Econ Exam II

efficiency as a goal: critiques

- gov should also account for equity (critique #1) - willingness to pay (which is how we measure economic surplus) reflects ability to pay rather than the true benefit of a good (critique #2)

reasons for market failure

- not perfectly competitive - externaltiites (consumption and production decisions have impacts on people other than producers and consumers) - limited infromation - irrationality - government regulations (government intervene's in market somehow)

effect #1 of globalization

1. can lead to increased income inequality in rich countries globalization has increased income inequality in wealthy countries. if you live in the US and a) you work for a firm that produces goods that are imported, such as a clothing firm (low wage workers), you are now competing against firms from other countries. --> since more competition, wages decrease b) if you work for a firm that exports goods to other countries, such as a software firm (high wage workers), you now have a much larger market --> wage of already highly paid workers increases, causing wage gap/income inequality to increase ultimately, lower-wage workers tend to be hurt, while higher wage workers tend to benefit --> increased inequality

examples of labor supply shifters

1. changing wages in other occupations (amazon starts hiring econ teachers to be analysts for higher wages, supply curve for economics teachers shifts in bc less quantity) 2. changing number of potential workers -each year more economics degree holders than the year before (excess quantity) --> supply curve shifts OUT 3. changing benefits of not working -gov starts paying $600 a week to unemployed poeple, so less quantity of workers affects labor, supply curve shifts in 4. nonwage benefits and costs 12 months of paid parental leave becomes mandatory; more poeple want jobs, supply curve shifts OUT

why does education inc wage

1. develop human capital (knowledge and skills that make u productive) 2. send a signal (conveys that u can focus/do something hard)

what explains variation in wages?

1. education and human capital --> dif skill levels, more education = higher wages 2. nature of the job (more dangerous, paid more) 3. institutions: laws, workplace org (min wage laws) 4. discrimination

why does market labor supply curve always slope up>

1. extensive margin: at higher wages, some people who were not working start working 2. intensive margin: existing workers work more 3. some ppl switch from one job to another (ex: switch from market for economics teachers to market for analysts if wage is higher)

the trade debate: against free trade

1. natural security gov banned import of chinese goods for national security (limitation of free trade) 2. protection to help nascent industries develop (if small country wants to start auto industry, will at first restrict competition from outside countries by limiting imports 3. other countries may temporarily export goods at very low prices (ex: dump the goods) to crush competiton might start buying t-shirts from country that doesn't have min wage laws if you raise min wage in your country (bc goods become more expensive) 4. trade is a way of skirting regulations 5. importing leads to job losses

4 solutions to externality problems/how to internalize

1. private bargaining (coase theorem) 2. pigouvian corrective taxes and subsides 3. cap and trade 4. laws, rules, and regulations

private bargaining

COASE THEOREM - when people can COSTLESSLY bargain they will get to the efficient outcome (people who face externalities bargain with supplier)

computing consumer surplus and producer surplus for a market graphically

Consumer surplus = area UNDER demand curve, ABOVE price, and to the left of quantity producer surplus = area ABOVE supply curve, BELOW price, and to the left of quantity (these area's depend on PRICE, which also determines quantity) maximizing economic surplus is when shaded area is as big as possible

how to determine individual consumer surplus at a certain price graphically

MB on demand curve at that quanity = your marginal benefit, - price (cost) = economic surplus

is equil. price same price + quanitty that maximizes CS?

NO

individual producer economic surplus

P (benefit to producer) - MC

pos externality --> implications/graph

Positive externalities lead to UNDERproduction, such that private equilibrium Q LESS THAN the efficient quantity

other ways governments restrict trade --> red tape

RED TAPE excessive red tape is similar to a tariff --> raises COST (even if not financial) of imports however, worse bc doesn't raise revenue

an individiduals labor supply

THIS tells us how much each PERSON would work at each wage

what happens to surplus if gov taxes good?

