ECON 402 Exam 2
In 2018, a wind farm developer was ordered to dismantle its newly constructed wind turbines after adjacent residents filed a lawsuit complaining that they never consented to the loud noise and visual obstructions of the turbines. How could the wind farm developer have utilized insights from the Coase Theorem to avoid its legal troubles and ultimately wasting millions of dollars on wind turbines it never got to operate?
- The developer could have paid people living near the wind farm a stipend for putting up with the noise and the restricted views. - The developer could have invested in improved infrastructure for power generation to lower residents' electricity costs as well as to promote the use of wind farms. The Coase Theorem says that when people can bargain costlessly and legal rights are clear and enforced, externality problems can be solved by private bargaining. One way to accomplish this is through side payments. Perhaps the developer of the wind farm could have given nearby residents some form of a payment to compensate them for the noise. Such an agreement could potentially have eliminated the reason for a lawsuit. Another way to use private bargaining is through strategic investment. If infrastructure for power generation needed updating in this area, the developer could have invested in this to provide residents more dependable and cheaper electricity. In the other two scenarios, the government gets involved, and we would no longer consider this private bargaining. If the developer petitions the government to fund the project, the good would become a public good. In terms of setting a quota, again the developer would need to bargain with the government instead of privately with the residents. This could also reduce profits so much that it would be better off paying the residents directly for the inconvenience caused by the windfarm.
Scenarios that are likely to lead to an inefficient outcome
- a market transaction in which buyers or sellers behave irrationally - a market transaction in which one party has information not available to other party - a market dominated by few powerful businesses - a market in which government regulation creates distortions
a tax on buyers
- causes a decrease in demand - Shifts demand to the left - Price falls and quantity falls - The fall in price is less than the amount of tax - Increases the price buyers pay and decreases the price that sellers receive
Social norms act as a corrective tax by discouraging people from partaking in an action that will cause a negative externality by fear or shame of being judged harshly by others in society. Corrective tax examples
- deciding to throw your trash in a trash bin - picking up after your dog when out on a walk - taking your toddler out to the car instead of letting him throw a temper tantrum in the store Throwing your garbage in the trash, picking up your dog's waste, and taking your toddler out to the car during a tantrum are actions done to avoid society's corrective tax on bad behavior. In most places there is an expectation that you will not litter and will throw your trash in the garbage instead. There are signs that warn of fines for littering, but it is likely more powerful that other people will give you dirty looks if you throw your garbage on the sidewalk. Likewise, if you own a pet, you are also expected to pick up after them when you are out in public. Again, dirty looks and judgement will ensue if others see you leave your dog's droppings on the sidewalk or in the park. A toddler throwing a tantrum in the grocery store can pose a negative externality for everyone in earshot. Whereas other parents might understand the challenges and be able to withstand the screaming, others may give unapproving glances and annoyed stares. More than likely, this is enough to make parents take their toddlers to the car until they calm down.
Social recognition can act as a corrective subsidy and cause people to partake in more activities that will create positive externalities. Corrective Subsidy examples
- holding the door open for an elderly lady entering the store behind you - deciding to donate blood at the local blood drive Holding doors open for others and donating blood are examples of society's corrective subsidy on good behaviors. While you are under no obligation to hold open a door for anyone, you are likely to do so. Most likely it will be to feel like you are doing a good thing for a senior citizen. You may also get a smile from the elderly lady or anyone near enough to witness your act of kindness. Donating blood can be somewhat painful and time consuming. On the other hand, you get a snack at the end, and a sticker that tells the world you just did a good thing. Kudos!
Dave takes advantage of the low price of gas to purchase a sports utility vehicle. Sports utility vehicles generate a negative externality. Too many sports utility vehicles are produced relative to the socially efficient quantity. Anita decides to smoke a cigarette while she is waiting at a busy bus stop. Cigarettes create a negative externality. Too many cigarettes are produced relative to the socially efficient quantity.
