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Econ 202 notes Week 8

by: Leslie Pike

Econ 202 notes Week 8 ECON 202

Leslie Pike
GPA 3.9

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Chapters 5 and 6, market failure
Dean Jordan
Class Notes
Economics, Econ 202
25 ?





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This 2 page Class Notes was uploaded by Leslie Pike on Thursday March 24, 2016. The Class Notes belongs to ECON 202 at Western Kentucky University taught by Dean Jordan in Spring 2016. Since its upload, it has received 10 views. For similar materials see PRIN ECONOMICS-MICRO in Economcs at Western Kentucky University.

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Date Created: 03/24/16
Week 8 notes Announcements: Exam 2 will be administered next Thursday. A supply curve shows the minimum price a firm will accept per unit of good or service for a particular amount of goods or services. A producer surplus is the excess amount received from the sale of a good or service over the cost of producing it. Market failure results when a market delivers an inefficient outcome. Market failures are generally caused by market regulation: taxes, subsidies, quotas. Market failures can also be caused by high transaction costs, such as sales taxes or tariffs. A public good benefits everyone. Examples of public goods are libraries, sidewalks, roads, national parks, public education, etc. A common resource is owned by no one but can be used by everyone. Example: fish in the ocean. Fairness is a normative idea. There are two definitions of fairness: 1. It’s not fair if the rules aren’t fair 2. It’s not fair if the outcome isn’t fair Utilitarianism is a Robin Hood-like idea; we take from the rich and give to the poor. An extra $10,000 would do a minimum-wage worker more good than it would a Bill Gates; therefore, we should take money from Bill Gates and give it to minimum- wage workers. This sounds great until you factor in what is called “The Big Trade-Off”. (Yes, everything involves a trade-off, what were you expecting?) Redistributing wealth is expensive. If we tax the rich to give to the poor, we need an IRS to ensure that taxes are being paid properly, and somebody has to pay the IRS. Every dollar taken from a rich person does not equal a dollar given to a poor person. When businesses are taxed in America, they tend to produce less, or take their business overseas, costing the U.S. millions of potential tax dollars. Utilitarianism just doesn’t work as well in the real world as it does on paper, because it makes the economic pie smaller. Even if the poor people are getting a bigger piece, it’s a bigger piece of a smaller pie. We would be better off trying to make the pie itself bigger, because when the pie grows everyone’s piece grows, including the poor person’s piece. What happens when a government regulates the market? Let’s look at the labor market. Let’s say that minimum wage is raised to above the equilibrium point. More people will want to work, but fewer firms will hire them. This creates a surplus, known as unemployment. The higher-skilled workers (who likely were being paid considerably more than minimum wage in the first place) will keep their jobs, but the lower-skilled workers (who were paid minimum wage and whose salaries have been raised) are now too expensive for the company to afford, so they will be laid off, or the company will raise the prices of its goods and services to compensate, contributing to inflation. The now-unemployed people, who do not benefit a company enough to be paid the new, higher wage, will have to remain unemployed or be employed illegally and be paid in cash (chances are, they will make less than minimum wage). Minimum wage laws don’t really benefit the low-skilled workers that they are supposed to be helping.


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