USC manic econ 224 exam 4 study guide
USC manic econ 224 exam 4 study guide ECON 224
Popular in Introduction to economics
Popular in Department
This 8 page Study Guide was uploaded by Sarah Albert on Friday January 29, 2016. The Study Guide belongs to ECON 224 at University of South Carolina taught by marian Manic in Winter 2016. Since its upload, it has received 62 views.
Reviews for USC manic econ 224 exam 4 study guide
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 01/29/16
Externalities and Public Goods Costs and Benefits of Pollution ● marginal social cost of pollution is the additional cost imposed on society as a whole by an additional unit of pollution ● marginal social benefit of pollution the additional benefit to society from an additional unit of pollution ● avoiding pollution requires using scarce resources that could have been used to produce other goods and services. ● socially optimal quantity of pollution the quantity of pollution society would choose if all its costs and benefits were fully accounted for ● the upward sloping marginal social cost curve, msc, shows how the marginal cost to society of an additional ton of pollution emissions caries with the quantity of emissions ● marginal social benefit curve, msb, is downward sloping because it is progressively harder, and therefore more expensive, to achieve a further reduction in pollution as the total amount of pollution falls, increasingly more expensive technology must be used ● as total pollution falls, the cost savings to a polluter of being allowed to emit one ton rises ● Qopt the quantity corresponding to the point O, where MSB crosses MSC ● a market economy left to itself will not arrive at the socially optimal quantity of pollution Pollution: An external cost ● pollution yields both benefits and costs to society ● in a market economy, without government intervention, those who benefit from pollution like the owners of power companies decide how much pollution occurs ● for polluters, the benefits of pollution take the form of monetary savings: by emitting an extra ton of sulfur dioxide, any given polluter saves the cost of buying expensive, lowsulfur coal or installing pollution control equipment. so the benefits of pollution accrue directly to the polluter ● the costs of pollution fall on the people that have no say in the decision about how much pollution takes place ● in a market economy without government intervention to protect the environment, only the benefits of pollution are taken into account in choosing the quantity of pollution ● so the quantity of emissions won't be the socially optimal quantity it will me the Qmkt, the quantity at which the marginal social benefit of an additional ton of pollution is zero ● the quantity of pollution in a market economy without government intervention will be higher than its socially optimal quantity ● the environmental costs of pollution are the best known and most important examples of external cost ● external cost uncompensated cost that an individual or firm imposes on the other ● ex traffic congestion individual who chooses to drive during rush hour increases congestion and increases the travel time of other drivers ● external benefits benefits that an individual or firm confer on others without receiving compensation ● external costs and benefits are jointly known as externalities ● external costs called negative externalities and external benefits known as positive externalities The inefficiency of excess pollution ● in the absence of government action, the quantity of pollution would be inefficient , polluters would pollute until the marginal social benefit of pollution is zero Private solutions to externalities ● coase theorem even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs are sufficiently low ● transaction costs the cost to individuals of making a deal ● externalities need not lead to inefficiency because individuals have an incentive to make mutually beneficial deals deals that lead them to take externalities into account when making decisions ● when individuals do take externalities into account when making decisions, economists say they internalize the externality ● if externalities are fully internalized, the outcome is efficient even without government intervention ● the cost of communications among the interested parties. such costs may be very high if many people are involved ● the costs of making legally binding agreements. such costs may be high if expensive legal services are required ● costly delays involved in bargaining. even if there is a potentially beneficial deal, both sides may hold out in effort to extract more favorable terms, leading to increased effort and forgone benefits ● when transaction costs prevent the private sector from dealing with externalities it is time to look for government solution Policies toward pollution Environmental Standards ● protection of the environment has become a major role of government in all advanced nations ● the environmental protection agency is the principal enforcer of environmental policies at the national level, supported by the actions of state and local government ● environmental standards rules that protect the environment by specifying actions by producers and consumers Emission taxes ● emission taxes are taxes that depend on the amount of pollution a firm produces ● an emission tax equal to the marginal social cost at the socially optimal quantity of pollution induces polluters to internalize the externality to take into account the true costs to society of their actions ● an emission tax ensures that the marginal benefit of pollution is equal for all sources of pollution, but an environmental standard does not ● in general, taxes designed to reduce external costs are known as Pigouvian taxes ● main concern is that in practice government officials aren't sure how high the tax should be set Tradable emissions permits ● tradable emissions