A negative externality is a negative side effect of a transaction on individuals not involved in the transaction. Sports utility vehicles and cigarettes both generate negative externalities. When Dave drives his sports utility vehicle, he creates air pollution from the vehicle's emissions. Larger vehicles, including sports utility vehicles, may also create hazards for drivers of small vehicles who are more likely to be harmed in collisions. Second-hand cigarette smoke has been shown to create health problems for non-smokers. When an activity produces a negative externality, the activity is overproduced because the external costs are not reflected in the market supply curve.
Jerome has a beautifully landscaped front lawn with lots of colorful flowers. Landscaped lawns produce a positive externality. Too few landscaped lawns exist relative to the socially efficient quantity. Susan decides to walk to work instead of driving. Walking to work creates a positive externality. Too few walks to work exist relative to the socially efficient quantity.
A positive externality is a positive side effect of a transaction on individuals not involved in the transaction. Landscaped lawns and walks to work both generate positive externalities. Jerome's neighbors benefit from seeing the colorful flowers in Jerome's beautifully landscaped lawn, although they do not pay the costs associated with maintaining the lawn. When Susan walks to work instead of driving, she creates less traffic, benefitting motorists. She may also enjoy private health benefits from walking, which may benefit her employer in the form of a healthier employee. When an activity generates a positive externality, the activity is under-produced because the external benefits are not reflected in the market demand curve.
Positive vs normative statments
An economic statement is positive if it makes a factual claim that can be tested with evidence. A positive statement need not be true. Economists may predict that raising the minimum wage will result in unemployment, that an increase in the gasoline tax will reduce air pollution, or that an increase in the federal income tax will cause workers to increase the number of hours they work. These predictions may or may not prove true, but each is a positive statement because no value judgement is being made. An economic statement is normative if it concerns what should occur, reflecting a value judgment. The claim that the federal minimum wage should be increased is a value judgement and therefore a normative statement.
_____ is important because it leads to market failure, producing _____.
An externality; inefficient outcomes
Suppose there is one ticket left for tonight's performance of Hamilton on Broadway. The ticket costs $700. Sean is a community college student and has been saving his tips from his waiting job for months to see the show. He is willing to pay $705 for the ticket. Anca has seen Hamilton five times already but wants to see it again before heading to Europe for a month. She is willing to pay $1,250 for the ticket.
Anca buying the ticket leads to the more economically efficient outcome, as she will receive more economic surplus from the purchase. Sean may very well want the ticket more, but he is restricted by his income. Willingness to pay incorporates both desire and affordability.
Which of these must be TRUE for a voluntary exchange to occur?
Both the buyer and seller have to be better off if the transaction occurs.
Which of the following is a government subsidy?
Zach lives in the Bronx and goes to Baruch College in Manhattan. New York City gives him a free MetroCard every month for him to get from his home to his classes
quantity regulation
a maximum or minimum quantity that can be sold
Joe decides to build a chicken coop in his suburban backyard. He has several hens and one rooster. The rooster wakes up his neighbor each morning at 5:00 am. Joe's chicken coop creates
a negative externality if the neighbor wants to sleep longer and a positive externality if the neighbor is happy to be awaken early each day.
Jostin is ill and goes to the doctor. The doctor diagnoses him with a bacterial infection and prescribes an antibiotic. Jostin's visit to the doctor produces
a positive externality if it prevents other people from getting sick and a negative externality if the bacterial infection becomes resistant to antibiotics.
