Unit 4 Economics

Asymmetric information happens:

1) Adverse selection - behavior before the deal - Ex: Selling a used car and knowing it is a lemon but not saying anything about that in order to get a better deal (asymmetric information) - Ex: In order to deal with this problem, when giving health insurance, companies interview people in order to see whether they would be a good customer or not and how much to charge them 2) Moral hazard - behavior after the deal - Ex: Someone being less careful about fires after fire insurance as they will believe it will bail you out

Common resource

A common resource is a good that is nonexcludable but is rival in consumption. An example is the stock of fish in a fishing area, like the fisheries off the coast of New England. Traditionally, anyone who had a boat could go out to sea and catch fish—fish in the sea were a nonexcludable good. Yet the total number of fish is limited: the fish that one person catches are no longer available to be caught by someone else. So fish in the sea are rival in consumption. - Because common resources are nonexcludable, individuals cannot be charged for their use. But the resources are rival in consumption, so an individual who uses a unit depletes the resource by making that unit unavailable to others. As a result, a common resource is subject to overuse: an individual will continue to use it until his or her marginal private benefit is equal to his or her marginal private cost, ignoring the cost that this action inflicts on society as a whole. -- But fishers have no personal incentive to take this cost into account. As a result, from society's point of view, too many fish are caught. the marginal social cost of your use of that resource is higher than your marginal private cost, the cost to you of using an additional unit of the good.

Perfect income distribution

A country with a perfectly equal distribution of income would have a Gini coefficient of 0, because the Lorenz curve would follow the line of equality, and area A would be zero. At the other extreme, the highest possible value for the Gini coefficient is 1—the level it would attain if all of a country's income went to just one person.

2) Provide 3 examples from the reading of external costs

A family buys a Ford Explorer, which causes pollution and poses a threat to drivers of smaller cars, because it benefits their pregnant wife as it risks her chance of getting hurt in a car crash. A farming company uses pesticides to make more goods faster, which maximizes their profits, but this causes consumers to get cancer from the pesticide. Another example is dog owners do not pick up the poop of their dogs as it is costly, however, the smell bothers others and it can also cause someone to slip and hurt themselves.

When is a good excludable

A good is excludable if the supplier of that good can prevent people who do not pay from consuming it.

Nonrival consumption good

A good is nonrival in consumption if more than one person can consume the same unit of the good at the same time.

How is a good private

A good is private if only you can use and benefit from it - Although only you benefit from it, a private good can have positive / negative externalities

A good is public when

A good is public if not just the person who buys it can use it and benefit from it - Ex: If company A builds a lighthouse so its ship can get safely to shore, Company B can take advantage of this lighthouse without having to finance for it -- Problem it causes is that no one will be willing to pay for others benefits (no one will build lighthouse) which then hurts everyone and causes an underallocation of public goods --- This is why people use taxes to create public goods

When is a good a rival in consumption

A good is rival in consumption if the same unit of the good cannot be consumed by more than one person at the same time.

Private good

A good that is both excludable and rival in consumption is a private good.

When does a negative externality occur

A negative externality occurs when the social costs + external costs > private benefits

What is a positive externality

A positive externality is when private benefits + external benefits > social costs

4) What is the difference between private cost and social cost?

A private cost is a cost that only affects oneself and a few people that they are associated with. A social cost affects the entire public.

Public good

A public good is the exact opposite of a private good: it is both nonexcludable and nonrival in consumption. A public sewage system is an example of a public good: you can't keep a river clean without making it clean for everyone who lives near its banks, and my protection from sewage contamination does not prevent my neighbor from being protected as well. Disease prevention. When a disease is stamped out, no one can be excluded from the benefit, and one person's health doesn't prevent others from being healthy. National defense. A strong military protects all citizens. Scientific research. In many cases new findings provide widespread benefits that are not excludable or rival.

