Econ Final Exam

Emission Taxes

A tax on every unit of pollution produced to achieve the socially efficient outcome.

Becker's Theory of Discrimination: Non-Discriminating Firms

Can hire from a larger supply of workers at lower wages, resulting in lower costs and greater profits.

Environmental Policy

Deals with the incentives faced by policy makers who wish to align public interests with business interests.

U.S. Poverty Rates Have...

Declined from 1959 to 1975 and have remained roughly steady since.

Job Crowding/Dual Labor Market

Discrimination in male-dominated jobs shifts the supply left, pushing wages higher, while female-dominated jobs see wages fall.

Traditional Causes of Poverty

Lack of human capital. Mental or physical disability. Drug addiction Unwillingness to work or apathy toward work. Refusal to relocate for work.

Firms hire workers based on their value relative to their cost:

MRP = W

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Elasticity of Demand for Labor (% change in quantity/% change in wage)

Measures responsiveness of quantity of labor demanded to changes in wages. Factors include: Elasticity of demand for the product, Ease of input substitutability, Labor's share of total production costs.

Becker's Theory of Discrimination: Discriminating Firms

Must pay higher wages for "preferred" workers, resulting in higher costs and lower profits.

Types of Union Structures: Union Shop

Nonunion workers can be hired but must join the union within a specified time.

Types of Union Structures: Agency Shop

Nonunion workers may be hired but must pay union dues for its services.

Becker's Conclusion

Pressures of market competition should drive discrimination to zero in the long run.

Life Cycle Effects

Young people typically earn modest incomes. Income peaks roughly between ages 45 and 55. Income declines with retirement, as do costs.

Public Policy to Combat Discrimination

1. Equal pay act of 963: Requires that women and men recieve equal pay for equal work. 2. Civil rights act of 1964: Prohibits discrimination based on race, color, sex, religion, nationality. 3. Executive order 11246: Established affirmative action. 4. Age discrimination in employment act of 1967: Protects workers over age 40 from age discrimination. 5. Americans with disabilities act (1990): Prohibits discrimination based on physical or mental disabilities. 6. Employment nondiscrimination act (proposed): Would prohibit discrimination based on sexual orientation or gender identity.

The Average Union Wage Is...

10-20% higher than the average nonunion wage within the same industry.

Distribution of Income

A flow measure reflecting the funds received by individuals or businesses over a specific period.

Lorenz Curve

A graphical measure of income inequality: Cumulates households of various income levels on the horizontal axis. Cumulates the share of total income on the vertical axis. The more bowed the Lorenz curve, the greater the income inequality.

Distribution of Wealth

A measure of an individual's or family's assets, net of liabilities, at a given time.

Marketable or Tradable Permits

A regulatory body sets a maximum allowable quantity allowed, typically called the cap, and issues permits granting the right to pollute a certain amount. These permits can be bought and sold; hence the common term cap and trade.

Rawls Maximin Principle

A society should maximize the welfare of the least well-off individual. Suggests that some people are born unlucky into poor households, and therefore income redistribution would make society more equitable.

Limitations to Becker's Theory

Adjustment costs of firing unproductive workers and hiring new workers can be high. Women may be less mobile than men and less willing to accommodate employer's demands (such as travel). Women may continue to choose more flexible career paths that do not penalize extended absences from the labor market.

Externalities

An action or transaction that affects a third party who is noa a party to it. Can be a positive externality (benefits to others outside the market). Can be a negative externality (costs to others outside the market). Externality can be caused by production or consumption.

Positive Consumption Externalities

An external benefit shifts the demand curve up and to the right. The market produces less output than is socially optimal.

Negative Production Externalities

An external cost shifts the supply curve up and to the left. The market produces more output than is socially optimal.

What would shift the market labor supply curve to the right?

An increase in minimum age for retirement benefits.

Ronald Coase

Argued that private markets are the most efficient way to solve externality problems.

Unions

Associations of employees that bargain with employers over the terms and conditions of work.

Benefits vs .Cost of Union Membership

Benefits include: Higher wages and job benefits through collective bargaining. Greater job security against arbitrary or vindictive decisions by management. Costs include: Membership dues. Cost of strikes (lost wages). Loss of some individual flexibility.

Public Goods Exhibit: Nonrivalry

Consumption by one does not reduce that good's or service's utility to others.

U.S. Poverty Rates Are...

Correlated with race, though black and hispanic poverty has fallen.

The Firm's Demand for Labor is Derived from:

Demand for its product and the productivity of labor.

What determines how much you get paid?

Depends on marginal productivity.

Poverty Thresholds

Developed in the 1960s based on the USDA's food plan. In 2015, an American household of four earning less than $24,259 was in poverty.

Causes of Income Inequality

Differences in human capital, as high-paying jobs require much more education and skills than before. Discrimination that keeps wages low for certain groups of workers. The rise of two-earner households, which has increased overall household income significantly.

Solutions to common property resource problems

Establishing private property rights, Using government policy to restrict access to the common resource, Informal organizations that restrict each user's benefits from the resource (examples include raising the gas tax, subsidizing alternative transportation, and privatizing toll roads).

