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The study of how the allocation of resources affects economic well-being is called

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Welfare Economic

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A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it

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maximizes the combined welfare of buyers and sellers.

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Willingness to pay

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measures the value that a buyer places on a good

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Consumer surplus

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is the amount a consumer is willing to pay minus the amount the consumer actually pays.

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Producer surplus measures the

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benefits to sellers of participating in a market.

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Producer surplus directly measures

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the well-being of sellers

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Total surplus is

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equal to producer surplus plus consumer surplus.

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The "invisible hand" is

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a concept developed by Adam Smith to describe the virtues of free markets.

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Laissez-faire is a French expression which literally means

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allow them to do.

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Market power refers to the

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ability of market participants to influence price.

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Which tools allow economists to determine if the allocation of resources determined by free markets is desirable?

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consumer and producers surplus

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Negative Externality

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The cost to society of a decision made by an individual, company or any other entity that is creating a Negative Externality is the uncompensated cost suffered by bystanders affected by the decision (external cost) plus the direct cost of the decision (private cost) incurred by the decision maker. The decision maker is not paying for the entire cost of the decision.

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Positive Externality

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The social value of a "decision" made by an individual, company or any other entity that is creating a Positive Externality is the uncompensated "benefit" received by bystanders affected by the "decision" (external benefit) plus the direct benefit of the "decision" (private value) received by the decision maker. The decision maker is not receiving the entire benefit of the decision.

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When a good is excludable

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people can be prevented from using the good The property of a good whereby a person can be prevented from using it

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Goods that are excludable include both

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private goods and natural monopolies.

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Goods that are not excludable include both

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common resources and public goods

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An FM radio signal is an example of a good that is

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nonrival in consumption.

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An example of a private good would be

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a t-shirt.

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A cheeseburger is

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excludable and rival in consumption.

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A cable television broadcast of a movie is

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excludable and not rival in consumption.

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At the local park there is a playground for children to use. While anyone is allowed to use the playground, it is often very busy, reducing the enjoyment of many of the children who use it. The playground is a

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common resource.

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A free-rider problem exists for any good that is not

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excludable.

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Tom is a non-union employee at General Power. The majority of the employees at General Power are unionized. The union at General Power has negotiated very good benefits. Even though he is not a union member and he does not have to pay union dues, Tom receives all the benefits that the union has negotiated. Tom's behavior is an example of

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free riding

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Who among the following is a free rider?

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Fred watches many public television programs, but he has never sent in a contribution to the station.

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When a free-rider problem exists,

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the market will devote too few resources to the production of the good.

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National defense is provided by the government because

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free-riders make it difficult for private markets to supply the socially optimal quantity

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Knowledge is an example of a

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public good.

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A lighthouse might be considered a private good if

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the owner of the lighthouse is able to exclude beneficiaries from receiving the benefits of the lighthouse.

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If the government decides to build a new highway, the first step would be to conduct a study to determine the value of the project. The study is called a

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cost-benefit analysis

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The Tragedy of the Commons occurs because

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a common resource is rival in consumption

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Imagine a 2,000-acre park with picnic benches, trees, and a pond. Suppose it is publicly owned, and people are invited to enjoy its beauty. When the weather is nice, it is difficult to find parking on summer afternoons. Otherwise, it is a great place. An efficient solution to the parking problem would be to

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charge higher prices for parking at busy times.

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Consider the following problems: Overcrowded public highways, overfishing in the ocean, polluted air, and the near-extinction of the wild rhinoceros. What do these problems have in common?

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They are all the result of a failure to establish clear property rights over something of value.

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When externalities exist, buyers and sellers

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neglect the external effects of their actions, and the market equilibrium is not efficient.

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Which of the following is an example of an externality?

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a beautiful flower garden outside of the local post office, a flu shot that prevents a student from transmitting the virus to her roommate cigarette smoke that permeates an entire restaurant all of the above

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If a sawmill creates too much noise for local residents

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the government can raise economic well-being through noise-control regulations

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Private markets fail to account for externalities because

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decisionmakers in the market fail to include the costs of their behavior to third parties

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When negative externalities are present in a market

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social costs will be greater than private costs.

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A negative externality will cause a private market to produce

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more than is socially desirable.

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Which of the following is an example of a positive externality?

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a nice garden in front of your neighbor's house

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If education produces positive externalities, we would expect

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the government to subsidize education.

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When the government uses a command-and-control policy to solve an externality, it

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creates policies that directly regulate behavior.

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A local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not comply with local clean air standards. This decision provides an example of

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a direct regulation of an externality

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Emission controls on automobiles are an example of a

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command-and-control policy to increase social efficiency

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Corrective taxes are typically advocated to correct for the effects of

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negative externalities.

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Private solutions may not be possible due to the costs of negotiating and enforcing these solutions. Such costs are called

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transaction costs.

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Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $200 to Dick and that Jane bears a cost of $400 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that

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Jane pays Dick $300 to give the dog to his parents who live on an isolated farm.

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A positive externality

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is a benefit to someone other than the producer and consumer of the good

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A positive externality will cause a market to produce

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less than is socially desirable

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Which of the following is an example of a positive externality

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Mary not catching the flu from Sue because Sue got a flu vaccine.

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When the price rises from P1 to P2, consumer surplus

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decreases by an amount equal to B+C.

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Consumer=

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Buyer and the Demand

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Producer =

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Seller and the Supply

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Suppose that the production of plastic creates a social cost which is depicted in the graph above. Without any government regulation, how much plastic will be produced? (Private Cost)

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650

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Suppose that the production of plastic creates a social cost which is depicted in the graph above. What is the socially optimal quantity of plastic?

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500 social cost

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Which of the following is an example of a positive externality?

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Mary not catching the flu from Sue because Sue got a flu vaccine.

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Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $700 to Dick and that Jane bears a cost of $500 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that

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The current situation is efficient

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When a good is excludable

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people can be prevented from using the good.

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Suppose that the Town of Podunk is considering hiring an additional police officer. The reduction in crime is estimated to be worth $10 for each of Podunk's 4,500 residents. What should the city do?

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Hire the police officer if the cost of the new officer is less than $45,000.

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Explicit cost

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require an outlay of money, e.g. paying wages to workers ( opporunity cost

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Implicit cost

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Do not require a cash outlay. e.g. the opportunity cost of the owners time

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Taxes on specific goods such as gasoline and alcoholic beverages are called

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excise taxes.

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The two types of taxes that are most important to state and local governments as sources of revenue are

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sales taxes and property taxes

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The largest source of income for the federal government is

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individual income taxes.

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A payroll tax is a tax on

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the wages that a firm pays its workers.

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All of the following are transfer payments except

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personal income taxes.

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The government's health plan for the elderly is called

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Medicare.

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The federal healthcare spending program that specifically targets the poor is called

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Medicaid.

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Public schools, which educate most students through high school, are paid for primarily by

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local governments.

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Under a regressive tax system,

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the marginal tax rate for high income taxpayers is lower than the marginal tax rate for low income taxpayers.

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Tax evasion is

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illegal.

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The benefits principle of taxation can be used to argue that wealthy citizens should pay higher taxes than poorer ones on the basis that

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the wealthy benefit more from services provided by government than the poor

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Vertical equity states that taxpayers with a greater ability to pay taxes should

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contribute a larger amount than those with a lesser ability to pay.

Eco Chapter 7-11 – Flashcards

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