permits are licences to emit limited quantities of pollutants that can be bought and sold by producers ● these permits are tradeable. firms with differing costs of reducing pollution can now engage in mutually beneficial transactions, those that find it easier to reduce pollution will sell some of their permits to those that find it more difficult ● tradeable permits provide polluters with an incentive to take the marginal social cost of pollution in account positive externalities Preserved farmland: an external benefit ● pigouvian subsidy a payment designed to encourage activities that yield external benefits Positive externalities in the modern economy ● most important single source of external benefits is the creation of knowledge ● spreading of knowledge across individuals and firms is known as technology spillover ● greatest source of technology spillovers are major universities and research institutions Public goods Characteristics of a good ● excludable suppliers of the good can prevent people who don't pay from consuming it ● rival in consumption the same unit of the good cannot be consumed by more than one person at the same time ● when a good is both excludable and a rival in competition it is called a private good ● wheat is an example of a private good. it is excludable the farmer can sell a bushel to one consumer without having to provide wheat to everyone in the country. and it is a rival in consumption: if i eat bread baked with a farmers wheat, that wheat cannot be consumed by someone else ● not all goods possess these characteristics. some goods are non excludable the supplier cannot prevent consumption of the good by people who do not pay for it. Fire protection and an improved environment are an example of these ● nor are all goods rival in consumption. nonrival in consumption if more than one person can consume the same unit of the good at the same time. tv programs are non rivals in consumption. your decision to watch a show does not prevent other people from watching the same show ● private goods excludable and rivals in consumption, like wheat ● public goods non excludable and non rival in consumption, like a public sewer system ● common resources, which are non excludable but rival in consumption, like clean water in a river ● artificially scarce goods, which are excludable but nonrival in consumption, like on demand movies Why markets can supply only private goods efficiently ● markets cannot supply goods and services efficiently unless they are private goods excludable and rival in competition ● if a good is nonexcludable, self interested customers won’t be willing to pay for it they will take a free ride on anyone that does pay, so there is a free rider problem ● when students have to do a group project, the shirkers freeride on someone elses effort ● nonexcludable goods suffer from inefficiently low production in a market economy Providing public goods ● examples of public goods:disease prevention, national defense, scientific research ● because these goods are non excludable, the suffer from the freerider problem, so no private firm would be willing to produce them. And because they are non rivals in consumption, it would be inefficient to charge people for consuming them. as a result society must find non market methods for providing these goods How much of a public good should be provided? ● in the special case of a public good, the marginal social benefit of a unit of the good is equal to the sum of the individual marginal benefits that are enjoyed by all consumers of that unit ● if a customer could be compelled to pay for a unit before consuming it (the good is made excludable) then the marginal social benefit of a unit is equal to the sum of the customer’s willingness to pay for that unit Cost benefit analysis ● estimation and comparison of the social costs and social benefits of providing a public good Macroeconomic questions ● how many people are employed in the economy as a whole this year? ● what determines the overall salary levels paid to workers in a given year? ● what determines the overall level of prices in the economy as a whole ● what government policies should be adopted to promote employment and growth in the economy as a whole ● what determines the overall trade in goods, services, and financial assets between the united states and the rest of the world ● paradox of thrift when families and businesses are worried about the possibility of economic hard times, they prepare by cutting their spending. this reduction in spending depresses the economy as consumers spend less and businesses react by laying off workers. as a result families and businesses may end up worse off than if they hadn’t tried to act responsibly ● combined effect of individual decision can have results that are very different from what any one individual intended, results that are sometimes perverse ● the behavior of macro economy is greater than the sum of the individual actions and market outcomes ● to a much greater extent than microeconomics, macroeconomists are concerned with questions about policy, about what the government can do to make macroeconomic performance better ● before the 1930s economics tended to regard the economy as self regulating, they believed the problems such as unemployment would be corrected through the working of the invisible hand and that the governments attempt to improve the economy's performance would be inefficient at best, or make things worse ● keynesian economics a depressed economy is the result of inadequate spending. government intervention can help a depressed economy through monetary and fiscal policy. ● monetary uses changes in the quantity of money to alter interest rates, which in turn affect the overall level of spending ● fiscal policy uses changes in taxes and government spending to affect overall spending ● real gross domestic product a measure of the economy’s overall output ● recession