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ECO 103 - Exam 3 Study Guide/Sheets for Test

by: Shannon Surell

ECO 103 - Exam 3 Study Guide/Sheets for Test Eco 103

Marketplace > Illinois State University > Economcs > Eco 103 > ECO 103 Exam 3 Study Guide Sheets for Test
Shannon Surell
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This is the study guide that I have created for the third exam. It is on chapters 7, 8, 9 and 10. I combined all of the notes we took in class and put it together onto three pages. I would sugge...
Individuals and Social Choice
Amir Marmarchi
Study Guide
ECO 103, Amir Marmarchi, Study Guide, Exam 3
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This 3 page Study Guide was uploaded by Shannon Surell on Sunday April 10, 2016. The Study Guide belongs to Eco 103 at Illinois State University taught by Amir Marmarchi in Spring 2016. Since its upload, it has received 276 views. For similar materials see Individuals and Social Choice in Economcs at Illinois State University.


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Date Created: 04/10/16
CHAPTER 7 Externality: A by-product of an activity that hurts/helps someone who is not involved in the activity Negative externality: imposes a burden/cost on others Production (cause) and consumption (cause) Positive externality: confers benefits on others Ex) people who live next to bakery and can smell good bread, education and vaccines protect your child and anyone else who the child comes in contact with Benevolent social planner only cares about size of economy (NOT LAW OR WHO GETS WHAT) Determine what actions will lead to largest benefit for society to share - Side bargains (bargain around the law): a payment made to another to cease or to engage in an activity Changes payout and equilibrium The Coase Theorem: when transactions costs are sufficiently low, the property right to an activity will be acquired by the party that values it most Implies the socially optimal benefit will be realized, and legal constraints will not affect result May not always work in the real world (if it doesn’t take money it at east takes time) Law makes no difference whether someone will do something or not Property right: right to own/control resource Transaction cost: cost of arranging and enforcing a transaction (ex. hiring an attorney) Costs above and beyond the bargain itself Implications Society cannot rely on bargaining to resolve disputes about pollution When these costs are sufficiently high to preclude bargaining, the law is not irrelevant High transaction costs can prevent a Coasian deal! CHAPTER 8 Transaction Costs Search costs: costs incurred to determine the polluter Collectivization costs: costs of motivation and organizing people Negotiation costs: costs associated with the process of securing the terms of an agreement Monitoring and enforcement costs: associated with monitoring and enforcing terms of an agreement Policies that Policymakers should make when designing pollution regulation policies Principle 1: Regulation is necessary only when transaction costs preclude bargaining between polluter and victim If regulators can’t figure out the transaction costs are, it’s best they figure it out themselves (no govt) Principle 2: Regulation should achieve the outcome the affected parties would have reached had transaction costs not been so high Regulators often explicitly/implicitly assign property rights to one party Often property right is NOT absolute Regulation may inhibit bargaining that could reach ideal outcome Regulation can be through transactions rather than the pollution Principle 3: Regulation should be designed to make the polluter internalize the cost of the externality Private costs: costs that are borne by the producer of a good or service External costs: value of a negative externality borne by those who do not produce the good/service Social cost: full cost of producing a good/service, include producer’s private costs & all external costs Internalizing an externality: absorbing, or paying for, an externality If polluter imposes a cost on someone, a regulation should impose those additional costs on the polluter Principle 4: Eliminating pollution entirely should not be the goal of regulation Government should decide how much pollution should be tolerated; it cannot be removed completely Subtle Issues Don’t just compensate the pollution victims, but to reduce the pollution too (Normative view!) Some victims may be hard to identify or they are not here yet (unborn children) Those who benefit from pollution are not always the ones that pay for compensation to the victims (ex. Company creates disaster, company goes bankrupt, government has to compensate victims) How much risk pooling (or insurance) a society really needs? (There is “too much” insurance!) Who should mitigate the risks/pollution? It’s not always the creator that should do it! Do we always want to lower the transaction cost? (ex. Moderate court costs is good!) Tools Governments can use Taxes Key = choosing appropriate tax level Too low = private costs increase, pollution will continue to reduce overall economic outcome Too high = cause more efficient and less polluting producers to halt production Tax must equal the external costs the activity creates Subsidies Government may pay these to reduce pollution Government gets the money for