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What insight(s) did we get from the classroom clicker experiment where students had to choose how many points to contribute to a class account? ✔✔Some people were willing to give more in order to acquire a higher point total, but other would keep all of their points. The people who decided to keep all of their points ended up better in the long-run. What insight(s) did we get from the Moblab experiment on asymmetric information (the Lemons Market experiment) ✔✔The seller knows more about the value of the car. The buyer is losing money. Moreover, if this process is repeated high-price purchases will decrease. High-quality goods are being pushed out by low-quality goods. What insight(s) did we get from the Moblab experiment on externalities? ✔✔Two supply curves. People are not taking externalities into account when they make trades. When a tax was imposed, people started to take it into account. With a tax people cared (increased the price), but without a tax they didn't take externalities into account. The tax puts the market at the equilibrium and market the same.
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What insight(s) did we get from the Moblab experiment on fishing? ✔✔The Tragedy Of The Commons. Everyone was supposed to take out half of the fish, but in overfishing took place. As soon as April and May came around, there would be no fish. Fish were rival, but non-excludable. What insight(s) did we get from the classroom experiment in which "sellers" had to choose which one of four markets to enter (the "free-entry-free-exit" experiment)? ✔✔Some market had prices and high profits and some markets had low prices and low profits. Sellers were moving to a better alternative. These were all short-run decisions in search of the long-run. It is the long-run equilibrium when no one has any incentive to move. Lastly, people tried to put up barriers to entry. Companies try to do this in order to preserve positive profit. Do you understand the basic problem with "asymmetric information"? (from chapter 11) ✔✔Occurs when one party to an economic transaction possesses greater material knowledge than the other party. This normally manifests when the seller of a good or service has greater knowledge than the buyer, although the reverse is possible. What impact does an increase in tax rates have on tax revenues? ✔✔• Does doubling the excise tax rate on a good double the amount of revenue collected?
- No, because the tax increase will reduce the Q of the good or service transacted.
- In some cases, raising the tax rate may actually reduce the amount of revenue the government collects.
What impact does a tax on sellers have on the market price? ✔✔It raises the market price. Sellers and buyers both get a lower price and are worse off. Why does a sales tax cause a deadweight loss in a market? ✔✔• For consumers, tax is a price increase ○ Loss of consumer surplus
- For sellers, tax is price increase Loss of producer surplus What can be said about the income elasticity of demand for public goods? ✔✔There is a relatively elastic demand for public goods. Whether it knowledge or fresh air, everyone will always use them no matter their income. What is the difference and between "head tax," "proportional tax," and "progressive tax," and what is the reason why a "head tax" to pay for of a public good might not result in the provision of the public good? ✔✔Head Tax: a uniform tax imposed on each person Proportional Tax: proportion of income paid in taxes rises with family's income Progressive tax: a tax that imposes a lower tax rate on low-income earners compared to those with a higher income, making it based on the taxpayer's ability to pay
A "head tax" collects the same amount from every citizen; moreover, if a tax of $500 is only worth $400 to one person, there will not be a majority. A government cannot rely on a head tax What is the marginal cost of having an additional consumer of a non-rival good if it is already provided to somebody else? ✔✔The marginal cost is 0. What do "free-riders" do? ✔✔Don't pay for a public good but use it to their benefit When is it efficient to provide a public good, and why is it often not provided even if provision is efficient? ✔✔Public good: is non rival, non excludable It is not provided because the collective benefit is always greater than the individual benefit causing people not wanting to pay for it. How is the total willingness-to-pay for a public good calculated? ✔✔When marginal social benefit = the marginal cost What is a public good? What is a common resource? What are real-world examples of both? ✔✔Common resource: rival, non excludable Rival Good ✔✔a good for which consumption by one person does diminish the quantity or quality of consumption by others
How is the WTP for a permit related to the marginal costs of pollution reduction? ✔✔The WTP for permits is related to the marginal costs of pollution reduction because every firm's WTP will decide how much they pollute and the MSC they are willing to take on because of this pollution. The firms that will buy the most will buy the most permits are able to take on these costs. What is the difference between an environmental tax and an environmental permit system? What do they have in common? ✔✔Environmental Tax: taxing pollution concentrates pollution reduction in firms that can accomplish it at the least cost; it can be difficult to determine the optimal tax rate Environmental Permit System: Utilizes low-cost pollution control Permit fees can offset other taxes Total cost same as with tax; administratively simple Predictable operating and investing environment Citizens can lobby government to set target pollution
How/why does a permit system work for environmental goods? ✔✔Utilizes low-cost pollution control Permit fees can offset other taxes Total cost same as with tax; administratively simple Predictable operating and investing environment Citizens can lobby government to set target pollution Do you understand the numerical example about "Sludge Oil" and"Northwest Lumber"? ✔✔Refer to Chapter 11 powerpoint When does a "tax on a negative externality" result in an efficient outcome? ✔✔It results in an efficient income when the pollution is concentrated on the firms that can accomplish it at the least cost. What are examples of environmental policies, and how do they work? ✔✔1. Set pollution standards
- Regulate harmful activities such as the release of toxic chemicals into the environment
What are externalities? ✔✔benefit or loss without compensation, pretty much like indirect results Social Marginal Cost ✔✔private marginal costs + external marginal costs Do you understand the "Carla-the-Editor" numerical examples? ✔✔Refer to Chapter 8 powerpoint. What can you say about deadweight loss and producer and consumer surplus in perfect price discrimination? ✔✔It should be clear that there are two key differences under conditions of perfect price discrimination. The first is that there is no Dead Weight Loss. This means that this pricing scheme is economically efficient and output is the same as it is under conditions of perfect competition (figure 12.b.1). The second difference is that there is no consumer surplus. The produced has captured the entire consumer surplus for itself as profit. What is "perfect price discrimination," and what is the "hurdle method"? ✔✔Perfect Price Discrimination: charging everyone consumer their reservation price The Hurdle Method: giving a certain group a discount
What is "price discrimination" and what are the conditions for it to work? ✔✔The action of selling the same product at different prices to different buyers, in order to maximize sales and profits. For it to work:
- Firms must be able to control supply.