Adam Smith on the market

Adam Smith believed that a private market would naturally come to an equilibrium and will make socially benefitting decisions despite them being private - Even though this applies, some decisions are negative to society such as pesticides in farm products, where producer gets the best deal yet this hurts consumers although they are not involved in the transactions

Are adults who work full time likely to be poor

Adults who work full time are very unlikely to be poor: only 2.9% of full-time workers were poor in 2012. As a result, many of the poor are members of what analysts call the working poor: workers whose income falls at or below the poverty threshold.

Does income tend to rise, fall, or stay the same

Does inequality tend to rise, fall, or stay the same over time? The answer is yes—all three. Over the course of the past century, the United States has gone through periods characterized by all three trends: an era of falling inequality during the 1930s and 1940s, an era of stable inequality for about 35 years after World War II, and an era of rising inequality over the past generation.

What happens every time MSB > MSC

Every time marginal social benefit is greater than marginal social cost, we have a positive externality and an under allocation of goods Demand curve shifts to the right during this in order for quantity to increase as well as price goes up due to more goods being sold This causes deadweight as well but on the opposite end of the graph In order for a government to be efficient from a positive externality, they use a pigouvian subsidy

What happens every time MSC > MSB

Every time marginal social cost is greater than marginal social benefit, we have a negative externality and an over allocation of goods

Excludability

Excludability: Sellers keeping nonpayers out of buying a good, this happens most of the time - Ex: When I buy a hamburgers, it keeps nonpayers of buying this good - Ex: Non excludability is when others can free ride a good

When is market not efficient

Market is not efficient when marginal social cost is greater than marginal social benefit

Markets are efficient when...

Markets are efficient when marginal social and private cost and social and private benefit are equivalent to each other - Not when marginal social / private cost = marginal social / private benefit

What does an externality cause for government

Markets are supposed to be efficient yet if their are externalities it is not efficient, so the government must do something in order to remove this externality (if it is negative) - Ex: Taxes put on alcohol in order to remove externalities such as drunk driving accidents

What are ways to mitigate adverse selection?

Markets will failure because price is not correct. If someone is selling their used car for a higher price as it has not been in a crash, people do not know this so he will have to lower the price in order to get people to buy it. (Buyer does not have enough information). If the seller has information that the buyer does not have about the car, even if the car is a good car, the buyer will assume something is wrong with the car and not buy it. Thus, the supply of good cars will not be in the market as they will only be sold at the same price of bad cars. As only worse and worse cars are brought into the market, the price decreases as people assume the cars have worse and worse condition. In this instance, the marginal benefit will be greater than the marginal cost as there is an underallocation of goods.

When will markets supply artificially scarce goods

Markets will supply artificially scarce goods because their excludability allows firms to charge people for them. However, since the efficient price is equal to the marginal cost of zero and the actual price is something higher than that, the good is "artificially scarce" and consumption is inefficiently low.

Mean / Median household income

Mean household income, also called average household income, is the total income of all U.S. households divided by the number of households. Median household income is the income of a household in the exact middle of the income distribution—the level of income at which half of all households have lower income and half have higher income. - It's very important to realize that these two numbers do not measure the same thing. This example helps explain why economists generally regard median income as a better guide to the economic status of typical American families than mean income: mean income is strongly affected by the incomes of a relatively small number of very-high-income Americans, who are not representative of the population as a whole; median income is not.

Non rivalry

Non rivalry: My consumption does not affect your consumption - Ex: If I pay for fireworks, my friends benefit from seeing it without having to pay for it - No shared consumption

Rivalry

Rivalry: My consumption affects your consumption, deals with the quality of a consumption - Ex: If I drinking sodas, other cannot drink or benefit from my soda, this makes a good private good - The person who consumes the commodity pays for it (private good) - Shared consumption

In- Kind benefits

Second, the table distinguishes between programs that provide monetary transfers that beneficiaries can spend as they choose and those that provide in-kind benefits, which are given in the form of goods or services rather than money. As the numbers suggest, in-kind benefits are dominated by Medicare and Medicaid, which pay for health care.

Poverty threshold

Since 1965, however, the U.S. government has maintained an official definition of the poverty threshold, a minimum annual income that is considered adequate to purchase the necessities of life.