TR still counted as part of economic surplus, since benefit to society decreased economic surplus; more equity means less effeciient tax shrinks TOTAL economic surplus, but is redistributed to promote equity

subsitution and income effects

a change in wage has two OPPOSING effects subsitution effect of inc wage: when wage INC, benefit of working an additional hour also INC, so the opp cost/price of leisure INC --> higher wage pushes you to work MORE (substitue leisure for work) however, whwen you're richer, your benefit for leisure also inc, which pushes you to work less Income effect of inc wage: when wage INC, u r richer so can do cooler thigns w leisure, so MB of liesure INC higher wage pushes you to work LESS bc opp cost of working inc

Efficient Allocation: who gets what?

a competitive market ensures that people who value the goods the most (as measred by WTP) will get them in particular, anyone who has MB > P (marginal cost) will get the goods!

the problem/solutions of externalities

a free market will NOT produce the efficient quantity (not achieving full economic surplus) solve externalities by getting the actors (buyers and sellers) to consider ALL the costs and benefits of their actions, not just the PRIVATE costs and benefits --> internalize the externality by making THEM feel costs and benefits

absiolute advantage

absolute advtnage refers to the ability to do a task best or most efficiently (person best at task does it, so if you're better at your roomate than cleaning, U clean) NOT efficient

summary: effects of economic trade

always inc ecoomic surplus :)

definition of externality/neg and pos externality

an activity has an externality if it imposes costs or benefits on people other than the ones engaged in the activity (not suppliers or demanders) neg externality: when the activity imposes COSTS on bystanders (factory pollutes and poisons children) pos externality: when the activity brings BENEFITS to bystanders (choco factory brings in tourism, which helps local businesses)

what shifts demand for labor? (MRPL curve)

anything that affects the productivity of labor - if labor MORE productive, inc marginal benefit from labor --> at any wage employers will higher more labor than they did before (inc demand)

solution to tragedy of the commons

assign ownership rights --> one person takes responsibility for the resource limit access --> need tickets to graze (owner want to make sure that the commons used effectively -- perhaps by charging other people to graze on it, would internalize the externality) incentize owner to manage it (in their interest to maximize value of the commons) inducing market forces, since they want to generate max economic surplus

ex: prediction markets to predict who will be next repub president, create tickets r worth $1 if trump becomes preesident , then let people trade what would price of ticket be? who would buy?

buyers: 1. poeple who want him to win 2. people who think he will win 3. people who are worried that he will become nominee, so want to "hedge?" their psychological state 4. people who don't know anything about politics answer: #2

2. Changes in the price of capital

capitol = assets that allow for increased productivity (machines that workers use) ex: hairstylists use scissors: dull scissors --> sharp scissors, will inc productivity, which will in turn inc marginal revenue revenue the effect of a change in the price of capital depends on how capital and labor work together (skill of the job) capitol could make workers more productive -- then capital and labor are complements --> sharper scissors = more haircuts if price of sharp scissors falls, demand for workers inc capitol could make workers unnecessary (then they are substitues) --> replacing mcdonalds workers with kiosks if price of kiosks fall, demand for workers dec

an externality

case wherein free markets fail demand curve = MB of demanders, supply curve = MC of suppliers efficient quanity = intersection of these curves (in theory) however, what if production/consumption of this good impacts OTHER people (this is NOT compatured by the supply and demand curve) to find socially efficient quanity, have to account for externalities/impact to people that arent suppliers or demanders (ex: neighbors)

see curve on asnwer, what is the most efficient (cheapest from society's perspective) way to make 11 widgets

cheapest for each firm to make widgets until their P = MC

examples of corrective taxes/subsidizes

cigarettes taxed at high rate, same w gasoline, same w cutting in line flu shots subsizided, education subiszied, voting is subsized (increase benefit you get from doing those activities, even if not necessarily financial)

why would u use taxes instead of coase thereom?

coase thereom only works for people where u can bargain (2 parties) but not really for stuff like pollution since so many dif people affected, so better to just do tax

what determines what countries export and import?

comparative advantage

job advice

comparative advantage: on demand side/from employers perspective: - your good at this job relative to other jobs u could do, such that ur opportunity cost of doing this job is low on supply side (your perspective) -your less troubled by disamenities of ur job/wage premium makes up for it OR -u enjoy the work so the wage penalty is small relative to ur benefit

dif between efficient quanity vs equlibrium quanity

competitive equilibrium intersection of private cost/demand, efficient quanity is ALWAYS the socially optimal quanity

efficient production: who makes what

competitive market ensures Q* widgets made at lowest possible cost (such that the lowest cost firms make widgets) however, as firms make more widgets, cost to make widgets increases to get Q* widgets, the market settles at the price P any producer who can make a widget for less than P will make as many as they ca as long as MC < P however, for producers where MC becomes > P, will not make additional widgets basically, finding the cheapest possible way to produce Q* to maximize benefit to society

welfare analysis (quantifying economic surplus) of imports: who wins and who loses?