Positive analysis examples
a positive statement is a statement of fact that can be shown to be true or false - Sales tax is often higher on goods considered to be luxury goods such is expensive watches and yachts. - Tariffs on imports increase the prices Americans pay for Foreign made goods. - Sales tax on cigarettes reduces the amount of cigarettes sold in a year. - Raising the minimum wage will result in some workers losing their jobs - An increase in gasoline tax will reduce the amount that people drive and will therefore cause a reduction in air pollution Note that a positive statement need not be true. As long as it states the way things are, not the way things should be
deadweight loss
how far economic surplus falls below the efficient outcome Deadweight loss = economic surplus at efficient quantity - actual economic surplus
Banning smoking in public areas is an example of using _____.
laws and regulations to reduce negative externalities
If a new tax on sellers of $500 per automobile is introduced, equilibrium occurs at the point where the _____curve meets the _____ curve.
new supply; demand
What kind of cooperation is required in competitive markets for there to be efficient production?
no cooperation is required
Goods that are _____ and _____ are known as common resources.
nonexcludable; rival
The question "Which is the better outcome, and what policy should the government adopt?" reflects:
normative analysis
_____ analysis requires a value judgment, while _____ analysis is purely objective, and _____ analysis should always be performed first.
normative; positive; positive
market failure
occurs when the forces of supply and demand lead to an inefficient outcome There are five sources of market failure 1. Market power 2.Externalities 3. Information problems 4. Irrationality 5. Government regulations
In extreme cases of the adverse selection problem for buyers, _____ products are available for sale.
only low-quality
The median earnings for a 25 to 34 year old, full-time, year round worker with a high school education was about $31,830 in 2016, while similar workers with a bachelor's degree (but no further education) earned $49,990, and as a result, they pay more income tax. There ______ a private benefit for individuals who attend college and earn a bachelor's degree.
there IS Individuals with bachelor's degrees earn higher incomes than individuals without bachelor's degrees. This is a private benefit to the individual who holds a bachelor's degree.
The private market for college education results in _________ individuals going to college to earn bachelor's degrees relative to the socially efficient outcome.
too few When a positive externality exists, the private market will under‑produce, and too few individuals will obtain bachelor's degrees. In order to encourage more people to obtain degrees, the government can subsidize college education. This occurs in the United States through state‑funded colleges and subsidized student loans.
You buy a pair of sunglasses from a manufacturer for $50. You would have been willing to pay $65 for them; it cost the manufacturer $20 to make them. What is your consumer surplus?
$15
marginal benefit
(willingness to pay) the maximum amount you are willing to pay for the product
A tax on sellers
- Shifts supply to the left - Price rises and quantity falls - The rise in price is less than the amount of tax - Increases the price that buyers pay and decreases the price that sellers receive
Does an individual's attainment of a bachelor's degree generate an externality?
A positive externality exists because college educated individuals pay higher taxes and are often considered more valuable to employers than individuals without college diplomas. However, there are also external benefits to society when more people hold bachelor's degrees. For example, many employers need college‑educated individuals to fill specific jobs. In fact, many employers in the United States consider the local populations' educational rates when deciding where to locate their businesses. These employers know they will benefit from having a large pool of educated individuals available to fill their open positions. This benefits the employer, but it also benefits states with high educational levels because more companies are willing to open businesses in those states. The government also benefits when individuals with bachelor's degrees earn more money and consequently pay higher taxes. These external benefits create a positive externality in the market for college education.
public goods are
A.nonexcludable and nonrival.
moral hazard
Economists call the choices you make because your actions are not fully observable and you are partially insulated from their consequences moral hazard. The problem with moral hazard is that it can lead people to make more wasteful and risky choices. You make different choices when the marginal benefits from your actions are shared. You make different choices when your actions aren't observable.
Which concept is most relevant to the question, "Who should get what?"
Efficient allocation
Which concept is most relevant to the question, "How many goods should be bought and sold?"
Efficient quantity
Government intervention is one possible solution for market failure. What is one possible reason why a government-controlled used car market may not provide an efficient outcome?
Government actors may have their own incentives that might not align with market efficiency. However, with government intervention, there is the possibility of government failure. Government failure exists when government policies lead to worse outcomes. A common cause of government failure is that government actors may respond to incentives that do not align with market efficiency. For example, government officials may act in ways likely to get them reelected or that expand the power of a particular government agency but that are not in the public interest.
three steps for evaluating taxes
Is the supply or demand curve shifting? Is that shift an increase in taxes, shifting the curve to the left? Or is it a decrease in taxes, shifting the curve to the right? How will prices and quantities change in the new equilibrium?