Social security

Social Security, the largest program in the U.S. welfare state, is a non-means-tested program that guarantees retirement income to qualifying older Americans. It also provides benefits to workers who become disabled and "survivor benefits" to family members of workers who die. Social Security is supported by a dedicated tax on wages - The benefits workers receive on retirement depend on their taxable earnings during their working years: the more you earn up to the maximum amount subject to Social Security taxes ($117,000 in 2014), the more you receive in retirement. - Instead, they're determined by a formula that gives high earners more than low earners, but with a sliding scale that makes the program relatively more generous for low earners.

Social optimal quantity

Social optimal quantity = new quantity that makes market efficient when a positive or negative externality is available

What is the emphasis on this unit

The emphasis of this unit is market do not always work - Often because of externalities, aka spillover costs - Externalities involve 3rd party costs -- Ex: A neighbor buys bongos and he is happy to buy them and music store is happy to sell them, but you get irritated because they are loud and aggravated

What are solutions for government externalities

The first two solutions overlap with the approaches to private goods with negative externalities. Just as governments use Pigouvian excise taxes to temper the consumption of alcohol, they use alternative forms of Pigouvian taxes to reduce the use of common resources. For example, in some countries there are "congestion charges" on those who drive during rush hour, in effect charging them for the use of highway space, a common resource.

What are the arguments against anti poverty programs

There are two different lines of argument against antipoverty programs. One is based on philosophical concerns about the proper role of government. Some political theorists believe that governments should not redistribute income—that government's role should be limited to maintaining the rule of law, providing public goods, and managing externalities. The more conventional argument against income redistribution involves the trade-off between efficiency and equity. A government with extensive antipoverty programs requires more revenue, and thus higher marginal tax rates, than one that limits itself mainly to the provision of public goods such as national defense.

How to maximize social welfare

To maximize society's welfare, the government should increase the quantity of street cleanings until the marginal social benefit of an additional cleaning would fall below the marginal social cost.

What are transactions based on and what do they not look at

Transactions are made based on price, but people in a transaction do not look at the costs to other people that their transactions will have which is what causes externalities

U.S. Poverty programs

U.S. antipoverty programs include three huge programs—Social Security, Medicare, and Medicaid—several other fairly big programs, including Temporary Assistance for Needy Families, the Supplemental Nutrition Assistance Program, and the Earned Income Tax Credit, and a number of smaller programs.

Incentives for efficient levels of productions and consumption for public goods

We have seen that, in the cases of public goods, common resources, and artificially scarce goods, a market economy will not provide adequate incentives for efficient levels of production and consumption. Fortunately for the sake of market efficiency, most goods are private goods. Food, clothing, shelter, and most other desirable things in life are excludable and rival in consumption, so the types of market failure discussed in this module are important exceptions rather than the norm.

5) What does Pigou have to do with all of this and how is the Canada example helpful?

What Pigou has to do with all of that he wanted to tax coal because it negatively affected others due to the smog it causes. This is a negative externality and he was trying to mend this situation. The Canada example is helpful as the carbon emissions may not affect someone personally, but it does seriously affect the forest in Canada which affects the community and people as a whole. This is another example of a negative externality. The tax on carbon makes people less incentivized to buy it which helps decrease carbon emission.

What does welfare program do

the U.S. welfare state has the effect of redistributing income from some people to others.

Why are private goods usually efficient

(That is, a private good will be produced and consumed in efficient quantities in a market free of market power, externalities, and other sources of market failure.) Because private goods are excludable, producers can charge for them and so have an incentive to produce them. And because they are also rival in consumption, it is efficient for consumers to pay a positive price—a price equal to the marginal cost of production. If one or both of these characteristics are lacking, a market economy will lack the incentives to bring about efficient quantities of the good.