consumer surplus inc a lot (since goods are a lot cheaper) but producer surplus decreases however, overall, society is BETTER, since boost to consumers is greater than decrease to producers

welfare analysis of exports

country would export if world price was higher than domestic price (bc can make more off of it) therefore, demanders are hurt (bc less of good available for them to buy) and producers are better off (because can make more $$!) society as a whole is better off

artifical markets

create a market/price by aggregating info thats difficult to access

measuring the extent of market failire: deadweight loss (how much the market failed by)

deadweight loss: how much POTENTIAL economic surplus is lost when the market is not at a perfectly competitive equilibrium DWL = max POSSIBLE economic surplus - actual economic surplus yields lower/higher than efficient quanitity

workers willingness to do certain jobs

depends on nature of job

extensive margin

do u work at all?

individual demander economic surplus

economic surplus is benefit - cost, so MB - P

Bobby's WTP for a pair of bluchers is $200, and he buys a pair for $150 from gants. what is the economic surplus from this transaction?

economic surplus of bobby = 50 economic surplus of gants = 150 - gants's WTA economic surplus has to take intoa ccount economic surplus from BOTH sides of transaction

critique #2

effeciency means that goods go to people w highest WTP but in addition to marginal benefit (which is what we use it to measure), WTP also reflects ability to pay (which we fail to account for)

a well functioning market will ensure:

efficient quanity, efficient production, efficient allocation (not equity, but max economic surplus) the invisible hand: all individuals just working to promote their own best interest (best deal for themsleves), in doing so , guides market forces to equilibrium price and quantity, which maximizes economic surplus in SOCIETY

who should trade what to get efficient quantity production, and allocation of good x?

ensure maximize comparaitive advantage

: What price and quantity maximizes the total economic surplus?

equilibrium price + quantity (total area is largest)

trade

exchanging something you value less for something you value more (ex: as a costumer, you trade your money for a good) trading reallocates good from ppl who value less to people that value more :)

commmunity college kids have a much larger share of jobs than students at gtown

extensive margin (opp cost of working at gtown is higher --> have to graduate in 5 years which costs way more at gtwon )

knowledge problem of internal market example

feeding america supplies food banks in US, wants to allocate supplies efficiently, but issue is that the bosses at feeding america HQ don't know the needs of individual food banks (knowledge problem)

individual vs market labor supply curve

for an individidual, the labor supply COULD slope down, but market labor supply curve always slopes up --> as wage goes up, the total hours of work in the market inc

Effects of International Trade on Price and Quantity: The case of imports assume domestic market closed to international trade and then opens up to world trade (we know/assume it doesn't effect world market, but what happens to DOMESTIC Q supplied/demanded, and what Q is imported?)

free trade: domestic price DROPS from 10 (domestic price) to 7 (world price) domestic consumers thus buy MORE (movement along demand curve, NOT shift, Q1 --> Q2) however, since now suppliers forced to sell at a lower price to compete, they sell LESS, (Q1 --> Q3) overall, demand increases, and domestic suppliers provide less

the free-rider problem: a special kind of externality problem what is it/consequence

free-rider problem: when someone can enjoy the benefits of a good without bearing the costs (ex: group project work were someone does no work, using roomates minifridge) prevents good production from getting to efficient quantity --> underproduction of these goods recall: if good has pos externality, market UNDERprovides (project could have been better, not enough minifridges in dorm) external benefit of joes minifirdge leads to underproduction of these goods (could have been more economic surplus if more minifridges)

intensive margin

given you are working, how many hours do u work

ex: manufacturing widgets is very polluting, so gov wants to restrict Q to 100 widgets total, 5 suppliers of widgets, but all have dif costs! what is cap, what is trade?

gov gives each supplier permits to produce 20 widgets; 100 = CAP however, some firms have higher production costs; allowing the suppliers to TRADE (buy and sell permits) ensures that the permits end up with the lowest cost producer of widgets

solution to free rider problem

gov support for public goods a competitive market tends to underprovide (rel to effecient quantity) public goods because of the free-rider problem ex: I enjoy walking my dogs in the woods, but not enough to buy a large property with woods, so free ride neighbors woods, which decreases their quality by crowding woods now no longer have a good public place to hike even tho combined WTP for hiking is high gov could instead use taxes/rexognize high combined WTP and provide the public good by providing a park however, since this method is gov intervention and does NOT rely on market forces, it could be inefficient (ex: gov could spend more or less on park than the people value the park) --> intervention IMPROVES efficiency, but still not most efficient