National defense is nonexcludable and nonrival.
National defense is provided for everyone living in a country. It would be very difficult to exclude some people from enjoying the benefits of living in a safe nation. Additionally, one person's enjoyment of a safe nation does not affect another person's enjoyment. Therefore, national defense is nonexcludable and nonrival.
Adverse selection of buyers example
People with asthma are more likely to buy health insurance.
Suppose that the demand for candy is less elastic than the supply of candy. If a tax is imposed on sellers of candy, which of the following is true?
Sellers will bear a smaller share of the tax burden because supply is more elastic than demand.
What action does government take to eliminate lemons or extremely low-quality products from the market?
Set the minimum standard for the product
A seat on a subway train is excludable and rival.
Subway stations have turnstiles preventing people who have not paid from entering the subway. A seat on a subway train is only available for use by one passenger at a time. Therefore, a subway seat is excludable and rival.
tax incidence
Tax incidence describes the division of the economic burden of a tax between buyers and sellers
economic burden
The economic burden describes the burden created by the change in after-tax prices faced by buyers and sellers as a result of the tax
A policy maker argues that congestion on the roads can be solved by private ownership of the roads. He argues that if the roads were privately owned, then the externality of congestion would be fully internalized and solved by the market. Discuss this by first explaining the externality problem that leads to congestion, and then explain whether the private market would deliver the efficient level of roads.
The externality is caused by drivers considering the PRIVATE benefit of using the road, but not the SOCIAL cost. More and more drivers pull onto the road, not recognizing the COST other drivers experience as a result. Private roads, or publicly operated toll roads, can reduce congestion because now the right to use the road is EXCLUDABLE. On the other hand, turning the public good into a club good poses other problems. Now the external BENEFITS will not be fully considered. When there is a POSITIVE externality, private markets will underproduce the good.
Two manufacturers of t-shirts are selling shirts for $10 each. The marginal cost for the first firm is $11, and the marginal cost for the second firm is $9. What should the companies do to increase economic surplus?
The first firm should produce less, but the second firm should produce more.
A popular national forest known for having dozens of access points for its well-used hiking trails located along public roads and highways is nonexcludable and rival
The national forest has dozens of access points located along public roads, making it difficult to exclude anyone from using the trails. Additionally, one person's use of the trails may not prevent someone else from enjoying them, but many hikers make the park less enjoyable for everyone. Therefore, the national forest is nonexcludable and rival.
A popular national park, which charges an entrance fee, is excludable and rival.
The national park has entry gates and charges an entrance fee. People who do not pay can be prevented from entering the park so it ss excludable and rival.
Adverse selection of sellers
The reluctance of owners of quality goods to sell, along with the eagerness to sell inferior goods, skews the overall quality of goods available in a market toward lower quality.
statutory burden
The statutory burden of a tax describes the burden of being assigned by the government the responsibility of sending a tax payment
Which of these is TRUE of both deadweight loss resulting from overproduction and deadweight loss resulting from underproduction?
When graphed, the deadweight loss seems to point to the efficient quantity.
Is snow plowing a public good?
Yes because the government provides it and you cannot exclude other houses from snow plowing. public goods are non excludable and non rival
A recent post being shared on Facebook suggests that consumers boycott self‑service checkout lines because they destroy jobs and are not very convenient to use. Consider this post from the perspective of economic analysis. Which response best illustrates economic reasoning?
You should use self‑service checkout lines if they increase your economic surplus. Economic analysis suggests you should use a cost‑benefit analysis to determine if self‑service checkout lines increase your economic surplus. Shoppers may be able to save time (a cost of going to the grocery store) by using self-checkout lines when they are buying only a few goods. Additionally, stores may reduce their marginal costs over the long run as they decrease their labor costs. Whether those reduced costs translate to lower prices for consumers or whether they translate to higher profits for owners is debatable. This does not necessarily imply that everybody involved benefits from self-checkout lines. Some individuals may be worse off, particularly the cashiers who lose their jobs. However, if the checkout lines increase economic efficiency, the benefits as a whole are as large as possible.