contractions periods of economic downturn when output and employment are falling ● expansions recoveries periods of economic upturn when output and employment are rising ● business cycle short run alteration between recession and expansion ● business cycle peak point at which the economy turns from expansion to recession ● business cycle trough economy transforms from recession to expansion ● unemployment rate most widely used indicator of conditions in the labor market ● long run economic growth the sustained rise in quantity of goods and services the economy produces ● result of growing population and workforce ● long run economic growth is crucial for many economic concerns such as a higher standard of living or financing government programs. It is especially crucial for poorer countries ● inflation a rise in the overall level of prices ● deflation a fall in the overall level of prices The pain of inflation and deflation ● inflation discourages people from holding onto cash, because cash loses value over time if the overall price level is rising, that is the amount of goods and services you can buy with a given amount of cash falls ● deflation causes a reverse problem. If price level is falling, cash gains value over time, so holding onto it can become more attractive than investing. this can deepen a recession ● price stability if the overall level of prices is changing, if at all, only slowly as a desirable goal International Imbalances ● open economy an economy that trades goods and services with other countries ● trade deficit the value of the goods and services bought from foreigners is more than the value of the goods and services it trades to them ● trade surplus when the value of goods and services bought from foreigners is less than the value of the goods and services it sells to them ● determined by decisions about investment spending and saving Measuring the macroeconomy ● almost all countries calculate a set of numbers known as the national income and product accounts ● national income and product accounts, or national accounts, keep track of the spending of consumers, sales of producers, business investment spending, government purchases, and a variety of other flows of money between different sectors of the economy ● economists use the national accounts to measure the overall market value the goods and services the economy produces. The measure is called the country’s gross domestic product Gross Domestic Product ● final goods and services goods and services sold to the final user ● intermediate goods and services goods and services that are inputs for production of final goods and services. In the case of intermediate goods and services, the purchaser is not the final user ● GDP is the total value of all final goods and services produced in an economy during a given period ● one way to calculate GDP is directly survey firms and add up the total value of their production of final goods and services ● second way is based on total spending on final goods and services. this method adds aggregate spending on domestically produced final goods and services in the economy ● third way of calculating GDP is based on total income earned in the economy. Firms and the factors of production that they employ are owned by households, so firms must ultimately pay out what they earn to households Measuring GDP as the value of production of final goods and services ● the way we avoid double counting is to count only each producers value added in the calculation of GDP the difference between the value of its sales and the value of intermediate goods and services it purchases from other businesses measuring GDP as spending on domestically produced final goods and services ● counting only the value of sales to final buyers, such as consumers, firms that purchase investment goods, the government, or foreign buyers ● we omit the sales of inputs from one business to another when estimating GDP using spending data Measuring GDP as factor income earned from firms in the economy ● summing up total wages, interest, and rent paid by firms as well as their total profit Real GDP: a measure of aggregate output ● gdp provides a good way to compare different economies, but it is not a good measure of the economy’s growth over time ● gdp can grow because the economy grows, or it can grow simply because of inflation ● in order to accurately measure the economy’s growth, we need a measure of aggregate output the total quantity of final goods and services the economy produces ● the measure that is used for this purpose is known as real gdp Calculating real gdp ● to estimate the true increase in aggregate output produced, we have to ask how much would gdp have gone up if prices had not changed ● real gdp total value of final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the same level of some given base year ● a real GDP number always comes with information about what the base year is ● a gdp number that has not been adjusted for changes in prices is calculated using the prices in the year in which the output is produced ● call this measure nominal gdp, gdp at current prices ● chainlinking uses the average between the gdp growth rate calculated using an early base year and the gdp growth rate calculated using a late base year ● us statistics on real GDP are always expressed in chain dollars What real gdp doesn't measure ● GDP, nominal or real, is a measure of the country’s aggregate output ● other things equal, a country with a higher population will have a higher gdp simply because there are more people working ● GDP per Capita gdp divided by the size of population, equivalent to the average gdp per person Price index and the aggregate price level ● single number representing the overall level of prices, the aggregate price level ● price index how we can summarize the prices of all goods and services produced and consumed in an economy with a single number Market basket and