DWL of over production

greater quantity than efficient gov could FIX by setting a qouta (to limit quantity directly) or impose a tax, which will limit quantity

why does saudi arabaia export oil, while importing everythign else?

has comparative advtange in the production of oil (low opp cost of producing oil bc can't really produce anything else since limited natural resources) other countreis that have a higher opp cost of producing oil find it beneficial to buy oil from saudi arabia

(true) efficient quantity of a good with an exterality

have to consider both private and external costs marginal private benefits (MPB) and marginal private costs (MPC) are just for suppliers/demanders marginal external benefits (MEB) and marginal external costs (MEC) are the MB and MC to outsiders/those that the suppliers and demanders didn't consider

rational rule for employers:

hire additional workers as long as MRPL (benefit) > wage (cost)

including a neg vs a pos externality on a S&D graph

if neg externality, draw the new MS(COST) curve if pos externality, draw the new MS(BENEFIT) curve either way, new curve will be ABOVE corresponding private curve

why would the government intervene or limit trade?

if the government is FOR the people, and limiting trade hurts consumers, why do governments limit trade bc if concentrated benefits of powerful people, they can organize political pressure 5 companies who would save 5 million each can lobby to make gov do import tax so they can sell at a higher price

4. nonwage benefits, subsidies, and taxes

if the nonwage cost of workers increases, then at any given wage employers would higher fewer workers. INWARD shift of the labor demand curve

which effect wins (typically)

if work at a low wage job and doubles, more likely that subsitution will dominate (u will want to work more, + can hire someone to help clean now) if already pretty rich and wage inc, income effect dominates (now u can golf more!)

the trade debate: for free trade

in favor of free trade: - more economic surplus - the losers within a country (ex: domestic producers of t-shirts) can be compensated by redistibrution --> send money that we're saving/extra economuc surplus to domestic producers that are not loosing money if industry hit hard by trade liberalization (easing of restricitions) gov taxing winners (consumers), sharing that money w losers difficult to do in practice!

1. changes in demand for the product (OF labor) shift curve

inc in demand for haircuts will inc marginal revenue product of labor (bc now can charge more for haircuts) inc in demand for the product means inc in price for the product which means inc in MRPL (because the marginal produce of each worker is now sold at a higher price)

fav shoe manufacturer stops manufactuirng in poor country, what would happen to shoe price

increase

even among students who work, community college students work more hours

intensive margin (opp cost of working at gtown is higher --> have to graduate in 5 years which costs way more at gtwon )

see slide for new productivity table determine most efficient outcome

jerry has abs adv. at both scavenging and fortifying but more efficicent if each person does the task they have a comparative advantage in to do so, use the costs in terms of hours to determine the OPPORTUNITY cost (ex, how much of the other task he would be able to do/produce if he used that time for that task instead) assign each task to the person that has comparative advantage so jerry should spend all his time procuring meals, while trey should fortify both huts (and then scavenge w remaining time) jerry proures 12/2.5 = 4.8 meals trey fortifes 2 hits, with remaining 4 hours, procures 4/8 = .5 meals between them, 2 fortified huts and 5.3 meals it is more efficient when the person who has the lowest opp cost of fortifying huts forifies all the huts

trey and jerry stranded to survive, have to scavenge for food for 12 hours of day and fortify 2 huts see productivity table on answer slide

jerry has absolute advantage for scavenging (takes him less time) trey has absolute advantage for fortifying (takes him less time) since both have abs advantage in dif task, makes sense that trade: jerry spends all his time scavenging (so 4 meals) trey fortifies 2 huts, and spends remaining time scavenging for food (8 remaining hours/5) = 1.6 meals between 2 of them, 2 fortified huts and 5.6 meals (more efficient outcome then when they didn't specialize and both fortified own hut (2 fortified and 5 meals) trading = more efficient outcome!

why in china no good deal on Lenovo laptop but great deal on dental cleaning?

