Microeconomics Final

What is the difference between poverty and income inequality?

Poverty is an absolute threshold of your standard of living-do you have enough to live a certain quality of life?

Income inequality is relative to other people- how is the distribution of income within a society

Under what circumstances could one change without the other changing?

Income inequality changes if the top earners income changes

Poverty changes if everyone's income changes

How can government assistance programs for the poor create a disincentive to work, leading to a poverty trap?

The more you work the more benefits you lose, creates a marginal tax rate, for every dollar I earn I lose a dollar, which creates a disincentive to work

Solutions

-phase out the befits more slowly=however that's more expensive

-cut the assistance, give more incentive to work but cause more hardship to low income people

The two primary explanations for rising inequality

1-Changing household composition (2 income homes vs single income homes) 2-earnings of high-skilled labor relative to low-skilled labor (technology has made more skilled people get paid more and low skilled people get paid less, replaced by machines)

How to measure income inequality using quintiles

Divide up all people into 5 equal groups, same number of pope in each group and then see how total wealth is different between those groups

1 problem is for the lowest quintile they get a lot of government benefits, so if you measure cash income it shows more inequality then there really is if you don't include benefits

Universal Basic Income (UBI)

Government gives every citizen a guaranteed amount of money regularly, regardless of employment-it's a recurring payment

Why do the right and left support UBI

Right- gets rid of the disincentives to work in existing programs (maybe, some people might be content not to work if they get a minimum standard from the government)

Left- help the poor and raise their standard of living

What are potential drawbacks of UBI

It would be really really expensive (like 3 times more than the entire current healthcare system)

It would cause negative economic impacts because of the high tax rates

Transaction costs

The costs of making an agreement or exchange (finding buyers/ sellers, negotiating, legal costs, gathering information)

Even if buyers and sellers exist deals may not happen because transaction costs are too high

Coase Theorem

If

1-property rights are clearly defined and

2-transaction costs are low

then private parties can negotiate solutions to environmental problems without government intervention

This theorem often fails because one of these two things are not present

Property rights

Legal rights to own, use, and control resources

Private benefits and costs

The benefits and costs directly experienced by buyers and sellers of a market transaction

Social benefits and costs

These include effects on third parties and society overall

Social costs = private costs + external cost

Social benefit= private benefit+ external benefit

Externalities

An externality is a cost or benefit imposed on third parties, not directly involved in the transaction

Negative externality

A harmful side effect imposed on others

Positive externality

A beneficial side effects to others

What is the main goal of environmental economics?

To make firms and consumers internalize externalities= make private decision makers, consider social costs and benefits

What is the tragedy of the commons

When shared resources are overused because nobody individually owns them, people act in self interest and deplete the resource (ex: overfishing, over grazing, overuse of ground water)

Solutions to the tragedy of the commons

1-create property rights

2-government regulation

3-permits/quotas

4-charging users for access

Why don't competitive markets produce socially optimal outcomes?

Because markets only include private costs and benefits- markets ignore external costs and benefits (ex: too much pollution, overuse of resources, under production of beneficial activities)

How to make companies consider external costs?

1-command and control regulations/direct restrictions

2-taxes

3-cap and trade program

Command and control/direct restrictions

an achieve goal but it's not going to be efficient because every firm has to follow it even if they aren't polluting a lot, have to use the one way they are told

Control but not no flexibility

Taxes

Would increase price of something by the same amount that is the difference between social benefit and private benefit- pay for that they do, the problem is the tax may not take away the pollution as much as you thought it would

Flexibility but not as much control

Cap and trade program combines the best of both

Cap the amount of pollution that can be emitted (the amount they want to allow)- each company can buy or sell (trade) permits to admit a certain amount of pollution

Why does cap and trade combine the advantages of taxes and command and control regulation?

-the cap gives government control over total pollution

-the trade gives firms flexibility to reduce pollution in the cheapest way possible

Understand the three ways to reduce residuals and the trade-off associated with those choices

1-use less inputs (poorer)

2-become more efficient (use same amount of resources but get more out of it)

3-recycling (throw away less that can be reclaimed- good but at each stage a little bit of the product is lost)

Know the difference between renewable and non-renewable resources

Renewable resources are resources that naturally replenish overtime if managed sustainably (animals, trees)

Non renewable do not come back (ex: oil, gold, coal)

How to make decisions about renewable resources

How much should I take to keep the balance where I'm going to have enough in the long run (ex: how many fish should I catch)

How to make decisions about non-renewable resources

I know I'm going to run out so the question is when should I use it? Price is a good dictator because the scarcer it is the higher the price

Be able to explain why predictions about impending resource shortages have not come to fruition

Because we have continuously become much more efficient at using the resources we have