Studied by 4 people
Externality
A cost or benefit to someone other than the consumer/producer.
Negative externality
The cost of being a third party to a situation.
Positive externality
The benefit of being a third party to a situation.
Negative externality of production
Cost to society is greater than the cost to the individual producer and the MPC curve is drawn parallel and to the right of the MSC curve.
Positive externality of production
Cost to the individual producer is greater than the cost to society and the MPC curve is drawn parallel and to the right of the MSC curve.
Negative externality of consumption
Benefit to the individual buyer is greater than the benefit to society and the MPB curve is drawn parallel and to the right of the MSB curve.
Positive externality of consumption
Benefit to society is greater than the benefit to the individual buyer and the MPB curve is drawn parallel and to the left of the MSB curve.
Government solutions to reducing negative externalities
Sell permits
Liability lawsuits
Taxes
Pass legislation to discourage it
Set environmental standards
Government solutions to encouraging positive externalities
Subsidies to buyers
Subsidies to sellers
Government direct produces the product
Make public service announcements
Pass legislation to encourage it
Public good
Characteristics: non-rivalry and excludability
Examples: public libraries, stoplight, public roads, sidewalk, etc.
Private good
Characteristics: rivalry and excludability
Examples: hamburger, personal car, home computer, iphone, boba, headphones, ramen, etc.
Absolute poverty
State in which one’s income is insufficient to meet one’s basic needs (food, water, shelter, clothing, etc.).
Relative poverty
State in which one is a victim of income inequality.
Government solutions to poverty
Taxes
Social insurance prgrams
Consequences of poverty
Health problems
Less education
Cycle of Poverty
Causes of income inequality
Ability
Education and training
Discrimination (age, race, gender, culture, etc.)
Affinity to take risk (risk takers tend to earn more income)
Unequal distribution of wealth
Luck
Personal Connections
Power of the Market (some jobs pay more, some products and services are more in demand than others)
Lorenz curve relationships
Diagonal line represents perfect equality of income.
The gap between the lines represents the degree of income inequality.
If perfect income equality existed, the diagonal line and the Lorenz curve would be the same line.
If one person has all the income (monarchy, dictatorship, etc.), the Lorenz curve would be a perfectly horizontal line on the horizontal axis until the lowest right corner of the quadrant, and then shoot up in a vertical line at the 100% of the population point.
Interpreting the Gini Ratio
Formula: (area between the Lorenz curve and the diagonal line)/(total area below the diagonal line)
Gini Ratio is a number between 0 and 1.
A higher Gini Ratio means more income inequality.
A lower Gini Ratio means more income equality.
Effects of equality of income
More income to more people allows more goods and services to be bought.
If the wealthiest groups have most of the money, they will only buy so much of a product before they stop buying it (when their satisfaction becomes low).
Effects of inequality of income
Equality of income reduces financial incentives to work and take risk.
Economic analysis of discimination
Discrimination reduces the demand for discriminated workers, which lowers their income and reduces the number of work opportunities.
Discrimination then forces discriminated workers to have to lower their wage demands to order to get jobs.
Discrimination then forces discriminated workers into lower wage-paying jobs, which widens inequality.
Note 
Flashcard (21)