lenovo laptop: free trade, so china sells this laptop to US citizens for same price dental cleaning: can't ship/export teeth cleaning, training in china dif (not as expensive)

other ways governments restrict trade --> an import quota

limits the amount of IMPORTS, also has similar effects to a tax, but also DOESN'T raise government revenue

how do trade restrictions affect total economic surplus of a country (relative to if there was free trade)

lower it, but can help specific people/firms within a country

how could i help my 3 year old who paints on walls internalize externality

make her help me clean walls, yell at her

suppose two consumers whose curves indicated by that in answer key, what's most efficient way to allocate 10 units?

make sure that MB = (or as close as possible to) P for both consumers more economic surplus here bc by giving one more to red who is getting more economic surplus/benefit from good and taking one away from blue who is getting less than the economic surplus red is getting, maximize benefit

3. better management and productivity gains

makes labor more productive, so MRPL inc, labor demand shifts OUT

demand for labor by employers

marginal product of labor (MPL): how much more quantity (widgets) will an additional worker produce marginal revenue product (expressed in dollars): how much additional revenue (dollars) will an additional worker bring in MRPL = MPL x price THIS is what comprises demand curve/MB MC or cost is WAGE so higher as long as MB > MC determine quantity of hair stylists they will get at each price (wage) given will get as long as MB > MC

cap and trade demo

marginal value of permit = marginal profit for firm can be succesful trade if marginal value of additional permit for one firm is > one firms marginal value of their current permit lower cost manufacturer making more goods = efficient production

what is the most efficient arrangement of producing goods?

maximizing comparative advantage by reducing opportunity costs as much as possible

equity

may get smaller peice of pie in total, but more EQUITABLE; equity revers to how EVENLY distributed are the benefits (or costs) of a certain outcome

globalization

measure of how much trade is going on the increasing integration of economies, cultures, political institutions, and ideas from different countries

an outcome is more ECONOMICALLY EFFIEICIENT than another if it yeilds...

more ECONOMIC SURPLUS most efficient otucome = largest possible amount of economic surplus; SIZE of the pie

superstar wages

muscians, CEO of HUGE firm, etc. operate in labor markets where being a tiny bit better makes a huge difference in your salary pop music: when the cost dif very small, people will listen to 1st best muscian, not 10th best managers: the very best CEO will raise value of company minimally more than 250th best, but if that minimal percetnage is for multibillion dollar company, than this very small dif is worth paying CEO an extra 8 million

Measuring total economic suprlus in the MARKET

need economic suprlus of EACH individual in market consumer surplus = sum of all demanders' surpluses producer surplus = sum of all suppliers surplus total economic surplus = consumer surplus + producer surplus

neg externality --> implications/graph

negative externalities lead to OVERproduction, such that Q at private equilibrium intersection is GREATER than the efficient quantity

coase theorem example: law says no loud music after 9, but u r neighbor who complains (benefit to u is worth 30 of quiet night and benefit to them of party is worth 100) no bargaining result bargaining result costly bargaining result

no bargaining, you call the cops, and ppl stop playing loud music (benefit to u is worth 30 and opp cost to them is worth 100) --> INEFFICIENT outcome bargaining --> party throwers pay u 50 not to call cops, both are better off --> efficient outcome costly bargaining (hate neighbors, roomies w dif WTP for quiet night) --> bargaining too hard, so won't get to the efficient solution :(

as the cost/price of leisure inc (giving up more $ to have leisure), ceteris paribus (income same) do people consume more leisure?

no, they consume less, as price of good inc, people consume LESS

is leisure a normal good? (ceteris paribus)

normal means that when income inc, people consume more leisure (assuming PRICE of leisure not changing) YESz

welfare analysis of external costs/efficient quantity of objects w external costs (i.e. pollution)

not actually effecient to have NO external costs, need cars!! (but they pollute) at the efficient quanity (where private curve intersects with social curve) there is still a huge quantity of widgets, just LESS than original quantity at competitive equilibrium when calculating economic surplus for efficient quantity, only shade up to new/efficient quanitty (also note that price also changes)

what's the price of an hour of leisure

opportunity cost/what you're giving up to get it; it depends on what uour giving up to take your leisure time

the efficicnety-equity tradeoff

policy a:inc total economic surplus by more, but most of that goes to rich people policy b: inc total economic surplus by less (less efficienty), but that benefit mostly goes to poor people (more equitable) TRADEOFF

