PA 380 Midterm Review: Key Concepts in Policy Analysis and Microeconomics

Comprehensive vocabulary flashcards covering key concepts for the PA 380 Midterm, including policy analysis foundations, market efficiency, price controls, externalities, public goods, information asymmetry, and social welfare functions.

Policy Analysis

Client-oriented advice that informs public decisions while considering social values; it is time-sensitive and decision-focused, synthesizing research to evaluate policy alternatives.

Policy Research

An academic and theoretical approach to inquiry, distinguished from policy analysis by its theoretical orientation rather than immediate client decision-making.

Objective Technician

A policy analyst role that focuses strictly on analytical integrity, empirical rigor, and factual accuracy.

Client's Advocate

A policy analyst role that actively supports a client's policy goals and positions while navigating analytical ambiguity.

Issue Advocate

A policy analyst role that utilizes analysis primarily as a tool for advancing personal policy goals and values.

Perfectly Competitive Market

A baseline market model characterized by many price-taking buyers and sellers, homogeneous goods, no product uncertainty, zero transaction costs, free entry and exit, private goods, and no affected third parties.

Law of Demand

The economic principle stating that as price decreases, quantity demanded increases, forming a downward-sloping demand curve.

Law of Supply

The economic principle stating that as price increases, quantity supplied increases, forming an upward-sloping supply curve.

Market Equilibrium

The state where quantity supplied equals quantity demanded in a market.

Ceteris Paribus

The condition of holding all other factors constant to isolate a specific cause-and-effect relationship.

Elasticity

The measure of the sensitivity or responsiveness of quantity demanded or supplied to changes in price or other determinants.

Economic Profit

Total revenue minus explicit accounting costs and implicit opportunity costs, differing from accounting profit by including opportunity costs.

Pareto Efficiency

An economic state where resources are allocated such that no individual can be made better off without making someone else worse off.

First Fundamental Theorem of Welfare Economics

The theorem establishing that under standard ideal conditions, a perfectly competitive market equilibrium naturally maximizes total social surplus and achieves Pareto efficiency.

Opportunity Cost

The value of the next-best alternative forgone when making an economic decision.

Sunk Costs

Past expenditures that cannot be recovered and should not influence current or future economic decisions.

Deadweight Loss

A reduction in total social welfare or surplus resulting from an inefficient allocation of resources in a market.

Price Ceiling

A legally established maximum price set below the market equilibrium (e.g., rent control), which leads to market shortages.

Price Floor

A legally established minimum price set above the market equilibrium (e.g., minimum wage), which leads to market surpluses.

Economic Tax Incidence

The actual division of the tax burden between buyers and sellers, which depends on the relative price elasticities of supply and demand rather than statutory liability.

Statutory Tax Incidence

The legal obligation specifying which market participant (buyer or seller) is legally required to pay the tax to the government.

Tariff

A trade policy instrument used to raise revenue and protect domestic industries, leading to higher domestic prices, reduced imports, and deadweight loss.

Positive Analysis

Descriptive, empirical analysis focused on explaining what is or predicting consequences without value judgments.

Normative Analysis

Prescriptive analysis focused on evaluating what ought to be, incorporating subjective values, ethical frameworks, and distributional goals.

Market Failure

A situation where the naturally occurring market equilibrium fails to produce the welfare-maximizing outcome, providing a rationale for policy intervention.

Externality

A spillover cost or benefit resulting from the production or consumption of a good that affects third parties not directly involved in the transaction.

Positive Externality

A spillover benefit enjoyed by third parties where marginal social benefit ($MSB$) exceeds marginal private benefit ($MPB$), resulting in underproduction at market equilibrium.

Negative Externality

A spillover cost imposed on third parties where marginal social cost ($MSC$) exceeds marginal private cost ($MPC$), resulting in overproduction at market equilibrium.

Pigovian Tax

A corrective tax set equal to the marginal external damage of a negative externality to align private costs with social costs and eliminate overproduction.

Pigovian Subsidy

A corrective subsidy set equal to the marginal external benefit of a positive externality to encourage production up to the socially optimal level.

Tradable Permits (Cap-and-Trade)

A market-based regulatory system that sets an overall cap on emissions and issues permits that firms can trade to achieve pollution reduction cost-effectively.

Public Good

A good that is both non-rivalrous and non-excludable in consumption (e.g., national defense).

Non-excludability

The characteristic of a good where it is impossible or prohibitively difficult to prevent non-paying individuals from consuming it.

Non-rivalry

The characteristic of a good where one individual's consumption does not reduce the quantity or availability left for others.

Free-Rider Problem

An incentive dilemma where individuals consume a non-excludable public good without paying for it, leading private markets to underprovide the good.

Lindahl Pricing

A theoretical public good financing scheme where each individual is taxed according to their marginal willingness to pay, requiring honest preference revelation.

Common Property Resource

A resource that is non-excludable but rivalrous, making it vulnerable to overuse and depletion (e.g., fisheries, grazing pastures).

Tragedy of the Commons

The economic problem where individual users acting independently in their self-interest deplete or spoil a shared common property resource.

Coase Theorem

The proposition that if property rights are well-defined and transaction costs are sufficiently low, private bargaining will lead to an efficient outcome regardless of initial rights allocation.

Information Asymmetry

A market failure occurring when one party in an economic transaction possesses more or better private information than the other party.

Search Goods

Goods whose quality and characteristics can be evaluated by consumers prior to purchase (e.g., clothing, electronics).

Experience Goods

Goods whose quality can only be determined by consumers after purchase and consumption (e.g., haircuts, meals at restaurants).

Credence Goods (Post-Experience Goods)

Goods whose quality may never be fully known or verified by consumers even after use (e.g., medical care, complex car repairs), posing the greatest concern for policy.

Adverse Selection

A pre-transaction problem driven by hidden characteristics where disproportionately high-risk or low-quality participants enter a market, potentially causing market breakdown.

Screening

A mechanism employed by the less-informed party to uncover private information from the informed party before a transaction (e.g., medical questionnaires, background checks).

Signaling

A credible action taken by an informed party to reveal private information or quality to an uninformed party (e.g., warranties, educational credentials).

Moral Hazard

A post-transaction problem driven by hidden actions where insured or protected individuals take more risks, reduce effort, or overutilize resources because they do not bear the full cost.

Social Welfare Function (SWF)

A mathematical or conceptual framework that aggregates, transforms, or maps individual utility levels into an overall measure of societal well-being.

Utilitarian Social Welfare Function

A social welfare framework that seeks to maximize the total sum of individual utilities in society, providing the conceptual foundation for cost-benefit analysis.

Rawlsian Social Welfare Function

A social welfare framework based on the maximin principle that seeks to maximize the utility and well-being of the least-advantaged (worst-off) individual in society.

Multiplicative (Nash) Social Welfare Function

A social welfare framework that maximizes the product of individual utilities, inherently penalizing severe inequality and favoring balanced distributions.

Act Utilitarianism

A normative ethical approach evaluating policies on a case-by-case basis based on the immediate utility produced by specific individual decisions (allocational focus).

Rule Utilitarianism

A normative ethical approach advocating adherence to general rules and institutional designs that maximize utility over the long run, even if an individual application appears sub-optimal.

Gini Coefficient

A statistical measure commonly used to quantify income or wealth inequality within a given population.

Substantive Values

Core societal ends and fundamental normative goals in policy analysis, such as human dignity, fairness, and equality.

Instrumental Values

Operational criteria and means used to achieve core substantive goals, including political feasibility and fiscal sustainability.