Unit 10,11,12 Econ Review

Externalities

  • Definitions:

    • Externality: A consequence of an economic activity that affects third parties who did not choose to be involved in that activity.
    • Positive Externality: A beneficial effect experienced by third parties.
    • Negative Externality: A harmful effect experienced by third parties.

  • Effects of Externalities:

    • Positive externalities can lead to underproduction of goods.
    • Negative externalities can lead to overproduction, as producers do not bear the full cost of their actions.

  • Examples of Externalities:

    • Positive Example: Bee-keeping not only produces honey but also pollinates nearby crops, benefiting farmers.
    • Negative Example: Pollution from a factory affects air quality for nearby residents, causing health issues.

Regulation, Subsidies, and Incentives

  • Government Regulation: Imposed to internalize externalities, ensuring producers and consumers consider the societal costs/benefits.
  • Subsidies: Financial aid provided to encourage production of positive externalities (e.g., grants for renewable energy).
  • Incentives: Programs that offer rewards (monetary or otherwise) to promote behaviors that have positive externalities.

Political Policies Affecting Regulations

  • Types of Policies:
    • Command-Based Policies: Directly restrict production or consumption (e.g., emissions standards).
    • Market-Based Policies: Use economic incentives to encourage compliance (e.g., carbon pricing).

Coase Theorem

  • Definition: A theory that suggests that if property rights are clearly defined, parties can negotiate to resolve conflicts over externalities without government intervention.
  • Implication: The negotiation will lead to an efficient outcome regardless of who holds the rights, assuming low transaction costs.

Types of Goods

  • Public Goods: Non-excludable and non-rivalrous (e.g., national defense).
  • Private Goods: Excludable and rivalrous (e.g., food).
  • Club Goods: Excludable but non-rivalrous (e.g., subscription services).
  • Common Goods: Non-excludable but rivalrous (e.g., fisheries).

Excludability

  • Definition: The ability to prevent someone from using a good.
  • Free Rider System: Occurs when individuals benefit from resources, goods, or services without paying for them, typically seen with public goods.

Transaction Cost

  • Definition: The cost incurred in the process of exchanging goods or services, including search, bargaining, and enforcement costs.

Cost-Benefit Analysis

  • Definition: A systematic approach to estimating the strengths and weaknesses of alternatives to ascertain the best approach to achieve benefits while preserving savings.

Differences Between Equality and Efficiency

  • Equality: The equitable distribution of wealth or resources.
  • Efficiency: The optimal allocation of resources to maximize total surplus.

Producer and Consumer Surplus

  • Producer Surplus: The difference between what producers are willing to accept for a good versus what they actually receive.
  • Consumer Surplus: The difference between what consumers are willing to pay for a good versus what they actually pay.

Imports and Exports

  • Effects on Taxes/Tariffs:
    • Tariffs increase the price of imported goods, influencing domestic prices and potentially reducing imports.
  • Quotas: Limit the quantity of goods that can be imported or exported.
    • Tariff Rate Order:
    • Absolute Quota: A fixed limit on quantity.
    • VER (Voluntary Export Restraint): An agreement between exporting and importing countries to limit the amount exported.

Taxation

  • Primary Aim of Tax System: To raise revenue for government spending on significant national needs.
  • Types of Taxes:
    • Lump Sum Tax: A fixed amount paid regardless of income or economic activity.
    • Consumption Tax: Tax on spending rather than income.
    • Payroll Taxes: Fund programs like Social Security and Medicare.
  • Social Security (SS): A government program that provides monetary assistance to people with inadequate or no income.
  • Medicare: A federal program that provides health insurance to individuals aged 65 and older, as well as younger people with disabilities.

Tax Structures

  • Progressive Tax: Higher tax rates as income increases, common in the US.
  • Regressive Tax: Takes a larger percentage from low-income earners than from high-income earners.
  • Proportional Tax: A fixed percentage tax rate across all income levels.
  • Sales Taxes: Tax imposed on sales of goods and services.
  • Capital Gains Taxes: Tax on profit from the sale of an asset.

Tax Incidence

  • Horizontal Equity: Individuals with similar ability to pay should owe similar amounts.
  • Vertical Equity: Individuals with a greater ability to pay should owe more.