ECON 202 EXAM 2

positive analysis

describes what will happen

normative analysis

describes what should happen

economic efficiency

an outcome is more economically efficient if it yields more economic surplus

economic surplus

total benefits - total costs flowing from a decision that has improved your well-being

efficient outcome 

yields the largest possible economic surplus

critiques of economic efficiency

• distribution matters, also important to account for equity

• willingness to pay reflects ability to pay, not just marginal benefit

  • the means matter, not just the end

where is consumer surplus on a graph

area between demand curve and price

where is producer surplus o a graph

between equilibrium price and supply

consumer surplus

the economic surplus you get from buying something
marginal benefit - price

producer surplus

the economic surplus you get from selling something
price - marginal cost

voluntary exchange 

buyers and sellers exchange money for goods only if they both want to 

economic surplus

consumer surplus + producer surplus

marginal benefit - marginal cost

surplus

maximizing quantity

deadweight loss

over or under production

efficient production

producing a given quantity of output at lowest possible price 

efficient allocation

allocating goods to create the largest economic surpluse

efficient quantity

quantity that produces the largest possible economic surplus

gains from trade

benefits that come from reallocating resources, good and services to better uses

comparative advantage

explains who should do what

absolute advantage

the ability to do a task using fewer inputs

opportunity cost of a task

hours this take takes/hours required to produce alternative output

specialization

focusing on specific tasks

prices 

signal wrapped in an incentive

central planner

command/planned economy

prediction markets

markets whose payoffs are linked to whether an uncertain event occurs

market failures

when the forces of supply and demand lead to an inefficient outcome 

reasons for market failure 

1. market externalities

2. government failure

3. market power

4. asymmetric information 

5. irrationality 

externality

a side effect of an activity that affects bystanders whose interest aren’t taken into account

negative externality

an activity whose side effects harm bystanders

postive externality

an activity whose side effect benefits bystanders

marginal private costs

extra cost paid by the seller from one extra unit

marginal external benefit 

extra external benefit accuring to bystanders from one extra unit

marginal social benefit

all marginal benefits, no matter who gets them
MPB + MEB

socially optimal quantity

the outcome that is most efficient for society as a while, including interest of buyers, sellers, and bystanders

rational rule for society

produce more of an item if its marginal social benefit is greater than or equal to the marginal social cost

property rights 

ownership of resources 

coase theorem

private bargaining will result in socially efficient outcome if:
property rights are clearly assigned

transaction costs are low

full information

social norms 

considering others’ feelings when making decisions

solutions to externality problems

• private bargaining and the coase theorem

• corrective tasks and subsidies

• cap and trade

• laws, rules, and regulations

• government support for public goods

corrective tax

a tax designed to induce people to take account of the negative externalities they cause

corrective subsidy

a subsidy designed to induce people to take account of the negative externalities

command-and-control

the government directly controls the allocation of resources 

pigouvian tax

corrective tax needed to make people internalize externalities

public goods

nonrival and nonexcludable

private goods

rival and excludable

common resources 

rival and nonexcludable 

quasipublic goods

nonrival and excludable

free-rider problem

individuals have no incentive to pay for things because they get benefits regardless

nonexcludable

when someone cannot be easily excluded from using something

nonrival 

a good for which one person’s use doesn’t subtract from another 

rival good

a good for which your use of it comes at someone else’s expense

club goods

goods that are excludable by nonrival in consumption

tragedy of the commons

people don’t consider negative externalities when using common resources, leading to overconsumption

public choice 

applies economic analysis to the government 

rent-seeking

attempts made by individuals and firms to use government action to benefit themselves at the expense of others

special interest legislation

introduced by lawmakers at the request of the group that stands to benefit

concentrated benefits

for the special interest group

diffused costs

for the consumers

rational ignorance

not worth it for people to learn about policies don’t hurt them very much and learning about them takes time

knowledge problem

information is decentralized

price floor

a minimum price allowed by law

effects of a price floor

surpluses, lost gains from trade/ DWL, wasteful increases in quality, misallocation of resources

price ceilings

a maximum price that sellers can legally charge

binding price ceilings

prevents the market from reaching the market equilibrium price

highest price sellers can charge is lower than the equilibrium price

binding price floor

prevents the market from reaching the equilibrium price
lowest price sellers can charge is higher than the equilibrium price 

effects of price ceilings

shortages, reduction in product quality, wasteful lines and other search costs, loss of gains from trade, misallocation of resources

rent control

price ceiling on rental housing

price gouging

increasing prices to an unfair level 

excise tac

tax on a specific good

statutory incidence

who is legally responsible for paying

economic incedicence

who pays through charges in prices

tax on sellers shifts

the supply curve

tax leads to a decline in

quantity sold

statutory burden

burden of being assigned by the government to send a tax payment

economic burden

burden created by the change in after tax-prices faced by buyers and sellers

tax incidence

division of the economic burden of a tax between buyers and sellers

tax on buyers shifts

the demand curve

relatively inelastic side of the market bears

more of the incidence

subsidy

payment made by the government to those who make a specific choice

why do we have taxes?

raising revenues, transfer payments, financing its own operations, correcting market failures

payroll taxes

come directly from your paycheck

corporate income taxes

levied on the profits of corporations

sales tax 

% of a purchase

property taxes

assessed on the valued of land and structures

avg. tax rate

taxes/income

marginal tax rate

amount of taxes paid on an additional amt of money earned 

marginal tax rate formula

Δtaxes/Δincome

tax bracket

amount of income at which rate kicks in

progressive tax code

increasing average rate

proportional tax code

constant average rates

regressive tax code. 

decreasing average rates

tariff

tax on goods imported into the country

autarky

no trade

import quota

limit on the quantity of a good that can be imported