Adverse selection of sellers example
Your local seafood shop advertises fresh seafood, but you are not certain if the seafood is actually fresh or if has been frozen.
Which of the following is an example of a positive externality?
Your neighbor plants a garden, causing the value of your house to rise
Which of the following is an example of a negative externality?
Your neighbor's band practices early in the morning, waking you up
_____is a price floor that prevents the market from reaching the equilibrium price.
a binding price floor
normative analysis examples
a normative statement is a statement of opinion that reflects one's values and so cannot be shown to be true or false. - Medicine is a necessary expense and therefore should be exempt from sales tax laws. - Sales tax should be higher on restaurant meals than on groceries because eating out is a luxury. - The government should impose tariffs on imports to protect American jobs. - The federal minimum wage should be increased to assist low income households Each of these is a statement of opinion and so isn't ultimately falsifiable. A sign that a statement is normative is that it includes the word "should" or "ought," since these words are frequently used in expressions of opinion.
subsidy
a payment made by the government to those who make a specific choice Example: a Pell Grant is a subsidy that the government gives lower-income people who choose to go to college. The government uses subsidies to try to encourage the consumption of certain goods and services, such as education.
An activity that has beneficial side effects for bystanders is called _____.
a positive externality
An urban farmer decides to build a bee hive to help pollinate the rooftop gardens in his neighborhood. The beehive generates
a positive externality if the rooftop gardens benefit from the pollination and a negative externality if the neighbors get stung by bees.
Car insurance companies hope that everyone drives safely. However, these companies are not getting the customers they prefer because of:
adverse selection of buyers
equity
an outcome yields greater equity if it results in a fairer distribution of economic benefits
On a graph of marginal cost and price, the area _____ represents producer surplus.
below price and above marginal cost
voluntary exchange
buyers and sellers exchange money for goods only if they both want to Voluntary exchange ensures both buyer and seller enjoy gains from trade Economic surplus is marginal benefit less marginal cost
Which best explains how markets determine who should make products? Products should be made by the producers who:
can make them at the lowest marginal cost
Corrective taxes are efficient because they
cause producers to internalize the social cost
The Coase Theorem states that externality problems can be solved by private bargaining if it is _____ and can _____.
costless; be legally enforced
Calculating _____ requires you to measure economic surplus at two points, the efficient quantity and the actual quantity.
deadweight loss
Since a change in price affects buyers and sellers in equal measure, the analysis of price is NOT necessary to determine:
deadweight loss
Bystanders' benefits are a part of social benefits; they do not appear on the _____ because they are _____.
demand curve; external benefits
positive analysis
describes what is happening, explaining why or predicting what will happen. Ask: what is going to happen if we adopt this policy?
Adverse selection of sellers is not about _____, but about _____.
disliking risk; a gap in knowledge
The idea that the more economic surplus that's generated, the better the outcome is known as:
economic efficiency
the efficient outcome maximizes
economic surplus
When the forces of supply and demand lead to an inefficient outcome
economists call this a market failure.
_____often limit the quantity of pollutants that firms can release.
environmental regulations
At the equilibrium quantity, marginal benefit is ___________ marginal cost. Consuming _______ means that some mutually beneficial exchanges do not take place, and producing _______ means that some goods go unsold.
equal to less more The Rational Rule for Markets says to produce more of a good if its marginal benefit is greater than its marginal cost and, conversely, to produce less of a good if its marginal cost is greater than its marginal benefit. At the equilibrium quantity, marginal benefit is equal to market cost. Consuming less means that some mutually beneficial exchanges do not take place, and producing more means that some goods go unsold. In either of these scenarios, total economic surplus is less than when output is at the equilibrium quantity.
