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Public Finance 1
Terms in this set (73)
Are public goods non rival, rival or non excludable, excludable?
Public goods are non-rival and non-excludable
What are toll goods considered?
Non-rival and excludable
What are free goods considered?
Rival and Non-excludable
What are private goods considered?
Rival and Excludable
T or F: The externalities of a public good affect everyone
T or F: Characteristics of the different types of goods (private, toll, public, free) have to do with how the products/ goods are consumed not produced
True: They are characterized by the way the products are consumed
What is the difference between a pure public good and a local public good?
A pure public good is purely non-rival and non-excludable.
A local public good is one that has some geographic focus that only some can access.
T or F: Education is thought of as a natural monopoly. Why?
true- because they have a high initial fixed cost, and then low constant MC (because the amount to add one child in a classroom is low)
T or F: a library is an example of a public good
False- not a public good because it is rival. If one person has it then you cannot have it too
What are the requirements for perfect competiton?
1. Homogenous products
2. Perfect information
3. Entry and exit in the market
4. Large number of buyers and sellers
5. No externalities
What is the formula to figure out a firm's monopoly profit (to help with the analysis and DWL)?
What is pareto optimality
A way to maximize total social welfare through Projects that make one person better off w/o any reduction of utility of any other person
What is Kaldor-Hicks efficiency?
A way to maximize total social welfare through Projects where the winners could compensate the losers, but where the net benefits exceed the net costs
These 5 principles of Arrows impossibility theorem are:
1. Unrestricted domain
3. Pareto Rule
4. Independent of irrelevant alternatives
What are the characteristics of social welfare function?
1. Need ordinal ranking of utility
2. Indifferent to transformations in units of measure of utility
3. If one person's utility increases, social welfare increases
What conditions are necessary for maximizing social welfare?
1. Efficiency in exchange
2. Efficiency in Production
3. Efficiency in Product mix
4. Interpersonal equity condition
Which condition of maximizing total social welfare is this: Happens if and only if it is impossible to allocate available goods so that one person is better off and no one is worse off.
Effiecieny of exchange
Which condition of maximizing total social welfare is this: It is satisfied if and only if you can increase one output quantity w/o decreasing other output quantities. The max output is already happening (with an assumed max input)
MRTS is the same for all goods a firm produces.
Efficiency in production
Which condition of maximizing total social welfare is this:
Occurs when its impossible to choose an alternative product mix on the PPF and distribute that mix so one person is better off and no one is worse off. NEED MRS= MRT
Efficiency in product mix
Which condition of maximizing total social welfare is this: Satisfied only if goods are distributed so that, on the margin, social welfare is the same no matter who consumes the last unit of the good/supplies the last unit of factor
Interpersonal equity condition
What is the rationale for government intervention through different policies?
They want to maximize public welfare and maximize the good of the public
What are lump sum transfers?
Taxes or subsidies that are not influenced by economics- behavioral characteristics don't determine who is receiving the money
What is the rationale for gov' interventions in the market?
When we have an economic market failure that results in inefficiency. We need gov't to help us satisfy all the conditions to maximize total social welfare.
The area on these graphs between social supply and social demand curve over to the quantity is the what?
Total social welfare
What is the First fundamental theorem of welfare economics
A perfectly functioning competitive market will satisfy the Pareto optimality conditions but is neutral in respect to equity
What is the Second fundamental theorem of welfare economics
Society can attain any efficient allocation of resources and therefore the socially optimal allocation of resources-by combining perfect competition with lump sum transfers
Where is consumer surplus found on a graph?
Under Demand curve up to the price
Where is producer surplus found on a graph?
Above supply curve up to the price
What are 3 conditions of the coase theorem? Is it for private or public parties?
1. Need well-defined property rights
2. Need full information
3. Need low-zero transaction costs
-used for private parties to resolve externalities
When the decision of one economic agent affects another in a non-market way
Are positive or negative externalities looked at on the demand curve?
positive externalities are looked at on the demand curve
Are positive or negative externalities looked at on the supply curve?
