Why can’t Private Firms produce a public good?
It is a market failure because of the free rider problem. It is non excludable and non rivalrous, so people that don’t pay for it can also receive the same benefits.
What is a public good? What are examples of public goods?
A public good is something is non excludable and nonrivalrous. This means that no one is excluded from consuming it and one person’s consumption doesn’t inhibit another’s. National defense
What are the four examples of market failures?
Public goods, monopolies, externalities,
What is the Coase Theorem?
When there are disagreements, the two companies can negotiate or bargain
What is a negative externality? What does it lead to?
A negative consequence of a product that affects third parties. It leads to overproduction.
How do you fix a negative externality?
Per unit taxes. Pigouvian taxes, cap and trade programs,
How do you fix a positive externality?
Per unit subsidy,
What was the Sherman Act?
trying to monopolize any part of trade is a felony offense. This act provided a basic foundation for antitrust legislation but was not specific enough
What was the Clayton Act?
Outlaws price discrimination, Prohibits tying contracts and stock acquisition, No interlocking directorates
What is the function of the Federal Trade Commission?
enforces federal consumer protection laws that prevent fraud, deception and unfair business practices
On the Lorenz Curve, Perfect Equality equals what quantity?
0
What is a positive Externality? What does it lead to?
Third party positive consequences that lead to underproduction
What is the Gini Ratio?
A number used to measure income inequality/income distribution
What is the rationale around the ability to pay taxation?
people with more money who pay more taxes are not heavily burdened
What is the rationale with benefits received principle of taxation?
What is the rationale with benefits received principle of taxation?
The rate of the tax pertains to:
a percentage at which the income of an individual or corporation is taxed
What is a progressive tax?
Tax rate increases as income increases
What is a regressive tax?
Tax rate decreases as income increases
What is a proportional tax?
A tax that is same no matter income
Why is a sales tax a regressive tax?
It is a bigger burden on individuals with lower incomes. This is because high income people use their income for consumption and other things like investing. Lower income people primarily use their income for consumption particularly.
What is a Tying contract?
When a seller forces the buyer to buy other things along with the product.
What is an adverse selection problem?
one party in a transaction has significantly more information about a product or service than the other party, leading to a situation where the party with less information is at a disadvantage and may end up making a poor decision due to the hidden characteristics of the product or service being bought or sold; this often happens in insurance markets, where people with higher risk profiles are more likely to purchase insurance, driving up costs for everyone else
What is a moral hazard problem?
one party in a transaction takes on greater risks than they normally would because they know that another party will bear the costs of any negative consequences that arise from those risks, essentially creating an incentive to act less responsibly due to the protection offered by the other party; this often happens in situations involving insurance, where people might engage in riskier behavior knowing their insurance will cover the costs.
What is asymmetric information?
When one party has more information than the other allowing them to make unfair decisions about the transaction
Why does the market system not produce public goods?
There is no profit as public goods have the “free rider problem” and the market system is profit driven.
What is the optimal quantity of a public good?
Where msb=msc
If the supply curve is perfectly inelastic, how would price increase while staying at the same quantity?
Demand would shift the price. But the quantity wouldnt move as the supply only has one quantity they are willing to produce
On the Lorenz Curve, the closer to the quantity of 1. The income inequality is:
More unequal
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