ECON 102 QUESTIONS AND ANSWERS LATEST UPDATED
VERSION, GRADED A+.
Market-based policies provide incentives so that private decision-makers will choose to solve the
problem on their own.
Examples:
corrective taxes and subsidies
tradable pollution permits
corrective tax
Also called Pigouvian taxes after Arthur Pigou (1877-1959).
A tradable pollution permits
A tradable pollution permits system reduces pollution at lower cost than regulation.
Firms with low cost of reducing pollution
do so and sell their unused permits.
Firms with high cost of reducing pollution
buy permits.
Result: Pollution reduction is concentrated among those firms with lowest costs
The Coase theorem:
Coase theorem: The private market will reach the efficient outcome on its own...
If private parties can costlessly bargain over the allocation of resources, they can solve the externalities
problem on their own.
If an activity yields negative externality
Such as polution --socially optimal quantity in market is less than equilibrium
If an activity yields positive externality
Such as technology spillovers --socially optimal quantity in market is greater than equilibrium
The arguments given to support trade restrictions are: (1) trade destroys jobs; (2) industries
threatened with competition may be vital for national security; (3) new industries need trade
restrictions to help them get started; (4) some countries unfairly subsidize their firms, so competition
is not fair; and (5) trade restrictions can be useful bargaining chips.
Economists disagree with these arguments: (1) trade may destroy some jobs, but it creates other jobs;
(2) arguments about national security tend to be exaggerated; (3) the government cannot easily identify
new industries that are worth protecting; (4) if countries subsidize their exports, doing so simply
benefits consumers in importing countries; and (5) bargaining over trade is a risky business, because it
may backfire, making the country worse off without trade.
, Free trade benefits a country both when it exports and when it imports.
...
A supply curve can be used to measure producer surplus because it reflects
sellers' costs.
negative externalities
...Government should tax goods with
externality,
the uncompensated impact of one person's actions on the well-being of a bystander. Externalities can
be negative or positive,
depending on whether impact on bystander is adverse or beneficial.
Social value
=
private value
+ external benefit (demand curve) positive externality
Social cost =
private cost + external cost (Supply curve) negative externality
Costs Short run:
Some inputs are fixed (e.g., factories, land).
The costs of these inputs are FC.
Costs Long run:
All inputs are variable
(e.g., firms can build more factories,
or sell existing ones)
Explicit costs -
require an outlay of money,
e.g. paying wages to workers
Implicit costs -
do not require a cash outlay,
e.g. the opportunity cost of the owner's time
Economic profit
=
total revenue minus total costs (including explicit and implicit costs)
VERSION, GRADED A+.
Market-based policies provide incentives so that private decision-makers will choose to solve the
problem on their own.
Examples:
corrective taxes and subsidies
tradable pollution permits
corrective tax
Also called Pigouvian taxes after Arthur Pigou (1877-1959).
A tradable pollution permits
A tradable pollution permits system reduces pollution at lower cost than regulation.
Firms with low cost of reducing pollution
do so and sell their unused permits.
Firms with high cost of reducing pollution
buy permits.
Result: Pollution reduction is concentrated among those firms with lowest costs
The Coase theorem:
Coase theorem: The private market will reach the efficient outcome on its own...
If private parties can costlessly bargain over the allocation of resources, they can solve the externalities
problem on their own.
If an activity yields negative externality
Such as polution --socially optimal quantity in market is less than equilibrium
If an activity yields positive externality
Such as technology spillovers --socially optimal quantity in market is greater than equilibrium
The arguments given to support trade restrictions are: (1) trade destroys jobs; (2) industries
threatened with competition may be vital for national security; (3) new industries need trade
restrictions to help them get started; (4) some countries unfairly subsidize their firms, so competition
is not fair; and (5) trade restrictions can be useful bargaining chips.
Economists disagree with these arguments: (1) trade may destroy some jobs, but it creates other jobs;
(2) arguments about national security tend to be exaggerated; (3) the government cannot easily identify
new industries that are worth protecting; (4) if countries subsidize their exports, doing so simply
benefits consumers in importing countries; and (5) bargaining over trade is a risky business, because it
may backfire, making the country worse off without trade.
, Free trade benefits a country both when it exports and when it imports.
...
A supply curve can be used to measure producer surplus because it reflects
sellers' costs.
negative externalities
...Government should tax goods with
externality,
the uncompensated impact of one person's actions on the well-being of a bystander. Externalities can
be negative or positive,
depending on whether impact on bystander is adverse or beneficial.
Social value
=
private value
+ external benefit (demand curve) positive externality
Social cost =
private cost + external cost (Supply curve) negative externality
Costs Short run:
Some inputs are fixed (e.g., factories, land).
The costs of these inputs are FC.
Costs Long run:
All inputs are variable
(e.g., firms can build more factories,
or sell existing ones)
Explicit costs -
require an outlay of money,
e.g. paying wages to workers
Implicit costs -
do not require a cash outlay,
e.g. the opportunity cost of the owner's time
Economic profit
=
total revenue minus total costs (including explicit and implicit costs)