price indexes ● to measure average price changes for consumer goods and services, economics track changes in the cost of a typical consumers consumption bundle the typical basket of goods and services purchased before the price changes ● market basket hypothetical set of consumer purchases of goods and services ● normalize the measure of the aggregate price level, which means they set the cost of the market basket equal to 100 in the chosen base year ● working with a market basket and a base year, and after performing normalization, we obtain what is known as a price index a normalized measure of the overall price level ● price index in a given year= cost of market basket in a given year / cost of market basket in base year X 100 ● consumer price index is the most widely used measure of the aggregate price level, the overall price level of final consumer goods and services across the economy ● price indexes are also the basis for measuring inflation ● the inflation rate is the annual percent change in an official price index ● inflation rate= price index in year 2 price index in year one / price index in year 1 x 100 ● “the inflation rate” is referring to the annual percent change in the consumer price index Consumer price index ● consumer price index CPI shows how the cost of all purchases of a typical urban family has changed over time ● it is calculated by surveying market prices for a market basket that is constructed to represent the consumption of a typical family of four living in a typical american city Other price measures ● producer price index PPI measures changes in the prices of goods purchased by producers ● GDP deflator for a given year is 100 times the ratio of nominal GDP to real GDP in that year Chapter nine externalities and public goods ● The optimal level of pollution in a society occurs when the marginal benefit of the last unit of pollution exactly equals the marginal cost of pollution. At this level the net benefits to society are maximized. If all the externalities of pollution are accounted for, the resulting level of pollution will be optimal ● There are benefits resulting indirectly from pollution because we obtain goods and services we enjoy even though in the process we create pollution. ● the marginal benefit of pollution emissions decreases as the quantity of pollution emissions increase ● a negative externality is an uncompensated cost imposed by an individual or firm on others ● In the absence of government action, polluters will pollute up to the point at which the marginal social benefit of pollution is zero ● Suppose the production of DVDs generates sulfur dioxide, an air pollutant. Then the market price for DVDs is less than the marginal cost to society of producing DVDs. ● efficient quantity of pollution is ● marketdetermined quantity of pollution is the quantity at which the marginal social benefit of an additional ton of pollution is zero ● It would be inefficient to produce goods when the marginal benefit is less than the marginal cost. Therefore an efficient level of product is achieved when marginal benefit is equal to marginal cost. Chapter ten intro to macro ● the modern tools of macroeconomics are fiscal policy and monetary policy ● monetary policy controlling interest rates ● If macroeconomic policy has been successful over time, it is likely that the economy has not seen any severe recessions. ● fiscal policy uses changes in government spending and taxes to affect overall spending ● recessions Periods in which output and employment are falling are known as ● business cycle shortrun alternation between economic upturns and downturns ● a peak ● economic recessions tend to be short and economic expansions tend to be long ● during a recession rising unemployment rates and falling aggregate output ● An open economy is an economy that trades goods and services with other countries. ● Economists use the term ongterm growthto indicate growth of the economy over several decades. ● The sequence of business cycle phases is peak, recession, trough, expansion. ● Recessions are periods when output and employment are falling. ● Chapter 11 GDP and the CPI ● If we add up all of the values added at every stage of production for a good, we will get the final value of the good ● intermediate goods ● The reason the dollar value of only final goods and services are counted in GDP is that if we counted the value of all goods, we would count inputs, more than once. ● Consider an economy that produces only two goods: DVDs and DVD players. Last year, 10 DVDs were sold at $20 each and 5 DVD players were sold at $100 each, while this year 15 DVDs were sold at $10 each and 10 DVD players were sold at $50 each. Real GDP this year using last year as the base year is: Real GDP this year = 15x20+10x100=$1,300 ● real gdp Divide nominal GDP by the CPI number to calculate real GDP ● nominal gdp = the actual dollar amount a country spends ● cpi = divide the current year's basket of goods and services by the base year's basket of goods and services. ● value added approach ● ● gdp calculated add up all the value added of all producers ● EnchantÈ Inc., a designer clothing company, buys $400 worth of silk from a silk trader and $30 worth of accessories from Accessories R Us to produce each dress. If the value added by EnchantÈ is equal to $200, then according to the valueadded approach, the price of the designer dress should be: ● The price of the final good must be equal to the sum of value added at each intermediary production step. there are three steps 1. production of silk = 400 2. production of accessories 30 3. production of the final dress 200 sum of value added = 630 ● nominal gdp in 2011= 250x1.10 + 100 x 2.5 =525 // real gdp in 2011(2010 as base year) = 250x1 + 100x2 =450 ● real gdp in 2010 = 200x1 + 100x2 = 400 // %change= gdp in 2011/ gdp in 2010 1 (x100) = 450/4001 (x100) =12.5 ●
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'