Theme 1 - Micro

    Subdecks (1)

    Cards (132)

    • 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
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