Econ Unit 2

What are solutions for the free rider problem?

3 categories: Strong social norms, government regulation, and provision and private property rights.

What is a natural monopoly?

A natural monopoly refers to a market where a single firm can produce the entire market quantity demanded at a lower cost than multiple firms.

What's the difference between economic and accounting profit?

Accounting profit can be misleading (TR - Explicit Costs) while economic profit is more accurate because it further subtracts implicit costs (Accounting Profit - Implicit costs).

What is the difference between implicit and explicit costs?

Explicit costs require a firm to spend money and is composed of the fixed and variable costs. Implicit costs that represent opportunities that could have generated revenue if the firm had invested its resources in another way.

What are the four barriers of monopolies?

Scarce resources, governmental intervention (patents), aggressive business tactics, and economies of scale.

What is an excludable good?

Sellers can make it usable for people who have only payed for it. EX: eating an apple.

What is social cost and benefit?

The total cost and benefit of a decision both private and external.

What are common resources?

They're not public goods (since they are rival) but they are non-excludable. Causes high demand. Rivalry causes quantity to dwindle.

How are quotas useful?

Using a quota to deal with externalities can be extended by permitting the buying and selling of quota allowances, a tradable allowance. Market quantity is socially optimal (efficient). Total surplus is maximized. Tradable allowance does not benefit government, not taxes = no revenue.

What is the difference between external costs and benefits?

An external cost is when an individual or firm's decision negatively affects an individual. EX: Sriracha factory pollution. The external benefit is when an individual or firm's decision positively affects an individual. EX: the Flu shot.

What makes a perfectly competitive market?

Buyers and sellers have full information Buyers and sellers can't affect prices. Goods or services are standardized. No transaction costs.

What is negative consumption externality?

Consumers can cause negative externalities during consumptions of goods and service. Consumers don't consider externality, they tend to consume too much. If they were to consider it they would consume less.

What are fixed costs?

Costs that do not vary with the quantity of output produced.

What are variable costs?

Costs that vary with the quantity of output produced.

What are private solutions to externalities?

External costs and benefits can be diffuse, complex, and hard to control. Solutions must ensure that individuals experience costs and benefits that are equal in value to the true social costs and benefits of their choices. Coase theorem state that if there are zero transaction costs to negotiate and agreements are enforceable, then an efficient equilibrium through private trades can be reached, even in the presence of an externality.

What is the tragedy of the commons and what are the solutions?

It is the depletion fo a common resource due to individually rational but collectively inefficient overconsumption. The problem with over-demand for common resources leads to inefficient quantity of production and consumption. Solutions: social norms, government regulation and provision, and private property rights.

What is a network externality?

It refers to a situation in which a product's usefulness increases or decreases with the number of people using it. EX: Positive - Instagram and Facebook. Negative - More people driving on the roads.

What does it mean when a good is rival in consumption?

One person's consumption prevents or decreases others' ability to consume.

What are public solutions to externalities?

Private solutions don't really work so people turn to public solutions. A Pigovian tax is applied to goods or services that cause negative externalities to raise price and reduce quantity consumed. The issue with this is setting the tax at the right level and no guarantee that the government can help people bearing the external cost.

What is a perfect monopoly?

Refers to a firm that is the only producer of a good or service with no close substitutes. A perfect monopoly is if it controls the market. A firm has monopoly power if it can manipulate the price.

What is the free rider problem?

Tendency of individuals/organizations to fail to contribute to production of public goods BECAUSE they can still benefit without contributing.

What is marginal revenue?

The additional revenue that will be generated by increasing product sales by one unit.

What is marginal cost?

The cost of producing one more unit of a good.

What is marginal product?

The increase in output that arises from an additional unit of input. The slope of the total production curve.

What is the positive externality?

When a person's private choice has positive consequences on someone not involved in making the choice. EX: Painting your house benefits the whole neighborhood.

What is marginal average rule?

When an additional worker's marginal product is greater than the existing average product, the average product increases.