Theme 1 - Micro

• Extending Property Rights


  Water companies are given the right to charge companies which dump waste into the rivers or the sea.

  A way of internalising the externality.
• Tradable Pollution Permits


  Pollution permits that can be bought and sold in a market. They are an attempt to solve the problem pf pollution by creating a market for it.
• Guaranteed Minimum Price


  Where the surplus output created is purchased by a government agency at the minimum price. The main aim of such a scheme is to protect producer incomes.
• Minimum Price


  A floor price set by the government on a good or service, below which it cannot fall. It may be enforced through government legislation.

  
• Maximum Price


  A ceiling price set by the government on a good or service, above which it cannot rise. It may be enforced through government legislation.

  
• Asymmetric Information


  Where consumers and producers have unequal access to information about a good or service in the market.
• Symmetric Information


  Where consumers and producers have access to the same information about a good or service in a market.
• Information Gaps


  Where consumers, producers or the government have insufficient knowledge to make rational economic decisions.
• Free Rider Problem


  If left to the free market, public goods would not be adequately provided for.

  The market fails because firms cannot withhold the goods and services from people who refuse to pay.
• Private Goods


  Those goods that have rivalry and excludability in their consumption.
• Public Goods

  Those goods that have non-rivalry and non-excludability by their consumption.

  Non Rivalry; Consumption of goods by one person does not reduce the amount available for consumption by another.

  Non-Excludable; Once provided, no person can be excluded from benefiting.

  Examples; Defense, Police Service, Street Lighting, Judiciary and Prison Service.
• Internalising the Externality

  Eliminating the externality by bringing it back into the framework of the Market Mechanism.

  = Creating a market for the Externality.

  Examples; Tradable Pollution Permits, Extending Property Rights, Taxes, Regulation, etc..
• Positive Consumption Externality

  
• Negative Production Externality

  
• Welfare Gain


  The excess of social benefits over social costs.
• Welfare Loss


  The excess of social costs over social benefits for a given output.

  A situation where MSB is ≠ to MSC and society does not achieve maximum utility.
• Social Optimum Level

  Marginal Social Costs (MSC) = Marginal Social Benefits (MSB)

  This is where society should be.
• Market Equilibrium Level

  Marginal Private Costs (MPC) = Marginal Private Benefits (MPB)
• Social Benefits

  External Benefits + Private Benefits.
• Private Benefits


  Benefits internal to a market transaction, which are therefore taken into account by the Market Mechanism.
• External Benefits

  Positive 3rd Party effects that are excluded from the Market Mechanism.
• Social Costs

  External Costs + Private Costs.
• Private Costs


  Cost internal to a market transaction, which are therefore taken into account by the Market Mechanism.
• External Costs


  Negative 3rd Party effects that are excluded from the Market Mechanism.
• Production Externality


  An external effect of production, which neither harms nor benefits the person or firm controlling the production.
• Consumption Externality


  An external cost or benefit arising from a consumption activity.
• Externalities


  The costs or benefits that are external to an exchange. They are 3rd party effects ignored by the Market Mechanism.
• Demerit Goods


  A good which is over provided by the Market Mechanism and tends to yield more costs to individuals than they realize.

  Examples; Tobacco, Drugs, Alcohol, etc..
• Reasons for Market Failure

  - Missing Markets ( Merit Goods and Public Goods)

  - Lack of Competition in the market.

  - Externalities

  - Imperfect Market Information

  - Factor Immobility

  - Inequality
• Market Failure

  A misallocation of resources caused by the Market Mechanism.
• Subsidy


  A government grant to firms, which reduces production costs and encourages an increase in output.

  Its shown as an outward shift of the Supply Curve.

  
• Producer Tax


  Below the original EQ and above the original supply curve.

  
• Consumer Tax


  Below the new EQ and above the original EQ.

  
• Incidence of Tax


  The distribution of the tax paid between consumers and producers.

  
• Ad Valorem Tax

  Tax levied increases in proportion to the value of the tax base. (VAT)

  - Steeper Gradient relative to the original Supply Curve.

  
• Specific Tax


  The amount of tax levied does not change with the value of the goods but with the amount or volume of goods purchased (Excise Duties)

  - Parallel to the 1st Supply Curve

  
• Indirect Taxes


  A tax levied on the purchase of goods and services. It includes both specific and Ad Valorem taxes.

  Its shown by an inward shift of the supply curve.

  
• Direct Taxes


  Tax paid on incomes or profits.

  Example; Income Tax and Corporation Tax.
• Tax Incidence when Supply is elastic

  Consumer Tax Burden > Producer's Tax Burden
• Tax Incidence when Supply is Inelastic

  Consumer Tax Burden < Producer's Tax Burden