Econ 2010 final

Externalities

Side effects of economic activities that affect third parties not directly involved in the transaction.

Positive Externality

A beneficial effect on a third party (e.g., education, vaccinations).

Negative Externality

A harmful effect on a third party (e.g., pollution, noise).

Market with Negative Externalities

Overproduction (market produces more than socially efficient).

Market with Positive Externalities

Underproduction (market produces less than socially efficient).

Solutions to Externalities

Taxes (Pigouvian), subsidies, regulations, tradable permits, Coase Theorem.

Network Good

A good whose value increases as more people use it (e.g., Facebook, Visa).

Competing for the Market

Firms try to dominate the market (winner-takes-most) rather than compete within it.

Digital Goods Being Free

Zero marginal cost to distribute (monetized via ads/data).

Labor Supply Curve

Workers’ willingness to work at different wage levels.

Wage Determination

Equilibrium where labor supply = labor demand.

Marginal Productivity of Labor (MPL)

Additional output from hiring one more worker.

Signaling Model of Education

Education signals ability to employers (not just skill acquisition).

Non-rival Good

One person’s use doesn’t reduce availability for others (e.g., public radio).

Free Rider Problem

People benefit without paying, leading to underprovision of public goods.

Tragedy of the Commons

Overuse of a common resource due to lack of ownership (e.g., overfishing).

Solutions to the Tragedy of the Commons

Government regulation, privatization, tradable permits.

Moral Hazard

Post-contract reckless behavior (e.g., insurance fraud).

Adverse Selection

High-risk individuals are more likely to participate (e.g., sick people buying insurance).

Addressing Asymmetric Information

Screening, signaling (e.g., warranties, certifications).

Largest U.S. Federal Spending Category

Mandatory spending (Social Security, Medicare).

Deficit vs. Debt

Deficit = annual shortfall; Debt = accumulated deficits.

Budget Surplus

When government revenues exceed its expenditures over a given period.