Econ 1 (Midterm 3)

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marginal cost of pollution
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is the additional cost imposed on society as a whole by an additional unit of pollution
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marginal social benefit of pollution
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the additional gain to society as a whole from an additional unit of pollution
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socially optimal quantity of pollution
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the quantity of pollution that a society would choose if all the costs and benefits of pollution were fully accounted for
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external cost
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an uncompensated cost that an individual or firm imposes on others
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external benefit
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a benefit that an individual or firm confers on others w/o receiving compensation
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inefficient
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in the absence of gov. action, the quantity of pollution will be ____; polluters will pollute up to the point at which the marginal social benefit of pollution is zero
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Coase theorem
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even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs are sufficiently low
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internalize the externality
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when individuals take external costs or benefits into account
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-costs of communication -costs of legally blinding agreements -costly delays involved in bargaining
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i.e. of transaction costs
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environmental standards
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rules that protect the environment by specifying actions by producers and consumers
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emissions tax
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tax that depends on the amount of pollution a firm produces
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internalize the externality
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an emissions tax equal to the marginal social cost at the socially optimal quantity of pollution induces polluters to _____
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zero
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in the absence of gov. action, polluters will pollute until the marginal social benefit of an additional unit of emission is ___
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pigouvian taxes
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taxes designed to reduce external costs
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tradable emission permits
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licenses to emit limited quantities of pollutants that can be bought and sold by polluters (firms will use transactions to re-allocate pollution among themselves)
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-induce polluting industries to reduce output -incentive to create & use less-polluting technology
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emission taxes and tradable permits do what?
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external costs
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when the marginal social cost of a good or activity exceeds the industry’s marginal cost of producing the good -in the absence of gov. intervention, the industry typically produces too much of the good
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external benefits
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when there are ____ from a good, the marginal social benefit exceeds the consumers’ marginal benefit
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marginal social benefit of a good or activity
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equal to the marginal benefit that accrues to consumer plus its marginal external benefit
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pigouvian subsidy
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a payment designed to encourage activities that yield external benefits
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industrial policy
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a policy that supports industries believed to yield positive externalities
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-optimal Pigouvian tax equal to the marginal external cost -system of tradable production permits
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socially optimal quantity (external costs) can be found by___
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technology spillovers
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-common i.e. of external benefits -when these occur, the marginal social benefit of a good or activity exceeds the marginal benefit to the consumers -too little is produced in the absence of gov. intervention
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optimal pigouvian subsidy equal to the marginal external benefit
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socially optimal quantity (technology spillovers) can be found by___
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-neither -enter -exit
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when P = AC, firms will (enter/exit) when P > AC, firms will (enter/exit) when P < AC, firms will (enter/exit)
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zero profits (normal profits)
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when P = AC. At this price the firm is covering all of its costs including enough to pay labor and capital their ordinary opportunity costs
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increases the value of production and in the long run this movement balances industries in a way that maximizes their total value of production
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the movement of resources from low-profit to high-proft industries does what?
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second invisible hand property
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the entry/exit decisions not only work to eliminate profits and losses, they work to ensure that labor and capital move across industries to optimally balance production so that the greatest use is made of our limited resources
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-shutdown doesn’t eliminate all costs -shutdown can be costly
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why won’t a firm shut down immediately if the price dips below average cost?
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estimate the effect of their decisions on their lifetime expected profit
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when its costly to enter and exit and there is uncertainty about future prices, firms must ______
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elimination principle
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above normal profits are eliminated by entry and below normal profits are eliminated by exit -to earn above normal profits a firm must innovate
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increasing cost industry
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an industry in which industry costs increase with greater output; shown with an upward slope supply curve
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constant cost industry
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an industry in which industry costs do not change with greater output; shown with a flat supply curve
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decreasing cost industry (rare)
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an industry in which industry costs decrease with an increase in output; shown with a downward sloped supply curve
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competitive industry
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-product being sold is similar across sellers -many buyers and sellers -each small relative to the total market -many potential sellers
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constant cost industry
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can expand without pushing up prices of its major inputs and this without raising its own costs
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constant cost industries characteristics
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-it is small relative to its input markets so when the industry expands it does not push up price of its inputs and thus industry costs do not increase
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short run
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the time period before any entry occurs
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long run
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the time it takes for substantial new investment and entry to occur
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invisible hand property #1
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even though no actor in a market economy intends to do so, in a free market P = MC1 = MC2 = MCn and as a result the total costs of production are minimized
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invisible hand property #2
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the entry and exit decisions not only work to eliminate profits and losses, they work to ensure that labor and capital move across industries to optimally balance production so that the greatest use is made of our limited resources
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free-rider problem
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individuals have no incentive to pay for their own consumption and instead will take a \”free ride\” on anyone who does pay -results in inefficiently low production
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-voluntary contributions -self-interested individuals/firms -made excludable
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how public goods are supplied
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excludable/rival in consumption
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goods may be classified according to whether or not they are __ and whether or not they are ___
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private goods
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-free markets can deliver efficient levels of production/consumption -are both excludable and rival in consumption
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cannot
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when goods are non excludable, non rival in consumption, or both, free markets ___ achieve efficient outcomes
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nonexcludable goods
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cause a free-rider problem
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nonrival in consumption goods
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-should be free -any positive price leads to inefficiently low consumption
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public good
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-nonexcludable and non rival in consumption -mostly supplied by the gov. -marginal social benefit of good = sum of individual marginal benefits to each consumer
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marginal social benefit/marginal cost
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efficient quantity of a public good is the quantity at which _____ = ______
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marginal social benefit
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is greater than any one individual’s marginal benefit, so no individual is willing to provide the efficient quantity
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allows citizens to tax themselves in order to provide public goods
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rationales for presence of gov.
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cost-benefit analysis
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help gov. determine the efficient provision of public good -is difficult b/c individuals have an incentive to overstate the good’s value to them
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common resource
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-is rival in consumption but non excludable -subject to oversee (individual doesn’t take into account that his/her use depletes amount for others)
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-marginal social cost of an individuals common resource is always higher than his or her individual marginal cost -pigouvian taxes, system of tradable licenses, assignment of property rights
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common resource problem/solutions
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artificially scarce goods
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-excludable but non rival in consumption -efficient price is zero b/c no marginal cost arises from allowing another individual to consume this good – + price compensates the producer for the cost of production but leads to inefficiently low consumption
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similar to monopoly
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problem with artificially scarce goods

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