Artificially Scarce Good

An artificially scarce good is a good that is excludable but nonrival in consumption. As we've already seen, pay-per-view movies are a familiar example. The marginal cost to society of allowing an individual to watch a movie is zero because one person's viewing doesn't interfere with another person's viewing. Yet cable companies prevent an individual from seeing a movie if he or she hasn't paid. Goods like computer software and audio files, which are valued for the information they embody (and are sometimes called "information goods"), are also artificially scarce.

What is an efficient Pigouvian subsidy

An efficient Pigouvian subsidy for a good is set equal to the good's marginal external benefit

1) What is an external cost (negative externality) and an external benefit (positive externality)?

An external cost is when the private cost of a person's behavior is different than the social costs from it. It then causes individuals to make a decision that makes them better off but hurts others. This is a negative externality. A positive externality is when someone does something that does not necessarily benefit them but helps society do better.

Asymmetric Information

Basic economic works is that buyer and seller has all the information they need, however that simply is not the case - Ex: A doctor knows more about medicine than a consumer has This is when one side has more information than another, this is a problem and markets will fail and not be efficient because of this

What problem do public goods face

Because these goods are nonexcludable, they suffer from the free-rider problem, so private firms would produce inefficiently low quantities of them. And because they are nonrival in consumption, it would be inefficient to charge people for consuming them. As a result, society must find nonmarket methods for providing these goods.

When should a government supply public goods

But as communities grow larger and more anonymous, social pressure is increasingly difficult to apply, compelling larger towns and cities to tax residents and depend on salaried firefighters for fire protection services. As this last example suggests, when other solutions fail, it is up to the government to provide public goods. Indeed, the most important public goods—national defense, the legal system, disease control, fire protection in large cities, and so on—are provided by the government and paid for by taxes. Economic theory tells us that the provision of public goods is one of the crucial roles of government. Using this information along with information on the cost of providing the good, the government can use marginal analysis to find the efficient level of providing the public good: the level at which the marginal social benefit of the public good is equal to the marginal social cost of producing it.

How to correct common resources with the government

But when it comes to common resources, often the most natural solution is simply to assign property rights. At a fundamental level, common resources are subject to overuse because nobody owns them. The essence of ownership of a good—the property right over the good—is that you can limit who can and cannot use the good as well as how much of it can be used - So one way to correct the problem of overuse is to make the good excludable and assign property rights over it to someone. The good now has an owner who has an incentive to protect the value of the good—to use it efficiently rather than overuse it.

Common resource problem

Common resource problem: Shortage (You have to regulate how much of a common resource you use as it can cause a shortage of that good which can cause devastating environmental consequences) - Ways to allow this to not happen: -- Permit, Quota, Excise tax, can only cultivate good on your land --- This rises price, but is good if efficient and it helps the environment ---- However can cause a black market to rise

Positive externalities

Externalities are not only negative, they can also be positive: - Ex: If I get a flu shot, the social cost is positive as now people are less likely to get the flu - Ex: When someone becomes educated, they are less likely to commit crimes which helps everyone live in a safer world - When externalities are positive, they are subsidized such as tesla which is an electric car company -- It helps the environment

What is a negative income tax

Finally, economists use the term negative income tax for a program that supplements the earnings of low-income workers. For example, in the United States, the Earned Income Tax Credit (EITC) provides additional income to millions of workers. It has become more generous as traditional welfare has become less generous. As an incentive to work, only workers who earn income are eligible for the EITC. - That is, the EITC acts as a negative income tax for low-wage workers. In 2014, married couples with two children earning less than $13,650 per year received EITC payments equal to 40% of their earnings. Payments were slightly lower for single-parent families or workers without children.

Means- tested programs

First, the table distinguishes between programs that are means-tested and those that are not. In means-tested programs, benefits are available only to families or individuals whose income and/or wealth falls below some minimum. Basically, means-tested programs are poverty programs designed to help only those with low incomes. By contrast, non-means-tested programs provide their benefits to everyone, although, as we'll see, in practice they tend to reduce income inequality by increasing the incomes of the poor by a larger proportion than the incomes of the rich.