- Firms must prevent resale of products from one buyer to another.
- There must be a difference in price elasticities in the different markets for the product. How will a single-price monopolist choose the quantity it is going to sell and the price at which it is going to sell that quantity? ✔✔• P> MR=MC determines the monopolists's profit-maximizing quantity of output
- A monopolist's produces a smaller quantity, charges higher prices, and can earn a positive profit I the long run How do a (single-price) monopolist and a perfectly competitive market with similar demand and cost curves compare in terms of market price, quantity, total surplus (efficiency), total consumer surplus and total producer surplus? ✔✔Monopolist
- Price Maker
- barriers to entry
when price is greater than marginal cost this determines the profit maximizing quantity for monopoly Why do monopolies exist? ✔✔• Profits cannot persist in the long run unless there is a barrier to entry: ○ Control of natural resources or inputs (De Beers) ○ Increasing returns to scale ("natural monopoly") ○ Technological superiority ○ Government-created barriers including patents, copyrights, licenses, and franchises ○ Network economies Why did the great chef in the example in class make so much money? ✔✔The chef has greater skill than many of the other chefs in the market; moreover, the chef requires more economic to raise the revenue of any given restaurant What is "economic rent"? ✔✔A portion of payment for an input that is above the supplier's reservation price for that input.
- Economic rents for inputs that cannot be replicated easily are NOT driven down to zero. Why is perfect competition efficient? ✔✔Because P = MC Also, This is because firms produce at the lowest point on the AC curve
What is the difference between "shutting down" and "exiting"? ✔✔A shutdown refers to a short- run decision not to produce anything during a specific period of time because of current market conditions. Exit refers to a long-run decision to leave the market. If a firm shuts down temporarily, it still must pay fixed costs. If a firm exits the industry in the long run, it has no costs.why What happens in the long run if firms in a perfectly competitive market make positive profits in the short run? What happens if they make negative profits? ✔✔They market will balance out in both situations and they will break even. What is the difference between the short-run and the long-run equilibrium in perfect competition? ✔✔short run: an economic balance that results when the quantity supplied equals the quantity demanded, taking the number of producers as given. Long run: an economic balance in which, given sufficient time for producers to enter or exit an industry, the quantity supplied equals the quantity demanded What are barriers to entry (or sources of market power), and what are real-world examples? ✔✔- Sometimes government regulation results in a barrier to entry. For instance, the government regulates the banking sector and there are requirements relating to capital and reserves that a company has to meet to set up a banking operation. long
Accounting Profit= total revenue - explicit costs
- no implicit costs! Firms aim to maximize economic profit because it is smaller than accounting profit. What can be the effect of government interventions in a market that does have problems with asymmetric information, externalities, lack of property rights, etc.? ✔✔Government can improve social welfare What is the effect of government interventions in a market that does not have problems with asymmetric information, externalities, lack of property rights, etc.? ✔✔Loss in Social Welfare Do you understand the 2x2 table about efficiency? ✔✔Refer to the slides. What is meant by the terms "efficiency," "socially optimal outcome" and "total surplus"? ✔✔The total surplus generated in a market is the total net gain to consumer and producers from trading in the market. It is the sum of the producer and the consumer surplus. What is meant by "deadweight loss"? ✔✔A deadweight loss is the reduction in total economic surplus due to the adoption of a policy (or some other intervention in a market).
THE rule (and its variations): How is the optimal level of any activity determined? ✔✔The principle of marginal analysis says that the optimal quantity is the quantity at which marginal benefit is equal to marginal cost MB = MC (the intersection on a graph)
- If there is no quantity at which MB = MC, then choose the largest quantity, at which MB > MC!
