Econ W 5&6
36 flashcards · Other · by Daniel F.
External cost
A cost of an activity that falls on people other than those who pursue the activity
External benefit
A benefit of an activity received by people other than those who pursue the activity
Coase theorem
if there is externality, bargaining will lead to an efficient outcome
Tragedy of the commons
he tendency for a resource that has no price to be used until its marginal benefit falls to zero One person’s use of the commons imposes an external cost on the others by making the property less valuable Common property is not used efficiently without property rights
non-rival good
A good whose consumption by one person does not diminish its availability for others
non-excludable good
A good for which it is difficult, or costly, to exclude non-payers from consumption
Private, public and hybrid goods
Demand curve for public goods
all buyers consume the same quantity but each has her own willingness to pay (P) Social demand curve: vertically add individual demand curves
Advantages and disadvantages of using the government to provide public goods
Cost of adding a tax is relatively low. Minimizes the difficulty in determining who will bear what share of the tax burden. May be the only feasible provider. One-size-fits-all approach will not satisfy everyone’s demand for public goods. Many people may oppose mandatory taxation.
The government should provide a pure public good only when the ...
benefit exceeds the cost The benefit of the public good is the sum of the reservation prices of all people who want the good. The cost of the public good is the sum of the explicit and implicit costs incurred to produce it.
forms of imperfect competition
Perfect competition
Supply and demand determine equilibrium price. The firm has no market power. The firm sells all it wishes at the equilibrium price. Sales will be zero if the firm raises its price; sales will not increase if the firm lowers its price. The firm's demand curve is a horizontal line at the market price.
Imperfect competition
The firm has at least some control over the price (some market power). The firm faces a downward-sloping demand curve.
Price discrimination
the practice of charging different buyers different prices for essentially the same good or service
Market power
the firm’s ability to raise the price without losing all sales because of Exclusive control over inputs Patents and copyrights Government licenses or franchises Economies of scale Network economies
Measuring Market Power with concentration index
Lerner Index: L=(P-MC)/P under perfect competition: 0 Hirschman-Herfindahl Index (HHI) = sum of squared shares of firms in the market under perfect competition: 0
Strategy
A strategy is a complete plan of action, i.e. a strategy of a player specifies an action for EACH decision node where the player might be called upon to act
Equilibrium
An equilibrium is a situation in which all players play strategies which are optimal GIVEN the other players’ strategies (best-responses).
Find equilibrium in a Sequential Move Game
solve backwards
find equilibrium / solve normal form games
delete all dominated strategies to form reduced games -> nash equilibrium dominant strategies A dominant strategy for a player is a strategy that gives him a higher payoff than all his other strategies NO MATTER WHAT the other players are doing. dominated strategies A dominated strategy for a player is a strategy that gives him a lower payoff than at least one other available strategy NO MATTER WHAT the other players are doing
Nash equilibrium
Any combination of strategies in which each player’s strategy is her best choice, given the other players’ strategies (no incentive to deviate!)
Models of oligopoly: Cournot model
is a market where firms choose output levels. firms choose output level to maximise profits given a competitor’s production. if the other firm(s) output is unknown: A firm can compute residual demand by reference to market demand for any given output by the rival(s), and determine their best response Reaction:
Models of oligopoly: Bertrand model
is a market where firms decide on price Bertrand Paradox: For two similar firms producing a highly substitutable output, the Nash equilibrium in prices is P = MC reasons why the paradox might not hold in reality: The firms have capacity constraints, and output cannot increase sufficiently for price to be driven down to cost. Product differentiation means that the firms' products are not highly substitutable. The firms understand that the short-term gain from undercutting leads to falling profit…
Residual demand
he demand not met by competitor(s) that could be met by the firm if it decides to produce output and sell it.
Product differentiation
firms’ products do not have to be sold at the same price reaction functions in prices can be used
Information in economics
The invisible hand theory assumes buyers are fully formed about how to spend their money in reality Consumers must employ strategies for gathering information but are never really fully informed
cost benefit of information
there are additional costs and uncertain benefits when engaging in further search
When to gamble to search
determine type of gamble Fair gamble: expected value = 0 better-than-fair gamble: expected value is positive determine attitudes to risk risk neutral person risk averse person
asymmetric information
situations in which buyers and sellers are not equally informed Lemons Model Adverse Selection Moral Hazard
Lemons model
adverse selection
Asymmetric information about the type: loans are taken out disproportionately by those who are least able to pay back
moral hazard
Asymmetric information about the action: people to spend less effort protecting what is insured
VMP = value of marginal product
Money value of the additional output a firm gets by employing one additional unit of labor
cost benefit principle in the labour market
VMP = W
Lorenz curve
Graph of cumulative distribution of income by percentages
Gini index
Compares absolute equality to lorenz curve: A/(A+B) higher the more inequality