France welfare program

France's large welfare state goes along with a high marginal rate of taxation. Some, but not all, economists believe that this high rate of taxation is a major reason the French work substantially fewer hours per year than Americans.

What is a government decision for a positive externality

Government decision for an externality is to impose an additional cost such as taxes and fines which then causes a producer to decrease the quantity of good that then removes negative externality - Ex: Tax on pesticides so less pesticides are in market making negative externality decrease

How is income distributed in the U.S.

How is it possible, then, that so many Americans still live in poverty? The answer is that income is unequally distributed, with many households earning much less than the average and others earning much more.

How serious is the issue of income inequality

How serious an issue is income inequality? In a direct sense, high income inequality means that some people don't share in a nation's overall prosperity. As we've seen, rising inequality explains how it's possible that the U.S. poverty rate has failed to fall for the past 35 years even though the country as a whole has become considerably richer. Also, extreme inequality, as found in Latin America, is often associated with political instability, because of tension between a wealthy minority and the rest of the population. Over time, their incomes will revert to a more normal level. So a table showing average incomes within quintiles over a longer period, such as a decade, would not show as much inequality. Furthermore, a family's income tends to vary over its life cycle: most people earn considerably less in their early working years than they will later in life, and then experience a considerable drop in income when they retire. Consequently, the numbers in Table 78.2, which combine young workers, mature workers, and retirees, show more inequality than would a table that compares families of similar ages.

When will a nonrival good have inefficient low quality

However, as noted earlier, when suppliers charge a price greater than zero for a nonrival good, consumers will consume an inefficiently low quantity of that good.

What happens in a market when there are no negative externalities

If there is no negative externalities, marginal social and private cost must equal each other, if one does exist, marginal social cost is greater

Efficient market with MSC =

In an efficient market, marginal social cost equals marginal private benefit plus marginal external benefit

What is an activity of negative externality

In the case of an activity that generates a negative externality, the marginal social cost of production is greater than the marginal private cost of production, the difference being the marginal external cost imposed on society.

Public good marginal social / private benefit

In the special case of a public good, the marginal social benefit of a unit of the good is equal to the sum of the marginal private benefits enjoyed by all consumers of that unit. Or to consider it from a slightly different angle, if a consumer could be compelled to pay for a unit before consuming it (the good is made excludable), then the marginal social benefit of a unit is equal to the sum of each consumer's willingness to pay for that unit. Using this principle, the marginal social benefit of an additional street cleaning per month is equal to Ted's marginal private benefit from that additional cleaning plus Alice's marginal private benefit. - Because Ted and Alice can simultaneously "consume" the same unit of street cleaning, the marginal social benefit is the sum of their marginal private benefits. And the efficient quantity of a public good is the quantity at which the marginal social benefit is equal to the marginal social cost of providing it.

Why do insurance companies not give insurance to sick / old people

Insurance companies do not give old people cheap insurance even though it is a nice thing to do as it as a risk of being very expensive compared to giving a healthy young person insurance - This is the reason that Obama Care gave healthcare for all, because without mandatory health care only old people would get health insurance causing insurance companies to lose money

Good that do not possess both qualities of private / public goods

Not all goods possess these two characteristics. Some goods are nonexcludable—the supplier cannot prevent consumption of the good by people who do not pay for it. Fire protection is one example: a fire department that puts out fires before they spread protects the whole city, not just people who have made contributions to the Firemen's Benevolent Association. An improved environment is another: pollution can't be ended for some users of a river while leaving the river foul for others. Nor are all goods rival in consumption. Goods are nonrival in consumption if more than one person can consume the same unit of the good at the same time. TV programs are nonrival in consumption: your decision to watch a show does not prevent other people from watching the same show.