Negative externalities' costs are looked at on the supply curve
T or F: When demand or supply is HIGHLY inelastic, the DWL is small
T or F: if Demand or supply curve is perfectly elastic, DWL is 0
T or F: Perfect competition with a lump sum transfer satisfies all conditions of social welfare theory
The preferred measure to analyze implications of policies and their effectivenss
When you can identify how much money you have to give consumer to get them back to their OG IC amount- BUT doesn't mean getting them back to their original point on the IC
Policy techniques to fix inefficiencies in the market
2- Impose a tax
3- give a lump sum transfer to get consumer back to IC
Instead of income being held constant, what is being held constant in a Hicks compensating variable analysis?
T or F: A natural monopoly can still exist in a perfect competition structure
False- a natural monopoly cannot exist w/o its natural monopoly structure
T or F: A Classic monopoly can still exist in a perfect competition structure
True- classic monopoly can exist in a perfect competition industry but doesnt. This is why we compare it with perfect competition firm
When all firms have some type of monopolistic power what is this considered?
T or F: in a monopoly, MR = MC
In a classic monopoly what is the long run profit (AC)?
Describe 2 tier pricing
There are high initial FC but really low MC for one unit of the service (good)
-Total surplus is very large!
-Common in utility and phone companies
-Consumer pays the fixed cost to help producer recover their initial costs
Describe regulated rate of return
-Leads to AC pricing
-Price is where D= AC
-Not as good of a policy solution as subsidy or patents
-Regulator sets price at zero economic profit
A tax that is set at a specific amount to push from one quantity to a more socially optimal quantity
If a fine on a firm is too large what happens
The firm can't solve the problem and the total surplus is reduced because the quantity reduction is too much
The notion that people are assymetric when they think about behaviors and are more hesitant to act when they take on a loss)
T or F: consumers and producers buying and selling behaviors are assymettric
T or F: coase theorem works for both positive and negative externalities
true- works for both positive and negative
For pollution abatement policy options-- IF the cost of installing the pollution abatement tech is higher than the cost of fine what is the firm likely to choose?
they will choose the to pay the fine
What are the two conditions under which there is a large difference between the change in consumer surplus and the HCV?
When there are large projects and large income elasticities
For corrective (pegovian) taxes, if the MC curve is flat what should the policy recommendation be?
The policy recommendation should be a corrective tax
For corrective (pegovian) taxes, if the MC curve is steep, what should the policy recommendation be?
The policy recommendation should be to do a quantity restriction
What is the free rider problem?
When no one wants to pay for a public good and you get the problem of the commons
What is fungability?
The ability to move money or revenue around to different accounts to free up spending
T or F: the gas tax is a targeted user taxx
What is an example of peak load pricing?
Toll roads - When tolls are set for a certain period of time to avoid congestion
What is a search good?
A good that can be inspected and looked at to solve the info asymmetry problem
What is an experience good?
A good that you can experience (first hand or second hand) to solve the info asymmetry problem.
Describe secondary source information
Like yelp or something - when you have someone else experience something and they report it back to you
What kind of goods is government regulation needed for? (Search, experience or post experience)?
Only for post-experience goods
What is a post-experience good?
A good that the government needs to intervene in because there is a large info asymmetry problem that can't be solved socially
What is the difference between moral hazard and adverse selection?
Moral hazard is when the consumer seeks out riskier behavior because they are insured
Adverse selection is the idea that people who need insurance get it first and their risk profile is higher for the insurance companies
How does the warranty address the issue of info asymmetry
Because the seller knows that the product is better than the buyer believes. Its the market trying to solve the info asymmetry issue by showing the consumer the product is good
What is the "insurance death spiral"?
The idea that riskier people are buying insurance and need many claims and pay outs so premiums go up and less healthy people buy and the riskier keep buying and keep needing claims and less healthy buy and its a never ending cycle
What is risk pooling?
Before the ACA they needed to do this because people with pre-existing conditions could not get insured. The risk is shared across all groups (healthy and not) to reduce the risk for the insurance companies.
How does sampling a product solve the issue of info asymmetry?
Because it lets the market solve the issue of info asymmetry--By letting the consumer sample the product because the seller knows it is better than the buyer believes
When is gov't intervention needed for info asymmetries
When its a post-experience good,
What are the conditions that would cause a large difference between the change in CS and the HCV?
When the policy change is large fraction of consumer's original income or the income elasticity of demand is large
If a supply curve is perfect inelastic what is the DWL?
No DWL it would be 0
DWL depends on the ___________ of the tax
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