eco midterm 2

actions taken if benefits are greater than the costs

economic efficiency

at least two functions of government that are legitimate

protection of individual rights to person
protection of property and provision of goods

both can't be provided through markets.

protective function of gov

using rules to enforce protection of personal rights and property (legal enforcement)

productive function of gov

gov provision not provided through markets because payment and consumption of good is difficult to connect

market transaction causes externality if someone

not directly involved in transaction receives uncompensated benefits or costs from it (for external cost then users of resource do not pay full cost for resource use)

external cost:
less output than desired and higher price

external benefit:
more output and higher price

sellers restrict market enable total profit by

raising price and reducing output

getting more money for less work

inconveniences rise with no increase in costs from firms means

full costs aren't considered

public good

nonrivalry in consumption and nonexcludability (shared and the same for everyone)

hard to limit benefits to only those who pay for it

better to have less public good

free-rider problem

nonexcludability- market devotes too few resources to producing a good

two products of different prices

gather info and gauge the marginal benefit of more information equals marginal cost of gathering it

market failure

the favored efficient allocation of resources won't be there, does not follow political action to improve the situation

poor product- unlikely to be bought by the same seller again

entrepreneurs can capture external benefits of a project by

expanding the scope of the project

gov failure with political decisions

conflict with efficient allocation of resources

gov licensing restrictions limit competition

restricted supply market (high P low Q)

external cost graph
s2/<-s1/ s2 is supply curve with external cost
b a
point a and b

a: competitive private market outcome
b: outcome consistent with economic efficiency

external benefit graph
\D1 \D2. D1 private market, D2 excluding benefit
a b

a: competitive private market outcome
b: outcome consistent with economic efficiency

In 2019, the combined expenditures of federal, state, and local governments in the United States were approximately 36 percent of gross domestic product (GDP). Approximately what percentage of GDP were government expenditures in 1930?

10%

transfer payments

income transfer from taxpayers to recipients who don't provide current goods and services for the payments

ex: benefits paid to social security recipients

economic behavior

incentives matter to predict the behavior of people in the private sector

similarity between market and public sector?

someone must cover cost associated with provision of scarce goods in both sectors

market allocation and political process differ

one-to-one link between payment for and receipt of the good in market sector, not true in political

public choice analysis

attempts to understand outcomes in public sector by looking at incentives politically by individuals

(chose candidate with most personal benefits and least personal cost)

votes less likely to change anything

less incentive to be informed

bureaucrats and public-sector managers have a strong incentive to

expand budgets to sizes greater than what would be considered economically efficient

if both benefits and costs of public sector actively widespread among voters

acceptance of productive activities and rejection of unproductive activities

gov action result in counterproductive use of resources

conflict between winning political elections and adoption of only productive programs

concentrated benefits and widespread costs the gov are likely to undertake

too much of these activities relative to what would be efficient

logrolling

vote trading among legislators

pork-barrel legislation

bundles a number of projects at the expense of general taxpayers together on a single bill

rent seeking

actions by individuals and interest groups that influence public policy that redistributes income (strategy to increase profit)

when used politically leads to wasteful use of resources

economic incentive for a university to promote internal efficiency of operations

weak difficult to tell and they wouldn't gain from what would improve efficiency of government

crony capitalism

business either implicitly or explicitly provide decision-makers with contributions in "exchange" for gov favors (to improve profitability)

decisions made by majority rule, elected officials have strong incentive to

take resources from taxpayers and use them to provide favors for various voting blocs in exchange for contributions and other forms of political support

GDP is equal to

market value of all goods and services produced domestically during a period

in computing GDP, market prices are used to value final goods and services because

market prices reflect the values of goods and services to the buyer

not included in GDP

value of used item at sale price because it changed and isn't the final cost!

u.s. imports are

not added to u.s. gdp because they are produced abroad

u.s. exports are

included in u.s. gdp because they are produced domestically

gross private domestic investment

includes business expenditures on new factories, tools, and machinery

positive net investment

economy's capital stock is greater at the end of the year than the beginning

inventory changes

adds to gdp because it represents goods produced during the current period

national income

employee compensation, self-employment income, interest, rents, plus corporate profits

cpi measures

impact of price changes on the cost of the typical bundle of goods purchased by households

cpi is calculated using

a fixed basket of goods