What is a rational reason for the existence of government

One fundamental rationale for the existence of government is that it provides a way for citizens to tax themselves in order to provide public goods—particularly a vital public good like national defense Of course, many people do vote out of a sense of civic duty. But because political action is a public good, in general people devote too little effort to defending their own interests. - They instead free ride this interest

What is one source of market failure and why is excludability crucial (free rider)

One source of market failure is rooted in the nature of the good itself: markets cannot supply goods and services efficiently unless they are private goods—excludable and rival in consumption. - To see why excludability is crucial, suppose that a farmer had only two choices: either produce no wheat or provide a bushel of wheat to every resident of the county who wants it, whether or not that resident pays for it. It seems unlikely that anyone would grow wheat under those conditions. - The general point is that if a good is nonexcludable, rational consumers won't be willing to pay for it—they will take a "free ride" on anyone who does pay. So there is a free-rider problem. Examples of the free-rider problem are familiar from daily life. One example you may have encountered happens when students are required to do a group project.

Pareto efficient

Pareto efficient is when you can't make anyone better off without making someone else worse off

Negative externality of production

People over producer goods for negative externalities as they do not realize the cost of it social cost is moved to the left

positive externality of production

People under produce goods for positive externalities as they do not fully realize the benefit of it Social cost is moved to the right

What is poverty blamed on

Poverty is often blamed on lack of education, and educational attainment clearly has a strong positive effect on income level—on average, those with more education earn higher incomes than those with less education

Four types of goods:

Private goods, which are excludable and rival in consumption, like wheat Public goods, which are nonexcludable and nonrival in consumption, like a public sewer system Common resources, which are nonexcludable but rival in consumption, like clean water in a river Artificially scarce goods, which are excludable but nonrival in consumption, like pay-per-view movies on cable TV

Marginal social benefit and cost of a good

Recall that the marginal social benefit of a good is the benefit that accrues to society as a whole from the consumption of one additional unit of the good. But what is the marginal social benefit of another unit of a public good—a unit that generates utility for all consumers, not just one consumer, because it is nonexcludable and nonrival in consumption

What is another controversy of welfare program

Some of the political controversy over the welfare state involves differences in opinion about the trade-offs we have just discussed: if you believe that the disincentive effects of generous benefits and high taxes are very large, you're likely to look less favorably on welfare state programs than if you believe they're fairly small. - To an important extent, however, differences of opinion on income redistribution reflect differences in values and philosophy.

How are some public goods provided and what is the issue of it

Some public goods are supplied through voluntary contributions. For example, private donations help support public radio and a considerable amount of scientific research. But private donations are insufficient to finance large programs of great importance, such as the Centers for Disease Control and Prevention and national defense. Some public goods are supplied by self-interested individuals or firms because those who produce them are able to make money in an indirect way. The classic example is broadcast television, which in the United States is supported entirely by advertising.

Povery rate

Somewhat surprisingly, however, this hasn't happened. Figure 78.1 shows the U.S. poverty rate—the percentage of the population living below the poverty threshold—from 1959 to 2012. As you can see, the poverty rate fell steeply during the 1960s and early 1970s. Since then, however, it has fluctuated up and down, with no clear trend. In fact, in 2012 the poverty rate was higher than it had been in 1973.

How do markets become efficient from taxes and subsidies

Subsidies in how a market becomes efficient when marginal social benefit exceeds marginal private benefit (positive externality) Taxes is how a market becomes efficient when marginal private benefit exceeds marginal social benefit (negative externality)

Why antipoverty programs have problems - what is notch

Suppose there is some means-tested benefit worth $2,000 per year that is available only to families with incomes of less than $20,000 per year. Now suppose that a family currently has an income of $19,500 but that one family member is deciding whether to take a new job that will raise the family's income to $20,500. Well, taking that job will actually make the family worse off because it will gain $1,000 in earnings but lose the $2,000 government benefit. This situation, in which earning more actually leaves a family worse off through lost benefits, is known as a notch. - Most welfare state programs are designed to avoid creating a notch. This is typically done by setting a sliding scale for benefits such that they fall off gradually as the recipient's income rises. As long as benefits are reduced by less than a dollar for every additional dollar earned, there is an incentive to work more if possible. Ex: For example, one 2005 study found that a family consisting of two adults and two children that raised its annual income from $20,000—just above the poverty threshold in 2005—to $35,000 would find almost all of its increase in after-tax income offset by the loss of benefits such as those from the Supplemental Nutrition Assistance Program, the Earned Income Tax Credit, and Medicaid.

