Public Goods, Voting Theorems, and Decision-Making in Economics

These flashcards cover key concepts related to public goods, voting theory, decision-making, and risk in economics.

Vertical Summation

For public goods, adds the worth of one unit to find the aggregate demand curve.

Horizontal Summation

For private goods, adds the quantity desired for a set price of a good to get the aggregate demand curve.

Free rider problem

Occurs when individuals benefit from resources or services without paying for them.

Median Voter Theorem

A project passes if the median voter's valuation is greater than the cost to that voter.

Arrow's General Possibility Theorem

Proves that a fair voting system is impossible under reasonable conditions.

Cycling

Outcome of a vote depends on the order of the choices.

Partial Public Goods

When some people can be excluded but not others.

Hidden action problem

A morale hazard where one party cannot observe the actions of another.

Hidden information problem

An adverse selection where one party cannot observe the quality of goods on the other side.

Signal

An indicator by producers of good-quality goods, such as a warranty.

Separating Equilibrium

When a signal forms two different equilibriums for two differently signaled things.

Pooling Equilibrium

When all parties make the same signal decision, with no signal present.

Sheepskin Effect

How a completed degree is more desirable than the same amount of education.

Information Asymmetries

Where one party has more information than the other party in a market.

Risk Aversion

The extent to which a person experiences disutility from risk.

Risk adverse

They lose utility from risk; depicted as a concave function.

Risk neutral

They neither gain nor lose utility from risk; depicted as a linear function.

Risk loving

They gain utility from taking risks; depicted as a convex function.

Risk Premium

The compensation required for someone to experience risk.

Adverse Selection

A pre-transaction risk caused by information asymmetry.

Moral Hazard

A post-transaction risk arising from information asymmetry.

Regulatory Capture

When government regulators align with the goals of private businesses.

Principal-agent Problem

A problem when a principal cannot monitor the efforts of the agent.

Reference Dependence

Outcomes are judged relative to a reference point.

Probability weighting

Distorts objective probabilities, overweighting small probabilities and underweighting larger ones.

Break Even Effect

Losers become more likely to take on risk to break even.

Endowment Effect

People demand more to give up an item than they would pay to get it.

Expected Value

The calculated value of outcomes adjusted by their probabilities.

Expected Utility

The sum of outcomes weighted by their probabilities.

Expected Utility Theory

The principle that people prefer options with the greatest expected utility.

St. Petersburg Paradox

An expected value paradox where infinite scenarios yield an expected value of infinity.

Alias Paradox

Proves the certainty effect, preferring certain outcomes over highly probable better outcomes.

Certainty effect

Overvaluing certain outcomes compared to uncertain ones.

Reflection effect

Risk preferences change based on how outcomes are perceived as gains or losses.