why has globalization increased

potential GAINS FROM TRADE (ex: can get cheaper clothing, tshirts, cars) also bc trade costs have been reduced trade costs = the extra costs incurred as a result of buying internationalyl rather than domestically, including costs such as shipping and import/export taxes --> if trade costs are high, it could discourage importing

price - why useful

price is an incentive (if price goes up, supllies try to producer MORE, demanders look for alternative) aggregates info - if prices changes, means something happened between relationship between supplu and demand (ex: demand went up means higher price) if price of stock goes up, tells u info about company (inc in value)

categorizing goods

private are excludable (exlude people) and rival (use up) common resources are nonexcludable (everyone has) and rival (can use up) club goods are excludable (exclude people) and nonrival (can't use up) public goods are nonexcludable (can't exclude people) and nonrival (can't use up) --> where free-rider problem can arise

characteristics of goods wherein free-rider problem arises

public goods nonexcludable: people cannot be prevented from using the good (ex: minifridge in dorm) nonrival: one person's use of a good does not preclude another from using it (ex: police officer, public wifi, anything where u cant "use up" good)

1. effecient quanity

quantity that maximizes surplus, market forces push quanity bought and sold to this equilibrium quantity, Q equilibrium quantiy the rational rule for market: produce more of an item if the MB of one more is greater than or equal to the MC

advanced cap and trade

rather than targeting the efficient quantity of the good produced, the government might target the externality (ex: pollution) itself for example, the gov could give permits for tons of CO2 emissions (externality) the widget manufacturers could make as many widgets as the want if they keep CO2 down advantage of this relative to capping the widgets --> gives companies an incentive reduce pollution; find CLEANER way to produce same amount of widgets

tragedy of the commons: another externality problem

recall, common resources are nonexcludable but rival (gets used up) tragedy of the commons: the tendency to overconsume a common resource (since j thinking abt their private benefit, not sustainability) --> used inefficiently without solution ex: everyones sheep ate the grass so now field sucks since it was free to graze on (inefficiency)

how to determine individual producer surplus at a certain price graphically

recall, price - MC so price - MC (find on supply curve at that quantity)

what does the area BETWEEN the supply curve and the MSC (social cost) curve and to the left of the quanity supplied represent

represents total EXTERNAL costs (not taken into account in private supply curve)

restricting free trade (why does gov do this?)

restricting trade = interfering w free market!!!! decreases economic surplus most gov restrict free trade by taxes, trade restrictions, or red tape tariff = tax on IMPORTS (to support producers)

the rational rule for society

revising the rule to account for exteralities have to compare marginal SOCIAL benefit to marginal SOCIAL cost where MSB = MPB + MEB MSC = MPC + MEC MB/MC of private people AND external people therefore rational rule for society is producer more of good as long as its MSB > MSC THIS is how we get efficient quanity in presense of externalities; the efficient quantity is where the MSB and MSC curves cross

rule about comparative advantage

someone always has a comparative advantage in something (unless 2 parties have same opp. cost, but in general dif opp. cost (same opp cost COULD happen in a 2-person, 2-good economy, but would not happen in real world where more than 2 tasks) because they are the low cost providers of that good, most effecicient for them to produce that good (specialization, due more of that task that u are least bad at and trade w ppl who are least bad at other tasks) Messi has huge opp cost of running triatholon, even if he would have absolute advantage

if trey charges .65 meals for fortifying jerry's hut...

still better off bc still lower than the opp cost in meals that jerry would have to sacrifice if he fortified his own hut

effect #2

supports exploitation of foreign workers increased global trade has led to workers in low income countries working in factories for rich country firms' at wages that would be horribly low in a rich country however, important to consider if those workers have any alternative (i.e., if nike closed down its factories in these countries, would be worse off bc now don't have jobs)

welfare analysis of a tariff

tariff causes the price to rise domestic buyers demand a lower quantity, domestic sellers supply a higher quantity (therefore imports are lower) leads to: DEC in consumer surplus, small INC in producer surplus, small INC in gov revenue (decreasing total economic surplus) consumer surplus: area below demand curve and above price producer surplus: area above supply curve and below price gov surplus: 4 (dif in new price - OG price) times # of shirts imported total surplus: sum of the above Q1 --> Q4 (lowers) what demanders demand domestically Q2 --> Q3 (increases) what suppliers supply domestically