Gary Becker

Explained demographic changes and criminal behavior by focusing on economic incentives. Argued that discrimination is economically detrimental to all parties. Won Nobel Prize in Economics in 1992.

Causes of Poverty and Income Inequality

Human capital (education and ability), Discrimination, Stagnant Wages, Poor are financially punished for being poor, Health problems, Bad luck.

Value of the Marginal Revenue Product (VMP)

In competitive labor markets, the firm is a price taker, which means MR = P. This is represented by MRP = MPP x P = VMP. For competitive firms, profits are maximized when labor is hired to the point where VMP = wage rate.

The Coase Theorem

In the presence of an externality, if transaction costs are small, the resulting allocation of resources will be efficient regardless of the initial allocation of property rights. The socially optimal level of production will be resolved no matter whether polluters are given the right to pollute or victims are given the right to be free of pollution.

Nozick's Arguement

It would be unjust to redistribute wealth when it is earned through hard work and innovation. Justice requires protecting property rights to ensure people are rewarded for their hard work.

Segmented Labor Markets

Occur when labor markets split into seperate parts, leading to wage differentials. Theories include: 1. Dual labor market hypothesis: Labor market is split into primary and secondary sectors. 2. Job crowding hypothesis: Occupations are broken into predominantly male and female jobs. 3. Insider-Outsider theory: Workers are segregated into union and nonunion sectors.

Market Failure

Occurs when a market outcome does not provide the socially optimal level of output. Causes of market failure include: Externalities. Existence of public goods, Common property resources.

Public Goods Exhibit: Nonexcludability

Once a good or service is provided, it is not possible to exclude others from enjoying it.

Depth of Poverty Measures

One measure of poverty debt is the income deficit, the difference between the poverty threshold and a family's income. A family of four living on one income at the national minimum wage ($7.25/hour, or $14,500 per year), would have an income deficit of: $24,259-$14,500 = $9,759

Types of Union Structures: Closed Shop

Only union members are hired.

Optimal Provision of Public Goods

Providing public goods involves the political process and uses some form of cost-benefit analysis. The demand for a public good represents the benefit to society, and the supply curve represents society's costs. Therefore, equating marginal benefits and marginal costs yields the optimal outcome.

Government Failure Occurs When:

Public policies do not bring about an optimal allocation of resources. The incentives of politicians and government bureaucrats are not in line with the public interest.

Types of Unions: Industrial Union

Represents all workers employed in a specific industry (example: auto workers - UAW)

Types of Unions: Craft Unions

Represents members of a specific craft or occupation (example; air traffic controllers - PATCO).

Competitive Labor Markets

Similar to competitive product markets, but several key assumptions: Firms operate in competitive industries with many buyers and sellers, a homogeneous product, and easy entry and exit. All workers are regarded as equally productive. Information in the industry is widely available and accurate.

Functional Distribution of Income

Splits income among the factors of production.

Marginal Revenue Product (MRP)

The amount of additional revenue one worker earns for the firm, represented by MRP = MPP x MR, MPP being the marginal physical product of labor, aka the additional output from adding one more worker.

Private Costs/Benefits

The costs/benefits of an economic activity directly borne by the immediate producer or consumer (excluding externalities).

Personal or Family Distribution of Income

The distribution of income to individuals or household groups (typically by quintiles, or fifths, of the population).

Shifts in Labor Demand

The following factors can lead to a shift of the labor demand curve: Changes in product demand, Changes in productivity, Changes in the prices of other inputs. Equilibrium in competitive labor markets occurs at the intersection of supply and demand.

Shifts in Labor Supply

The following factors can lead to a shift of the labor supply curve: Demographic changes, Nonwage aspects of job, Wages in alternative jobs, Nonwage income.

Social Costs/Benefits

The full resource costs/benefits of an economic activity, including externalities.

Political Left: Focus on Equity

The goal should be to make income and wealth more equitable through policies such as expanding public education, housing subsidies, and health care (i.e., making the pie slices more equal)

Political Right: Focus on Growth

The goal should be to provide incentives to work and reduce government welfare programs. The best way to cure poverty is to increase growth and make the overall pie bigger.

Market Labor Supply

Unlike individual labor supply curves, the market labor supply curve is positively sloped: Higher wages attract more workers. Market labor supply can shift in response to various factors.

The Supply of Labor:

The time an individual is willing to work at various wage rates.

Share of Income by Quintile

U.S. distribution of income has grown more unequal over the past three decades. Every income quintile except the highest has declined in percentage of income.

Unions and Wages

Unions reduce labor supply to push wages higher; this causes an increase in supply in the nonunion sector, reducing wages.

New Factors Causing Poverty

Wages have not kept up with rising costs. Technological changes and globalization have changed employment opportunities. Health costs are rising. Rise of single parent families.

Suppose immigration laws tighten. What will likely happen to wages and employment in the labor market?

Wages would rise; employment would fall.

Individual Labor Supply: Income Effect

Workers choose fewer hours when wages rise and more hours when wages fall.

Individual Labor Supply: Substitution Effect

Workers choose more hours as wages rise (opportunity cost of leisure rises).

Economic Discrimination

Workers of equal ability and productivity are paid different wages or are otherwise discriminated against. Result: Members of different groups are segregated into different occupations.