_____ is about assessing whether a policy will yield a fair distribution of economic benefits.
equity
A locked car is considered to be _____, and an airport people-mover is _____.
excludable; non-excludable
A solution to the free-rider problem is the government's power to _____, which is something businesses and individuals _____ have the power to do.
force people to pay for the goods they benefit from; do not
Economic surplus is also known as:
gains from trade
The co-payments you have to make each time you seek medical care are a method that insurers use to:
give you a stake in the outcome
Efficient allocation occurs when:
goods are distributed to create the largest possible economic surplus.
private goods
goods that are both excludable and rival in consumption
Government failure occurs when:
government policies lead to worse outcomes
Customers demanding lower prices because they suspect a _____ rate of forgeries in the gold market, which tends to _____ the rate of forgeries in the market.
high; increase
The Nobel Prize‑winning economist Oliver Hart once said, "If we know the marginal social cost [of pollution] emissions, a tax is better, but if we know the optimal quantity, cap and trade is better." Given this statement and the knowledge of ways governments can intervene in markets, evaluate the following statement: Any outcome that can be achieved by taxing can also be accomplished by establishing a quota. This is because
if we know the marginal social cost, we can set the tax so that price is equal to the optimal price. As a result, the optimal quantity will be achieved. If we know the optimal quantity, we can set a quota and the market will find the optimal price. Any outcome you can achieve by changing prices, which is what corrective taxes do, can also be achieved by changing quantities, which is what quotas do. This illustrates the broader point you learned in Chapter 6, that the government can use any of its tools to get the same socially optimal quantity. Your choice between corrective taxes or quantity regulation depends on the information you have. If you know the marginal social cost, use it as the basis for setting your corrective tax. The market will then find the socially optimal quantity. If you know the socially optimal quantity instead, use that in setting your quota.
When sellers and buyers bear the economic burden of a tax, the tax _____the price buyers pay and _____ the price sellers receive.
increases; decreases
When you exercise regularly, you create positive externalities because:
it does not only benefit you but also your health insurer
What do price ceilings cause?
lower prices but cause shortages
A binding price floor sets a price that is the _____price that sellers can charge and is _____ the equilibrium price.
lowest; above
The efficient quantity occurs where:
marginal cost = marginal benefit
When a market failure due to underproduction exists, economic surplus can be measured as the area below the marginal benefit curve and above the:
marginal cost curve, out to the actual quantity.
When the government imposes a tax on you as a seller, your _____of producing each unit _____ by the amount of the tax.
marginal cost; goes up
The problem of _____ arises when markets don't meet the perfectly competitive ideal of many buyers and sellers selling identical products.
market power
efficient allocation
maximizes benefits allocating goods to create the largest economic surplus
efficient production
minimizes cost producing a given quantity of output at the lowest possible cost
When you are considering renting an apartment or house, almost all landlords will require that you pay a refundable security deposit. The need for landlords to charge a security deposits reflects
moral hazard
If any seller can send a signal to buyers about a product's quality, then there is no difference between high-quality sellers and low-quality sellers. Therefore, in order for a signal to work, it must be substantially _____for _____ sellers.
more expensive; low-quality
A binding price ceiling can lead to all of the following EXCEPT:
more quantity supplied
You and a competitor are the only two producers in a market. You have produced 4,000 items and your marginal cost is $6.50. Your competitor has produced 5,000 items and now has a marginal cost of $8.00. Marginal benefit is $7.75 at the efficient quantity of 10,000. You should have produced _____, your competitor should have produced _____, and collectively the two of you should have produced _____.
more; less; more
Regulations should target _____ to avoid _____.
outcomes; stifling innovation
Any solution to the externality problem involves getting _____ to consider _____ effects.
participants; external
normative analysis
prescribes what should happen, which involves value judgements Ask: which is the better outcome, and what policy should the government adopt?
