services provided to customers by members of the regulated occupation.

Certification

A formal process of making certain that an individual is qualified in terms of particular knowledge or skills. Certification programs are often fostered or supervised by some certifying agency, such as a professional association.

Risk group

A grouping of insureds with a similar level of risk. Typical underwriting classifications are preferred, standard and substandard, smoking and nonsmoking, male and female.

Asymmetric information

A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge.

Spillover

A situation or feeling that starts in one place but then begins to happen or have an effect somewhere else.

Asymmetric information

Actors on one side of the market have much better information than those on the other. Borrowers know more than lenders about their repayment prospects, managers and boards know more than shareholders about the firm's profitability, and prospective clients know more than insurance companies about their accident risk.

Corrective taxes

Aim to internalize negative externalities by increasing the cost of the activity generating the negative externality.

Service contract

An additional warranty often sold with the purchase of consumer goods. These consumer goods include appliances and motor vehicles and the warranty is to cover repair costs not otherwise covered by a manufacturer's standard warranty. This is done by extending either the standard-warranty coverage period or the range of defects covered. This is also termed as extended service warranty or extended warranty.

International externality

An externality that extends across national borders. A negative example is emission of greenhouse gases that contribute to global warming. A positive example is technological innovation that diffuses to other countries.

Imperfect information

Anything that may impact a buyer or seller's decision making process is known and understood. For example, in a perfectly competitive market for health insurance, providers would have full information on their clients' health status and charge premiums directly in relation to the their expected costs. However, our real world transactions often involve incorrect/incomplete information; in reality, individuals know a lot more about their own health than do potential insurers. (Partial information that assists decision making, but lingering uncertainty can result in indecision or "wrong" decisions (Opacity of true costs and/or true benefits of an action; Inaccurate or misleading information) )This missing/incorrect information may lead to market failure because the party with better information has a competitive advantage.

Consumer Protection Laws

Are a form of government regulation, which aim to protect the rights of consumers. For example, a government may require businesses to disclose detailed information about products—particularly in areas where safety or public health is an issue, such as food.

Transaction cost

Costs involved in making economic transactions (i.e., exchanges)

Information

Data that is (1) accurate and timely, (2) specific and organized for a purpose, (3) presented within a context that gives it meaning and relevance, and (4) can lead to an increase in understanding and decrease in uncertainty.

Product charge

Fee levied on product with adverse environmental effects

User charge

Fee paid in exchange for the use of natural resources or for the collection or disposal of pollutants

Global public goods

Goods for which benefits reach across borders, generations and population groups.

Moral Hazard

Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for.

Public good

Non rival and non excludable. The non rival part of this definition means that my consumption does not affect your consumption of a good; I do not 'use it up'. The non excludable portion of this definition means that I cannot prevent you from consuming a good. Another way of understanding this concept is saying that adding an additional person to the public goods market has a marginal cost of $0. In other words, even those who do not explicitly (actually) pay for the good can benefit from the good.

Positive production externality

Occurs when a firm's production increases the well-being of others but the firm is not compensated by those others.

Positive consumption externality

Occurs when an individual's consumption increases the well-being of others but the individual is not compensated by those others.

Efficiency

Optimal allocation of resources

Collateral

Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. Because collateral offers some security to the lender in case the borrower fails to pay back the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans. A lender's claim to a borrower's collateral is called a lien....

Public goods

Public goods are non-excludable (not possible to prevent consumption i.e. fireworks) and non-rival in consumption consumption of a public good does not reduce the amount available for other people to consume (i.e. fireworks show broadcast, clean air, Information)

Intellectual property rights

Rights to ideas (Government granted: Patents, trademarks, copyrights; Government protected: Trade secrets)

Insurance

Risk-transfer mechanism that ensures full or partial financial compensation for the loss or damage caused by event(s) beyond the control of the insured party.

social costs & benefits

Same as internal costs & benefits, absent externalities, Sum of internal and external costs & benefits w/externalities.

Tragedy of the commons

Used to describe how damaging the effect of free-riding is on goods which are subtractable but non-excludable.

Pollution charge

an instrument for controlling pollution, designed to reflect the financial and economic costs imposed on society and the environment from discharging wastes and pollutants into water bodies. This has been enshrined in the Polluter Pays Principle which is now internationally widely accepted.

