Terms For ECO105 Test 3: micro 10-12

A subsidy, on a graph...

makes up the vertical distance between the MC curve and the MSC curve. This decreases the MC of the supplier. Intersection of the new (subsidized) MC curve and MB curve is the new socially efficient outcome which ALSO has market efficiency.

Marginal social benefit (MSB)

marginal private benefit (MB) + marginal external benefit

Marginal social cost (MSC)

marginal private cost (MC) + marginal external cost.

All businesses should hire more when...

marginal revenue product is greater than the wage rate.

Because of free rider problem...

markets underproduce products with positive externalities.

game theory

mathematical tool for understanding how players make decisions, taking into account what they expect other players to do.

Civil offences under the competition act

mergers, abusing dominant market position, lessening competition.

For a smart choice, invest with the present value...

of the stream of future earnings is greater than the price of the investment.

Nash equilibrium

outcome of a game in which every player makes the best choice for themselves given the choice of another.

Subsidy

payment to those who create positive externalities.

transfer payments

payments by governments to households

Free riders

people who consume products or services without paying, benefitting from positive externalities.

Criminal offences under the competition act

price fixing, bid rigging, false advertising.

Marginal external costs

price of preventing or cleaning up damage to others external to the original activity.

Marginal external benefit

price of the value or savings to others external to the original activity

Social benefits =

private benefits + external benefits

Social costs =

private costs + external costs

Regulated private monopoly.

private monopoly is granted, but it is regulated in such a way as to force it to act in a more competitive way for the benefit of efficiency and consumer well being.

Markets overproduce ___ and underproduce ___

products with negative externalities, products with positive externalities.

public goods

provide external benefits consumed by everyone, no one can be excluded.

Two major government policies to deal with natural monopoly

public ownership and regulation

crown corporations

publicly owned businesses in Canada, created by government.

marginal tax rate

rate on additional dollar of income

proportional/flat rate taxes

rate the same regardless of income

rate of return regulation

sets a price allowing the regulated monopoly to just cover average total costs, including normal profits.

When there are positive externalities marginal...

social benefits are greater than marginal private benefits.

free rider

someone who benefits from a product or service without paying their fair share//excluding ppl from consuming is often too costly or impossible.

Wealth is a

stock -- fixed amount at a moment in time

regressive taxes

tax rate decreases as income decreases

progressive taxes:

tax rate increases as income increases

How can governments reduce poverty and inequality?

taxes and transfers a lá the robin hood principle. Must apply key one: choose only when additional benefits are greater than additional opportunity costs.

Key insight of game theory

tension between the nash equilbrium outcome and the better outcome.

Public goods are likely to be under provided in...

the absence of government

With positive externalities...

the market clearing price is too high for buyers to be willing to buy the socially best quantity of output, and too low for sellers to be willing to supply the socially best quantity.

tragedy of the common

the overuse and depletion of a resource that no one can be excluded from because of missing property rights.

Subsidies remove...

the wedge that positive externalities drive between prices for buyers and sellers, getting individuals and businesses to voluntarily choose the quantity of output best for society.

Challenge facing government policy makers

to gain the low cost efficiencies of economies of scale but avoid the inefficiencies of monopoly's restricted output and higher price.

Internalize the externality:

transform external costs into costs the producer must pay to the government

Market failure

when markets produce outcomes that are inefficient or inequitable

How much wealth does the bottom 40% of families in canada own?

2%

How much wealth does the top 1% in Canada own?

24%

How many people, and what percent of children, live below the poverty line in Canada?

3 million, 8.2 %

How much wealth does the top 10 percent of families own?

51 %

present value =

Amount of money available in n years) / [(1 + interest rate)^n.]

Rule for smart social choices

Choose the quantity of output where —> marginal social cost (MSC) = marginal social benefit (MSB)

Major forms of government regulation in Canada

Government departments, agencies and boards, professional associations

When is public provision used?

Governments provide products or services when the positive externalities are widespread and important for citizens, and/or when it is difficult to collect revenues from users.

Costs associated with natural monopoly?

High fixed costs and low marginal costs --> results in economies of scale.

In light of the competition act, how are mergers approved?

If mergers that reduce competition also produce economies of scale they may be approved for promoting "efficiency and adaptability"

Why do governments use rate of return regulation?

In principle, government regulators try to set a price that just earns normal profits. But its hard to to tell how hard a business is trying to keep prices low, so rate of return regulation is used.

Disadvantages of crown corporations

Lack of competitive pressure, incentives for reducing cost and increasing efficiency are small, bureaucratic.

Cap and trade system

Limits the quantity of emissions businesses can release into the environment//set quantities while the market adjusts price.