this by taxing the general public Tax burden faced by each citizen is the same as the amount they receive in the form of a subsidy The program pays for itself and can make us richer and is widely used to promote environmental goal Cap-And-Trade-Systems: pollution reduction scheme in which the government sets an overall limit (cap) on the amount of pollution that can be emitted and then allows polluters to negotiate (trade) about who will get to pollute via a system of tradable pollution permits Trade of certificates if mutually beneficial BENEFITS: Makes society better off, internalizes the externalities polluters create, lowers transaction costs (when they can bargain), reduces transaction costs, and gives citizens a voice because they can buy permits too Government should give polluters new ways to produce goods to reduce pollution Government just needs to reduce number of permits released for the future CHAPTER 9 How many years the reserves of oil will last: Proven Reserves = # of years to depletion Annual Consumption Estimated reserves are about 1.2 trillion barrels World consumption is about 31 billion per year This doesn’t take into account that people are capable of changing their behavior o Price increase encourages conservation (increase yrs. to depletion) People respond to incentives (price increase) Increased prices cause people to cut consumption and conserve o Price increase encourages exploration (increase yrs. to depletion) Increase in oil price, increase potential profits Encourages companies to look for new oil sources o Price increases encourages development of oil substitutes (increases yrs. to depletion) Increase in oil prices increases looking for substitutes New alternatives = consumer buying less oil o Price increases also makes costly sources of oil more economical Endangered Resources Resources whose property rights aren’t protected/well enforced are in the greatest danger o Individuals are incentivized to get as many as possible Private resources tend to be carefully manages to provide profits well into the future Tragedy of the commons: tendency of a society to overuse and deplete open-access resources Property rights of these resources are NOT protected Government is left to manage these resources Depletion & pollution are BOTH PRISONER DILLEMMAS IN GAME THEORY! - Pollution happens because of poor property rights that allow polluters to force others to share their costs (same with depletion) Restricting access to endangered resources and their use Restrict access Used when ecosystems are wanted to be preserved Makes resource temporarily the property of those given permission to use it Restrict intensity of use Oceans, forests, etc Dictates the manner in which it can be used Both establish some form of property rights Improper allocation of resources leads to a deadweight loss These can be recaptured by allowing permits to be traded a secondary market - Variation of the cap and trade system Individual Transferable Quota (ITQ) System: system to control overfishing where the govt. decides how big the total fish catch will be and then lets fisherman negotiate to determine the share of the total catch each fisherman is allowed Government can assign some person absolute rights to the commons Requires less management, monitoring and bureaucracy Person running it has incentive to manage it carefully Resources without protected/enforced property rights are most subject to misuse If a government assigns a property right to someone who is insufficient, someone who can better use it can purchase it (application of Coase Theorem) CHAPTER 10 Classification of Goods - Rivalry and exclusivity Rival: a good that only one at a time can enjoy (ex. gas pump) non-rival: good that many people can use simultaneously (ex. Fireworks display) Exclusive: a good that a producer can prevent people from consuming Nonexclusive: a good that a producer finds difficult or cost to prevent people from consuming (ex. fireworks display) - Types Pure private good: rival and exclusive (ex. coffee, iPhone) Pure public good: non-rival and non-excludable (ex. flood control) Club good: non-rival but excludable (ex. toll road, swimming pool) Common pool resource: rival but non-excludable (ex. fisheries, fresh air) Free rider: person who enjoys benefits of a good without bearing a proportionate portion of the cost Public goods problem: tendency for private individuals to provide pure public goods in less-ideal amounts because of free riding How to overcome free-riding: Tax the general public Tax only the people who receive the benefits Charge fees (ex. toll roads) Makes it more likely that society will choose projects in which the benefits outweigh the costs rather than costs outweighing benefits Taxing may create perverse incentives for wealth creation Creates government failure (production of more things, but the WRONG things) Interest groups have an incentive to spend a lot of time and political energy to fight for public projects, even when they are welfare-destroying on the whole Principles for Government Provision of Public Goods Principle 1: markets are better at providing pure private goods Governments mostly provide pure public goods Principle 2: governments should provide non-rival and non-excludable goods only if the benefits outweigh the costs


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