Negative externality

A negative externality is a cost that is suffered by a third party as a result of an economic transaction. In a transaction, the producer and consumer are the first and second parties, and third parties include any individual, organisation, property owner, or resource that is indirectly affected. Externalities are also referred to as spill over effects, and a negative externality is also referred to as an external cost.

Positive externalities in production

Beekeeper producing honey (Pollination benefits spill over onto producers of apples, almonds etc.) or Construction and operation of an airport (Increased accessibility benefits local businesses).

Missing markets

Externalities exist because of these (i.e. if no one has the "right" to the atmosphere, anyone can use the atmosphere (for air travel or for dumping waste)

Power of coercion

Government has power to make you pay (Public goods paid for out of general taxation, then often provided low or zero price at the point of consumption (e.g., park access fee))

Consequences of adverse selection

If a transaction does take place, uninformed party faces a loss due to unknown, and therefore not considered, risk at the time of transaction

Tragedy of commons

In an situation where the consequences of a course of action are shared among a collective, while the benefits are reaped by an individual or single group within the collective, people will tend to take actions that in the long term are detrimental to the group as a whole. This is a tragedy because, in seeking their own personal gain, the members of the group actually ultimately hurt themselves. (i.e. overfishing, overlooking, traffic congestion, intensive use of public parks.)

Internal (private) cost & benefits

In the absence of externalities, all cost and benefits are internal to market exchanges

External costs & benefits

In the presence of externalities, there are external costs (negative externalities) or benefits (positive externalities) that spillover from market exchanges

Positive externalities in consumption

Individual maintains an attractive house (Benefits to neighbors in the form of increased market values for their properties) or Driving a vehicle charged by electricity from a renewable source (Reduces emissions and improves local air quality leading to better public health)

Non-excludable

Individuals who do not pay cannot be excluded from the benefits of the good or service.

External benefit

Occurs when producing or consuming a good causes a benefit to a third party. The existence of external benefits (positive externalities) means that social benefit will be greater than private benefit.

Non-rival

One individual's consumption of a good does not affect another persons opportunity to consume the good.

Occupational licensing

Over 1,000 occupations are regulated at the state level— and still more are regulated at the federal and municipal levels ◦ Governments require licenses for everyone from doctors and lawyers to florists and fortune tellers states required licenses for an average of 92 occupations

Advertising

Paid, non-personal, public communication about causes, goods and services, ideas, organizations, people, and places, through means such as direct mail, telephone, print, radio, television, and internet. An integral part of marketing, advertisements are public notices designed to inform and motivate. Their objective is to change the thinking pattern (or buying behavior) of the recipient, so that he or she is persuaded to take the action desired by the advertiser. When aired on radio or television, an advertisement is called a commercial.

Non excludable good

People can consume it without paying for it. (i.e. public radio)

Common pool resource

Possesses two attributes which distinguish it from other economic goods: the good is subtractable, or rival, and non-exclusive, or non-excludable... Subtractability implies that one individual's use of the resource reduces the level of the resource available for other users.

Regulation

Principle or rule (with or without the coercive power of law) employed in controlling, directing, or managing an activity, organization, or system.

Social benefit

Social benefit is the total benefit to society from producing or consuming a good/service. Social benefit includes all the private benefits plus any external benefits of production/consumption.

Social cost

Social cost in economics may be distinguished from "private cost". Economic theorists model individual decision-making as measurement of costs and benefits. Social cost is also considered to be the private cost plus externalities. Rational choice theory often assumes that individuals consider only the costs they themselves bear when making decisions, not the costs that may be borne by others. With pure private costs, the costs carried by the individuals involved are the only economically meaningful costs. The choice to purchase a glass of lemonade at a lemonade stand has little consequence for anyone other than the seller or the buyer. The costs involved in this economic activity are the costs of the lemons and the sugar and the water that are ingredients to the lemonade, the opportunity cost of the labour to combine them into lemonade, as well as any transaction costs, such as walking to the stand.

Cosign

Someone who will be responsible for paying back the debt if the other individuals fails to make their payments. 'Steve co-signed for the loan so that Amy was able to obtain a car loan despite her poor credit history.'

Input standards

Specify allowable inputs in production (i.e. low-sulfur coal ; no high-sulfur coal allowed, which is cheaper, but emits more sulfur dioxide when burned)

Performance standards

Specify limit but not how to achieve it. (i.e. emission limits for carbon monoxide, hydrocarbons, nitrogen oxides, and particulate matter, but polluters can decide how best to satisfy limit)

Design standards

Specify which currently available design/ method/technology must be used (i.e. Cars must have catalytic converters to reduce emissions.)