Governments typically set minimum wages in order to raise the wages received by the lowest wage workers. The minimum wage is a _____.
price floor
Solutions to negative externalities should be addressed by _____, instead of _____, whenever possible.
private bargaining; government intervention
In the labor market, workers are selling their labor to potential firms. Many hiring managers use professional services to search for credentials and certifications of workers in order to solve the problem of _____.
private information
_____ is the issue when one party to a transaction knows something the other doesn't.
private information
_________ is/are often cited as a cause of market failure in the market for used cars.
private information In the used car market, the seller has information about a vehicle that a buyer does not have. Private information often undermines trust, which can lead to inefficiency, since it may prevent some mutually beneficial transactions from taking place.
the rational rule for markets
produce until marginal benefit equals marginal cost Marginal benefit = marginal cost
Because buyers often expect that a seller is in possession of negative private information about the quality of the goods being sold, _____ goods sell below their value and _____ goods sell above their value.
quality; inferior
_____sets a minimum or maximum quantity that can be sold.
quantity regulation
what do price floors cause?
raise prices but lowers the quantity sold (surpluses)
Because buyers base their willingness to pay on the possibility of the seller possessing negative private information about the goods being sold, owners of quality goods are _____ to sell and owners of inferior goods are _____ to sell at the common market price.
reluctant; eager
mandate
requires you to buy or sell a minimum amount of a good
quotas
set a limit on the maximum quantity of a good that can be sold. Raise prices
If a new tax on sellers of $0.20 per 20-ounce bottle of soda is introduced, the supply curve _____until it lies _____ higher.
shifts left; $0.20
_____increase the quantities demanded and supplied, and they tend to lower the price buyers pay and _____ the price sellers receive.
subsidies, increase
The cost-benefit principle leads you to _____ if you have insurance.
take fewer preventative actions
a statutory burden is:
the burden of being assigned by the government to send a tax payment.
extrinsic motivation
the desire to do something for a reward or profit.
Intrinsic motivation
the desire to do something for the enjoyment of the activity itself.
consumer surplus
the economic surplus you get from buying something Consumer surplus = marginal benefit - price the difference between your willingness to pay and the price you actually pay for it
producer surplus
the economic surplus you get from selling something Producer Surplus = Price - Marginal Cost Producer surplus is the difference between the price a producer receives for a product and the willingness to accept, or the difference between price and marginal cost
efficient outcome
the efficient outcome yields the largest possible economic surplus
Government policies that specify _____ are likely to give an incentive to businesses to solve externality problems.
the intended objectives
Well-functioning markets produce:
the largest possible economic surplus.
Economic surplus is maximized when
the marginal benefit of consumption is equal to the marginal costs of production
A seller's willingness to accept
the minimum amount he or she is willing to accept as payment for a product and is equal to the marginal cost of production
economic efficiency
the more economic surplus that's generated, the more efficient the outcome
efficient quantity
the quantity that produces the largest possible economic surplus
adverse selection of buyers
the tendency for the mix of buyers to be skewed toward more high-cost buyers when buyers have private information about their likely costs. This problem arises because of private information—people buying insurance know things about their health that sellers do not. People expecting few health care costs will pay less for insurance. People expecting a lot of health care costs will pay more for insurance.
adverse selection of sellers
the tendency for the mix of goods offered for sale to be skewed toward more low-quality goods when buyers can't observe quality. It's selection because the sellers get to choose what's offered for sale, and it's adverse because they're more likely to offer low-quality goods. Sellers of high-quality goods may choose to not sell. Sellers of lemons are more likely to sell.
economic surplus
the total benefits minus total costs flowing from a decision
Rival goods are subject to market forces because:
there is competition over who can consume the good.
Customs regulations limit _____and _____ souvenirs you can bring back from abroad.
what kind; how many
binding price ceiling
when a price ceiling prevents the market from reaching the equilibrium price because the highest price that sellers can charge is set below the equilibrium price
price ceiling
when the government sets a maximum price
price floors
when the government sets a minimum price
The externality problem can be summed up by saying that _____ outcomes occur when people don't account for the interests of _____.
worse; bystanders
moral hazard example
you hire your neighbour to check your cat everyday while you are travelling. The neighbout check your cat every other day instead.
