ECON323

What is the difference between positive and normative analysis? [L1]

• Positive Analysis - how it works

• Normative Analysis - how it should ideally work

What are the 4 functions of the state? [L1]

1. Production - in cases of natural monopolies (ex. electricity, water)

2. Regulation - intervention when private production creates market failure

3. Redistribution - transfer resources to citizens or firms

4. Taxation - raise revenues

What is the difference between efficiency and equity? [L1]

• Efficiency: goal of reaching a Pareto efficient allocation of resource

• Equity: goal of reaching a fair allocation of resources

What is the governments role in economic efficiency? [L1]

• Government intervention need to restore efficient

• Trade-off - solving market failures = government failures

What is an externality? [L2]

• Def. - link between economic agents that lies outside the price system

• Welfare that is directly affected by the actions of someone else without any transcation

What are some examples of negative externalities? [L2]

• Driving a car = Generates congestion

• Firm emits CO2 = Contributes to global warming

• Drunk driving = Risks killing someone

• Everyone studies economics = Lowers salary of economists

What are some examples of positive externalities? [L2]

• Playing good music on street = Everyone can enjoy

• Friend joins social network = Expand own social network

• Clean shared kitchen = flatmates can enjoy

What are the effects of externalities in a market? [L2]

• Negative production externality = market produces too much of the good

• Positive production externality = market produces too little of the good

What are the assumptions of Coase Theorem? [L2]

• Property rights are defined

• Bargaining is costless

• Few players involved

• No wealth effect

What is the conclusion of Coase Theorem? (ex. Renauld’s Drums) [L2]

• Who owns the property right do not matter

• Bargaining will restore efficiency

• Property rights only determine who receives the payoff

What is an example of Coase Theorm in real life? [L2]

Carbon market

• Firms can trade pollution allowances

• Market distributes pollution in most efficient way

• Government must determine how much pollution is allowed

What is the difference between Pigouvian taxation and externality markets? [L2]

Pigouvian taxation: taxing externalities

• simple and direct

• Government must guess marginal externality at the optimum

Markets

• Decentralized and not direct

• Government must guess quantities produced at the optimum

What is the difference between excludable, rival, and impure public goods?

• Excludable Goods: consumers can be excluded from consuming it

• Rival Goods: consumption by one consumer reduces the quantity available for others

• Impure Public Goods: between private and public goods (ex. club goods, common property resources)

What is the problem with public goods? [L2]

• Most public goods suffer from congestion

• Pure public goods are an abstract idea (ex. highway for non-users)