Premium

The amount of money charged by a company for active coverage. The sum a person pays in premiums, also referred to as the rate, is determined by several factors, including age, health, and the area a person lives in. People pay these rates annually or in smaller payments over the course of the year, and the amount can change over time. When insurance premiums are not paid, the policy is typically considered void and companies will not honor claims against it

Corporate Reputation

The collective assessments of a corporation's past actions and the ability of the company to deliver improving business results to multiple stockholders over time. For example, many businesses assess corporate reputations using financial soundness, quality of management, products and services and market competitiveness as the criteria for ranking.

Fee for service

The term used for how doctors get paid. For each service the doctor performs they get paid a fee. Fee for service health care procedures include such items as a surgery procedure, test, or an office visit. The fee for service health care model has been criticized and health care reform advocates feel that there needs to be fee for service reform. Critics feel that the fee for service model encourages waste and extra expenses for health care.

Marginal social cost

The total cost to society as a whole for producing one further unit, or taking one further action, in an economy. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but also must include the costs to the external environment and other stakeholders

Positive externality

This occurs when the consumption or production of a good causes a benefit to a third party; a benefit that is enjoyed by a third-party as a result of an economic transaction. Third-parties include any individual, organisation, property owner, or resource that is indirectly affected. While individuals who benefit from positive externalities without paying are considered to be free-riders, it may be in the interests of society to encourage free-riders to consume goods which generate substantial external benefits.

Market failure

This occurs when there is an inefficient allocation of resources in a free market. Market failure can occur due to a variety of reasons, such as monopoly (higher prices and less output), negative externalities (over-consumed) and public goods (usually not provided in a free market).

Deductible

Typically used to deter the large number of trivial claims that a consumer can be reasonably expected to bear the cost of. By restricting its coverage to events that are significant enough to incur large costs, the insurance firm expects to pay out slightly smaller amounts much less frequently, incurring much higher savings. As a result, insurance premiums are typically cheaper when they involve higher deductibles.... Deductibles are normally provided as clauses in an insurance policy that dictate how much of an insurance-covered expense is borne by the policyholder. They are normally quoted as a fixed quantity and are a part of most policies covering losses to the policy holder. The insurer then becomes liable for claimable expenses that exceed this amount (subject to the maximum sum claimable indicated in the contract).

Coase Theorem

Under perfect competition, once government has assigned clearly defined property rights in contested resources and as long as transactions costs are negligible, private parties that generate or are affected by externalities will negotiate voluntary agreements that lead to the socially optimal resource allocation and output mix regardless of how the property rights are assigned

Property rights of intangible resources

Very tricky, ...the U.S. House bill to restrict NSA data collection, Facebook's decision to make it easier for users to share less personal information and Europe's top court ruling that EU citizens have the "right to be forgotten"...The right to privacy is one of the hallmarks of America's civil liberties, but in today's increasingly technological age, this right is failing to keep up with a growing number of online threats.

Government Provision

When government, rather than the market, provides the good or service (Government could own production, distribution, and final provision or any of these stages of the supply chain, or the government could just fund these activities i.e. Health Care, Education, or trash pick up.)

External costs

When someone bears a cost for which they are not compensated for.

Adverse selection

When you do business with people you would be better off avoiding. This is one of two main sorts of market failure often associated with insurance. The other is moral hazard. Adverse selection can be a problem when there is asymmetric information between the seller of insurance and the buyer; in particular, insurance will often not be profitable when buyers have better information about their risk of claiming than does the seller. Ideally, insurance premiums should be set according to the risk of a randomly selected person in the insured slice of the population (55-year-old male smokers, say). In practice, this means the average risk of that group. When there is adverse selection, people who know they have a higher risk of claiming than the average of the group will buy the insurance, whereas those who have a below-average risk may decide it is too expensive to be worth buying. In this case, premiums set according to the average risk will not be sufficient to cover the claims that eventually arise, because among the people who have bought the policy more will have above-average risk than below-average risk. Putting up the premium will not solve this problem, for as the premium rises the insurance policy will become unattractive to more of the people who know they have a lower risk of claiming. One way to reduce adverse selection is to make the purchase of insurance compulsory, so that those for whom insurance priced for average risk is unattractive are not able to opt out.

Free rider

Where one outcome of an action is that others are able to benefit from the action without contributing to its cost, is typically viewed as a problem for those bearing the cost of the action and an opportunity for those who are able to benefit from the action.