What does poverty result from?

Not owning labour skills or assets that the market values, or from not getting a high enough price for what you do own.

What happens to present value when interest rates rise?

Present value decreases when interest rates rise.

OPEC cartel

Since the recession of​ 1981-1983, the OPEC cartel has swung between periods of trust and high oil​ prices, and periods of​ mistrust, cheating, and lower oil prices. Just as game theory​ predicts!

Why is a subsidy often used by government?

To correct the problem of underproduction caused by positive externalities.

cartel

an association of suppliers formed to maintain high prices and restrict competition. Cartels collude to raise prices and restrict output to increase economic profits. Unstable because members can raise own profits by cheating others.

Trade offs to deal with market failure involve

evaluating whether the government outcome is better or worse than the market failure outcome

Income is a

flow-- an amount per unit of time

Emissions taxes internalize the externality by...

forcing producers to pay the external cost of the negative externalities; best policy choice.

Primary objection to cap and trade

give businesses a 'licence to pollute'

Primary advantage of cap and trade

gives businesses a choice between reducing emissions or buying permits to pollute.

Public provision

government provision of products or services with positive externalities, financed by tax revenues

Capture view of government regulation

government regulation benefits regulated businesses, not the public interest.

Public interest view of government regulation

government regulation eliminates waste, achieves efficiency, promotes the public interest.

Rule that yields maximum profits for a business

hire additional hours of labour​ (or any​ input) as long as marginal revenue product is greater than the wage​ (or price of the​ input).

Simple recipe for hiring inputs

hire additional inputs when marginal revenue product is greater than marginal cost

economic rent

income paid to any income in relatively inelastic supply

human capital: increased earning potential from work experience, on the job training, education.

increased earning potential from work experience, on the job training, education.

Externalities can be​ corrected, and the market outcome will be the same as the socially best outcome if...

individuals are faced with the private and external costs of their actions when making decisions.

market outcome

intersection of the MC and MB curves

smart social outcome

intersection of the MSC and MSB curves.

Income = wages, input =

labour

Most important concepts determining each income are

labour -- marginal revenue product, capital -- present value, land -- economic rent.

Income = rent, input =

land

present value

amount that, if invested today, will grow as large as the future amount, taking into account earned interest.

Income = profits (normal and economic), input =

entrepreneurship

Improving human capital through education and training...

addresses the underlying cause of poverty: lack of inputs that the market values.

The 1986 Competition Act

aims to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy. Prevents anti-competitive business behavior.

The Toronto poverty line is

$29699 for a family of three

Two viewpoints about market outcomes and market failure.

(1) Market outcome, even with monopoly power, is better than government regulation outcome if significant government failure. (2) Government outcome, with public interest regulations, is better than market outcome if significant market failure.

When do externalities occur?

When clear property rights are missing.

What happens re: incentives when governments tax?

When governments tax, it reduces incentives to provide inputs and to produce outputs. This means that output markets will produce fewer products and services.

When do natural monopolies arise?

When the technology has economies of scale that require a single supplier.

When do markets fail?

When there are positive externalities and the government is absent.

prisoner's dilemma

a game with two players who must each make a strategic choice, where results depend on the other players choice.

Externality

a situation in which a benefit or cost associated with an economic activity is experienced by a third party

emissions tax

a tax to pay for external costs of emissions

Marginal product

additional output from hiring one more unit of labour

marginal revenue product

additional revenue from selling output produced by an additional labourer.

Diminishing marginal productivity

as you add more of a variable input to fixed inputs, the marginal product of the variable input eventually diminishes.

positive externalities

benefits to society from a private choice

In the input market of the flow of economic life...

businesses pay wages, interest, and rent to households in exchange for labour, capital, and land.

income = interest, input =

capital

For inputs in inelastic supply, high output prices...

cause high input prices -- high economic rents

For most products and services, high input prices...

cause high output prices.

Collusion

conspiracy to cheat or devolve others

negative externalities

costs to society from private choices that affect others but you do not pay.

What are economic rents determined by?

demand

In an input/labour market, businesses ...

demand and households supply.

Derived demand:

demand for output and profits businesses can derive from hiring labour

Natural monopoly

economies of scale allow only a single seller to achieve the lowest average total cost

What can the merging of companies create?

economies of scale.

Policy options to reduce inequality and poverty:

education, training, progressive tax and transfer system.

carbon tax

emissions tax on carbon based fossil fuels

Anti combine/anti trust laws

encourage businesses to be competitors, make it illegal for businesses to combine to form monopolies, forbid collusion among businesses to raise prices or restrict supply.