There are three principal ways to induce people who use common resources to internalize the costs they impose on others:

Tax or otherwise regulate the use of the common resource Create a system of tradable licenses for the right to use the common resource Make the common resource excludable and assign property rights to some individuals

Supplemental security income program

The Supplemental Security Income program aids disabled Americans who are unable to work and have no other source of income. The Supplemental Nutrition Assistance Program (formerly known as the Food Stamp Program) helps low-income families and individuals to buy food staples.

Fishing industry and externalities + private goods

The fishing industry supplies the quantity QMKT at which its marginal private cost equals the price. But the efficient quantity is QOPT, the quantity of fish that equates the marginal social benefit (as indicated by the demand curve) to the marginal social cost, not to the fishing industry's marginal private cost of production. Thus, the market outcome results in overuse of the common resource. The supply curve S, which shows the marginal private cost of production of the fishing industry, is composed of the individual supply curves of the individual fishers. But each fisher's marginal private cost does not include the cost that his or her actions impose on others: the depletion of the common resource. As a result, the marginal social cost curve, MSC, lies above the supply curve; in an unregulated market, the quantity of the common resource used, QMKT, exceeds the efficient quantity of use, QOPT.

What are goals of income redistribution

The goals of income redistribution seem laudable: to help the poor, protect everyone from financial risk, and ensure that people can afford essential health care. But good intentions don't always make for good policy. There is an intense debate about how large the antipoverty programs should be, a debate that partly reflects differences in philosophy but also reflects concern about the possibly counterproductive effects of antipoverty programs.

What is the idea of externalities

The idea of externalities is that we can have private transactions but these private actions can have a negative or positive affect socially (externalities)

What is the perfect amount of something

The perfect amount of something is when marginal social cost = marginal social benefit - This means that the perfect amount of pollution would not be zero, it would be where mcs = mcb

Licenses for externalities

The policy maker issues the number of licenses that corresponds to the efficient level of use of the good. For example, hundreds of fisheries around the world have adopted individual transferable quotas that are effectively licenses to catch a certain quantity of fish. Making the licenses tradable ensures that the right to use the good is allocated efficiently—that is, those who end up using the good (those willing to pay the most for a license) are those who gain the most from its use.

Rational for welfare benefit

The rationale for the welfare state rests in part on the benefits of reducing economic insecurity, which afflicts even relatively well-off families. One source of economic insecurity is the risk of a sudden loss of income, as occurs when a family member loses a job and either spends an extended period without work or is forced to take a new job that pays considerably less. - Even if a family doesn't face a loss in income, it can face a surge in expenses. The most common reason for such surges is a medical problem that requires expensive treatment, such as heart disease or cancer.

What kind of taxes does welfare program use and how does welfare work

The report calculates only the direct effects of taxes and transfers, without taking into account changes in behavior that the taxes and transfers might cause. For example, the report doesn't try to estimate how many older Americans who are now retired would still be working if they weren't receiving Social Security checks. As a result, the estimates are only a partial indicator of the true effects of the welfare state. It shows two numbers for each group: the percentage of the group that would have had incomes below the poverty threshold if the government neither collected taxes nor made transfers, and the percentage that actually fell below the poverty threshold once taxes and transfers were taken into account. The effect of government programs was to increase the share of income going to the poorest 80% of the population, especially the share going to the poorest 20%, while reducing the share of income going to the richest 20%.

Problem with non excludable goods

The result is that nonexcludable goods suffer from inefficiently low production in a market economy. In fact, in the face of the free-rider problem, self-interest may not ensure that any amount of the good—let alone the efficient quantity—is produced. So in a market economy goods that are nonrival in consumption suffer from inefficiently low consumption.

3) What is the role of government when an externality occurs?

