Market Failure
Situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers.
Externalities
When an action (trade) has an effect on a non-consenting third party.
Positive: When a third party benefits from the actions of others/ example: the smell from a bakery/ solution: subsidy and homeowners association regulations
Negative: When a third party
Public Goods
A commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization.
Nonrivalrous: My consumption does not reduce your consumption
Nonexcludable: It is not possible to exclud
Tragedy of the Commons
An economic problem in which too many people can block each other from creating or using a valuable resource/ a commonly owned resource is overused
ex: fishery pasture/ solution: privatization and regulation of individual transferable quotas.
Tragedy of the Anticommons
Covers any settings in which too many people can block each other from creating or using a valuable resource/ too many property rights which lead to a good being underused
ex: Russian shopping mall or communal apartments/ solution : consolidate ownership
Income Inequality
Unequal distribution of household or individual income.
- Not the same as poverty
- Equity vs efficiency
- Fairness vs Cost and benefits
What is Government
An entity with a monopoly on the legal use of force.
Public Choice View
Governments are made up of rationally self-interested individuals, operating within a system of rules. Their actions are determined by their preferences and the incentives by the system of rules.
Public Interest View
A democratic government acts in such a way as to make its citizens better off; it effectively takes their preferences and translates them into beneficial policy action.
Rational Ignorance
If it is rational for voters to uninformed on many topics / refraining from acquiring knowledge when the cost of educating oneself on an issue exceed the potential benefit that the knowledge would provide.
Rational Abstention
Voters often rationally abstain from voting
Anti-foreign bias
Trades that would be okay with another citizen are seen as harmful with foreigners
Anti-market bias
Doing something to help someone while making a profit is wrong
Make-work bias
People see jobs as the purpose of an economy, rather than production
Pessimistic bias
The present isn't much better than the past, and the future will be terrible. So voters might make persistent mistakes.
Politicians
Want to provide goods and services to their constituents to get reelected. they also engage with lobbyists and interest groups. They act as though they are vote maximizers.
Bureaucrats
Want bigger budgets, more influence, more prestige. Lack of competition and profit motive tends to lead to excessive expansion.
Objectives:
- Advance their agency
- Expand the power and funding of their agency
- Please their constituents --> politicians a
Voting
1. Does not always lead to efficient outcomes
2. Requiring a majority to vote on something, strikes a balance between bargain and external costs.
- More likely to result in efficient outcomes if benefits are tied to the amount the voter pay.s
- Wicksell's
External Costs
The group making a decision that can impose costs on others/ imposed on a third party when goods and services are produced and consumed.
Bargaining Costs
The more people that are required to agree in order to pass a new policy, the more costly it is to reach a decision.
Special Interest Effect
If there is a concentrated, motivated, well-informed interest group, it will tend to beat a widespread, diffused, rationally ignorant group
Other problems with government action
Shortsightedness - Politicians seldom look farther ahead than the next election
Rent Seeking - The pursuit of income, payment, or receipt that cannot be competed away by the ordinary processors of the economy. The seeking of rent wastes resources.
Ineffic
How are wages determined?
1. Worker skills differ
- Experience
- Education
- Innate ability, personal background, motivation, and lots of other stuff
2. Different worker preferences
- In a competitive labor market, discrimination is costly to the employer.
3. Discrimination
4. Wor
Capital Markets
The rate of time preference: is usually taken as a parameter in an individual's utility function which captures the tradeoff between consumption today and consumption in the future, and is thus exogenous and subjective. It is also underlying determinant o
How interest rates are determined
Default rates: The savings rules set up by government employer matter a lot
Present and future value:
PV=F(1+r)^t
Use present value to make decisions across time
Crowdfunding
A way to raise funds for a new venture by soliciting from many people including non-experts
Capital Markets
Markets in which some people offer savings, sometimes for a long time and other people borrow them, so that they can be invested in productive activities
Ex: Loaning money to a friend, buying stock in a company, corporate bond repaid interest, crowdfundin