solution 3: cap and trade

taxes direclty affect the pricers buyers and sellers face in order to affect the quantity produced (affect prices to change quantity) however, cap and trade directly targets QUANTITY --> targets efficient quantity through a quota (in the case of negative externalities) - this requires knowing the efficient quantity - the government could hand out permits for so many units of production permits = CAP - if the permits are allowed to be traded, that could help efficiency even more = TRADE

comparative advantage

the abiloity to do a task at a lower OPPORTUNITY COST

gains from trade

the benefits reaped from trading

the labor-leisure tradeoff

the choice of how many hours to work is always a choice between labor and leisure

compensating differental

the difference in wages required to offset the desirable or undesirable aspects of a job (why night shift nurse gets paid more, morticians, etc.)

the labor market graph labelled

the labor market is in many ways like the market for other goods demand curve = employers DEMAND for labor supply curve = workers SUPPLY of labor price axis = wage/salary quantity = employment

problems with choosing the most efficient policy

the most effic9ient policy has POTENTIAL to make everyone better off if poliucy maker REDISTRIBUTES newly created wealth, ut resitribution is difficult in practice on the whole, society might get richer, but some people would be poorer **maximizing efficiency IGNORES equity

critique #1: distribution matters

theory: if gov could redistribute effecitvely, could maximize economic surplus, then tax people and redistribute reality: costless redistribistution not possible/politically feasible policies have distributional impacts: affect different parts fo society differetly. impacts are NOT distributed evenly among all people even the most free market shoudl evaulate policy based on BOTH efficiency and equity

solution 4: laws, rules, and regulations (bans)

these are NOT efficient the government can directly ban (or mandate) certain activities ex: no smoking on campus however, this doesnt internalize the externality --> it just PROHIBITS it internalizing guarantees that unpaid benefits/costs taken into account of composition of goods and services prices, but banning just prevents it all together --> effective but not EFFICIENT why not? might be giving up oops for revenue, might be banning something that's not actually creating externality since completley banning it

solutions #2: corrective taxes (and subsidies)

these are known as PIGOUVIAN taxes basiically increase or reduce costs actors (supplers/demanders) face by taxing (or subsiding) them for neg externality, corrective tax = external cost (so they FEEL cost) for pos externality, corrective subsidy = external benefit (so they FEEL benefit) in either case, however, have to know the external cost/benefit to effectively set cost

what does area UNDER supply curve (so far we have said above) and to left of quantity supplied represent

total COSTS (these are taken into account in supply curve)

Economic Surplus

total benefits - total costs

total economic surplus gained from any transaction

total economic surplus is the entire area between demand curve and supply curve and to left of quantity bought/sold, this is MAXIMIZED at equilibrium price

summary of trade (benefit/cost)

trade between two countries makes both countries better off as a whole, but WITHIN eac country, some people and firms may be worse off because of trade

why do countries trade with each other?

two dif countries have dif comparative advantages, so two countries could both be better off with trade

analyzing the effects of international trade: modeling principle how does international trade effect a countrie's DOMESTIC economy

two markets world market: all suppliers/demanders of widgets in world world supply and world demand determine price the domestic market: domestic market SMALL relative to the world, so doesn't have a significant impact on the world market (so assume what happens in domestic market doesn't affect world)

rational rule for workers, why "tricky"

w > MB leisure however MB of leisure depends on wage bc if ur richer can do cooler things w leisure, greater MB

market failure

when markets don't maximize profits/the size fo the pi, let you down, not perfecly competitive and don't lead soceity to the efficient outcome

welfare analysis of externalities (benefit/harm of externalities and how they affect producer/consumer surplus)/affect overall economic surplus

when there's an externality how much better off COULD society be/how would PS/CS/total economic surplus change by correcting externality

Specialization

when they cooperated, each did more of the job he was relativley better at, and they were both better off as a result

equilibrium/efficient quanityt

where MB = MC

domestic winnters and losers from free trade

winners: - consumers if importing - producers if exporting losers: firms (AND their workers) if importing same goods --> especially higher cost firms - consumers of exported goods (bc less of that good available to them)

can the gov help reduce DWL?

yea but if does opposite/hurts more, called government failure --> inc size of deadweight loss/making things worse

is an import quota on wheat theft?

yes, domestic farmers benefit at the expense of consumers --> economic surplus dec