The role of the government is to get involved and fix this externality in order to hinder the social costs that people get from pursuing their private interests. To do this, the government taxes externalities.

Coase Theorm

What is the Coase theorem: He said that if property rights are well specified and transaction costs are zero, the outcome is pareto efficient - Ex: Doctor and Candy Man. Doctor needs silence, Candyman needs noise to sell sell candy. Doctor cannot make money with noise and Candyman cannot make money silence. Doctor makes $400 with silence, candyman makes $200 with noise. They come to a consensus where Doctor gives candyman $300 to be silent which is less than he makes with silence, so it's worth it and candyman makes more than he would with noise. So this creates pareto efficiency. -- We want silence as its better for everyone, $400 > $200 so its more valuable -- You want to do an equation that still has $400 it surplus, when given $300 to candy man, there is $100 surplus from doctor and $300 from candyman, so $400 surplus again - Property rights determines who pays whom in order to make effective transaction -- Check page 287-288 for example of why property rights matter

Unequal income distribution

What we learn from Table 78.2 is that income in the United States is quite unequally distributed. The average income of the poorest fifth of families is less than a quarter of the average income of families in the middle, and the richest fifth have an average income more than three times that of families in the middle. The Gini coefficient, the most widely used measure of inequality, is the ratio of area A in Figure 78.2, between the line of equality and the Lorenz curve, to area B, below the line of equality. So we have Gini coefficient = A/(A + B)

Private good example: Wheat

Wheat is an example of a private good. It is excludable: the farmer can sell a bushel to one consumer without having to provide wheat to everyone in the county. And it is rival in consumption: if I eat bread baked with a farmer's wheat, that wheat cannot be consumed by someone else.

Nonexcludable good

When a good is nonexcludable, the supplier cannot prevent consumption by people who do not pay for it.

What does welfare mean

When people use the term welfare, they're often referring to monetary aid to poor families. The main source of such monetary aid in the United States is Temporary Assistance for Needy Families, or TANF. - it is available only to poor families with children and only for a limited period of time. - The older program was widely accused of creating perverse incentives for the poor, including encouraging family breakup. Partly as a result of the change in programs, the benefits of modern "welfare" are considerably less generous than those available a generation ago, once the data are adjusted for inflation.

How do show how externalities graphically

When showing how an externality affects a market, if negative, move quantity to the right, if positive externality, move quantity to the left

How do you find what makes markets msot efficient

When trying to find what makes market most efficient, find right before marginal social cost exceeds marginal social benefit - This is also the point where total benefit is the greatest compared to social cost - Permits are usually given on an average as its easier and gives government less power, permit gives average amount of everyone so it is best price for profit -- Ex: Health insurance is given an average price plus a little more so firm makes money on average despite some customers causing them to lose money while others causing them to make an excessive profit

How do we know a market is efficient

When we are in an efficient market, marginal social benefit = marginal social cost

Marginal social cost compared to marginal social benefit with negative externality

When we have a negative externality, the marginal social cost is greater than the marginal social benefit, hence this product hurts people who are not involved in the transactions making the market not efficient It means too much reallocation, so quantity needs to go down - Quantity needs to move to the left, In addition the supply curve moves to the left Productions (input) costs are too low so the price falls so many people buy the good causing the externality to impact more people When an efficient market has a negative externality, supply curve shifts to the left hence decreasing quantity This creates deadweight loss as certain deals now do not go through due to a higher price - Despite deadweight loss usually meaning inefficiency, with a negative externality, a tax that creates deadweight loss makes a market more efficient

Why does the government finance public goods through taxes

Why government finances public goods through taxes: - Ex: If Wolfy were to pay for national defense, no one else would due to free rider benefits so we would have an underallocation of national defense, so to counteract this, the government taxes everyone in order to finance it

MSB compared of MPB for positive and negative externalities

With a negative externality, marginal private benefit is higher than marginal social benefit and with a positive externality marginal social benefit is higher than marginal private benefit

What do you do to negative and positive externalities

You subsidive a positive externality and you tax a negative externality in order to make the market efficient again