Copayment

a fixed amount you pay for a health care service, usually when you receive the service. The amount can vary by the type of service. You may also have a copay when you get a prescription filled. For example, a doctor's office visit might have a copay of $30. The copay for an emergency room visit will usually cost more, such as $250. For some services, you may have both a copay and coinsurance.

Health maintenance organization

a form of health care that provides services for a fixed period on a prepaid basis. Physicians are paid a flat per-member per-month fee for basic health care services, regardless of whether their services are used by the patient HMO's are heavily regulated by federal and state laws, which vary by state. On the federal level, the the primary law governing HMOs is the Health Maintenance Organization Act of 1973. Characteristics of HMOs include: -Requiring members to go to their doctors and specialists. -Requiring members to go to their hospitals. -Requiring members to get referrals to see specialists

Warranty

a legal agreement provided by a manufacturer to a buyer accepting to repair or replace, free of charge, any part proving defective in material or workmanship. The Warranty agreement is an inevitable part of a sale of a product. It is an assurance provided by the manufacturer to provide repair or replacement, free of charge, of any part proving defective in material or workmanship for a certain time period after purchase. This agreement will contain the description of the product, as well as the details of the warranty coverage. It will contain the details of the manufacturer and the buyer, and materials or services that will not be covered by warranty. The agreement will also have the list of service centers authorized by manufacturer.

Market Power

ability to influence market price (i.e. Monopoly, Oligopoly, Monopolistic competition)

Perfect information

allows rational market participants to make optimal decisions

Regulation

broadly defined as imposition of rules by government, backed by the use of penalties that are intended specifically to modify the economic behaviour of individuals and firms in the private sector. Various regulatory instruments or targets exist. Prices, output, rate of return (in the form of profits, margins or commissions), disclosure of information, standards and ownership ceilings are among those frequently used.

Economic rationale

by bearing the cost of a negative externality, its producer will take it into account during decision making

Subsidies

direct payments from the government to consumers or producers (i.e. funding the research and development of clean energy, commonly associated with positive externalities.)

Cap and trade

environmental policy tool that delivers results with a mandatory cap on emissions while providing sources flexibility in how they comply. Successful cap and trade programs reward innovation, efficiency, and early action and provide strict environmental accountability without inhibiting economic growth.

Money-back guarantee

essentially a simple guarantee that, if a buyer is not satisfied with a product or service, a refund will be made.... The money-back guarantee was also a major tool of early U.S. mail order sales pioneers in the United States such as Richard Sears and Powel Crosley Jr. to win the confidence of consumers.

Marketable pollution permit

gives a firm the right to emit a given quantity of waste/pollution in a given time period. The quantity of pollution permits issued is determined by the regulators/government as they aim curb pollution to a socially optimum level. These permits can be bought and sold.

Signaling

idea that one party (termed the agent) credibly conveys some information about itself to another party (the principal). For example, in Michael Spence's job-market signalling model, (potential) employees send a signal about their ability level to the employer by acquiring certain education credentials. Price changes send messages to consumers and producers about whether to enter or leave a market ◦ Rising prices give a signal to consumers to reduce quantity demanded or withdraw from a market completely ◦ Rising prices give a signal to producers to increase quantity supplied or withdraw from a market completely ◦ Rising prices give a signal to potential producers to enter a market

Deadweight loss

inefficient allocation of resource—because too few resources are allocated to production of goods with positive external-ties

Intellectual property

ntellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce. IP is protected in law by, for example, patents, copyright and trademarks, which enable people to earn recognition or financial benefit from what they invent or create. By striking the right balance between the interests of innovators and the wider public interest, the IP system aims to foster an environment in which creativity and innovation can flourish.

Command - and - control regulation

refers to environmental policy that relies on regulation (permission, prohibition, standard setting and enforcement) as opposed to financial incentives, that is, economic instruments of cost internalization.

Propert rights

theoretical constructs in economics for determining how a resource is used and owned. Resources can be owned (the subject of property) by individuals, associations or governments.

Coinsurance

your share of the costs of a health care service. It's usually figured as a percentage of the amount we allow to be charged for services. You start paying coinsurance after you've paid your plan's deductible. Here's how it works. Lisa has allergies, so she sees a doctor regularly. She just paid her $1,500 deductible. Now her plan will cover 70 percent of the cost of her allergy shots. Lisa pays the other 30 percent; that's her coinsurance.