Economics Exam 3 Review - Labor Markets, Externalities, and Information

Comprehensive vocabulary flashcards covering basic economic goods, externalities, insurance concepts, information asymmetry, and labor market metrics as presented in the lecture notes.

Excludable

You can keep others from having something you purchased, specifically when they have not purchased the goods themselves.

Nonexcludable

A public good that is very costly and often impossible to exclude someone or groups from using the good, and thus hard to charge for it.

Rival

Your personal ownership or consumption diminishes another person or group’s consumption of the good.

Non-rival

Even when one person uses the public good, another person can use it as well.

Externality

The uncompensated impact of one person’s actions on the well-being of a bystander; the effect of an economic action onto a 3rd party.

Market Failure

When externalities exist in production or consumption, the market will not produce the optimal level of a good/service; results from incomplete property rights or difficulty enforcing them.

Property Rights

Rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

Positive Externality

Beneficial spillovers to third parties that are not being realized, resulting in under-production or under-consumption.

Negative Externality

Disamenities which spillover to third parties that may or may not be realized, resulting in over-production or over-consumption.

Social Benefits

$$\text{Positive Externalities} + ext{Private Benefits}$$

Consumption (Externality Type)

Refers to the benefits a consumer receives from a good or service.

Production (Externality Type)

Refers to the benefits a company gains from a new product or process.

Private (Graph Terminology)

The benefit either company or consumer experiences BEFORE the government steps in (Demand or Supply Curve before intervention).

Social (Graph Terminology)

The benefit either company or consumer experiences AFTER the government steps in (Demand or Supply Curve after intervention).

Coase Theorem

Private parties can solve problems through private negotiations instead of government intervention if property rights are enforceable, transaction costs are low, and both parties have full information.

Transaction Costs

Costs like time and other resources the parties incur in the process of agreeing during a negotiation.

Command-and-Control Approach

A policy where the government imposes quantitative limits on emissions or requires firms to install specific pollution control devices.

Cap-and-Trade

An example of Command-and-Control where the government sets allowable emissions, distributes allowances, and lets firms trade them.

Insurance

A method of protecting a person from financial loss where policyholders make regular payments to an entity that reimburses members for covered significant financial damage.

Premiums

Regular payments made by households or firms to an insurance company.

Risk Group

A group that shares roughly the same risks of an adverse event occurring.

Moral Hazard

A situation where people take more risks because they see their insurance as a safety net.

Adverse Selection

When groups with higher risk levels seek out insurance, straining the system; occurs when the risk-taking party knows more about their intentions than the insurer.

Asymmetric Information

The condition where one party, either the buyer or the seller, has more information about the product's quality or price than the other party.

Deductibles

An amount the policyholder must pay out of their pocket before the insurance coverage starts paying.

Copayment

When an insurance policyholder must pay a small amount (cost sharing) for each service before insurance covers the rest.

Coinsurance

A cost-sharing method where the insurance company covers a certain percentage of the cost and the buyer pays the rest.

Out of Pocket Maximum

The maximum amount a policyholder will pay in one year's time, after which the insurance company picks up $100\%$ of costs.

Warranties

A promise to fix or replace the good for a certain time period; used as a signal to differentiate high-quality goods from lemons.

Lemon

A defect or low-quality product where the true state of the product is not disclosed by the seller to the buyer.

Imperfect Information

A situation where buyers and/or sellers do not have all of the necessary information to make an informed decision about price or quality.

Expected Value (EV)

The average outcome you would expect over time if you repeated a risky situation many times.

EV Formula (Probabilities)

$$EV = \sum \text{Price} \times \text{Value}$$

EV Formula (Counts/Quantity)

$$EV = \frac{\sum (\text{Quantity} \times \text{Value})}{\text{Total Quantity}}$$

Poverty Trap

A situation where antipoverty programs cause benefits to decline substantially as people earn more, making working provide little financial gain.

Off Public Assistance Formula

\text{Off Public Assistance} = \frac{\text{Max Govt. Assistance ($)}}{\text{Reduction Rate}}

Lorenz Curve

A graph showing cumulative shares of income; the further the curve bows from the $45$-degree line of perfect equality, the higher the income inequality.

Income

Flow of money received, measured on a monthly or annual basis.

Wealth

The sum of the value of all assets, such as houses and money in the bank.

Unemployment Rate Formula

$$\text{Unemployment Rate} = \frac{\text{Unemployed}}{\text{Labor Force}}$$

Labor Force Participation Rate (LFPR) Formula

$$\text{LFPR} = \frac{\text{Unemployed} + \text{Employed}}{\text{Adult Population}}$$

Frictional Unemployment

Short-term unemployment arising from the process of matching workers with jobs, such as people changing jobs or college students seeking their first professional role.

Structural Unemployment

Unemployment arising from a mismatch between workers' skills and firms' needs, often long-term.

Cyclical Unemployment

Unexpected unemployment that rises and falls with business cycles, such as recessions or economic expansions.

Natural Rate of Unemployment

$$\text{Frictional} + \text{Structural Unemployment}$$

Minimum Wage

A Price Floor (PF) set by the government making it illegal to pay employees less than a certain hourly rate; it creates a surplus of workers (unemployment).

Monopsony

A market structure where there is a sole consumer of a good or service, or a sole demander of labor.