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Define Market Failure.
- Is justice for the government to intervene. Whenever the market fails to provide an efficient amount.
- Happens when a market doesn’t generate the most efficient outcome.
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What are the types of Market Failure?
- 1. Monopoly Power
- 2. Public Goods
- 3. Externalities
- 4. Information Failure
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Define Public Goods.
A good that is available for everyone to consume, regardless of who pays and who doesn’t.
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What are the characteristics of Public Goods?
- 1. nonrival-many people can enjoy the good at the same time
- 2. nonexclusive-can’t exclude anyone
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What are some examples of Public Goods?
National Defense, law enforcement, space exploration, lighthouse
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What is Public-choice economics?
A field of economics that uses models of rational choice to explore decision making in the public sector.
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Explain Free-rider problem.
A person who gets the benefit from a good but does not pay for it.
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Explain Externalities.
This occurs whenever a third party is affected.
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Explain the different types of externalities.
- Positive-benefit from something
- Negative-cost imposed on third party
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What is an example of a positive externality?
Education, vaccinations
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What is an example of a negative externality?
Smoking, pollution
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What is the government correction for externalities?
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Explain the Coase Theorem.
The government might not need to intervene.
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What is necessary for the Coase Theorem?
- 1. Number of parties must be small
- 2. Property rights must be clearly defined
- 3. Bargaining Costs must be approaching minimal
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What is optimal provision?
No zero, where benefits and costs equal.
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Explain Information Failure (asymmetric).
- Lack of information.
- A situation in which one side of the market-either buyer of seller-has better information that the other
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Define Adverse Selection.
A situation in which the uninformed side of the market must choose from an undesirable or adverse selection of goods.
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What is an example of Adverse Selection?
Used Cars
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Define Moral Hazard.
A situation in which one side of an economic relationship takes undersirable or costly actions that the other side of the relationship cannot observe.
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What is an example of moral hazard?
Insurance companies
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Define Deive Demand.
Demand from labor is derived from the demand.
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What is Marginal Revenue Product?
Additional revenue a firms receives from hiring one more worker.
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In a competitive labor market what is the marginal resource cost equal to?
To the wage rate
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What is the relationship between Marginal Revenue Product and Marginal Resource Cost?
MRP=MRC
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Define monopsony.
A market in which there is a single buyer of an input.
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When does monopsony power exist?
if restriction of an input reduces the price the buyer must pay (control over wage rate)
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What are the determinants of demand labor?
- 1. The Demand for Output
- 2. Price of other inputs (ex. Capital)
- 3. Changes in technology
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What is the Profit Maximizing Rule?
What is the ideal combination of land, labor and capital.
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What is the formula for profit maximizing rule?
- (MRPl/Pl)=(MRPk/Pk)=(MRPn/Pn)=1
- l-labor, k-capital, n-land
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What is the formula for Least Cost Rule?
(MPl/Pl)=(MPk/Pk)=(MPn/Pn)
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What is the formula for Elasticity of Demand for Labor?
(% change of demand of labor)/(% change in wage)
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List
- 1. Elasticity of output
- 2. Substituability of Labor
- 3. Labor shares of Total cost
- 4. Time
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