# Intro to Policy Analysis

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1. A graphical representation of all bundles of goods that make an individual equally well off
indifference curve
2. What are the two properties of indifference curves?
• consumers prefere higher indifference curves of indifference curves that are farther out
• indifference curves are always downward sloping
3. Why are indifference curves always downward sloping?
because that would violate the "more-is-better" assumption
4. The additional increment to utility obtained by consuming an additional unit of a good
marginal utility
5. A mathematical representation of all the combinations of goods an individual can afford to buy if she spends her entire income
budget constraint
6. What is the budget constraint formula?
M=P1X1 + P2 X2
7. In the budget constraint formula, what does M represent?
the source of income
8. In the budget constraint formula, what does P1 and P2 represent?
prices of two indifferent goods
9. In the budget constraint formula, what does X1 and X2 represent?
the two indifferent products
10. Define externality.
Whenever the actions of one party make another party worse or better off, yet the firsr party neither bears the costs nor receives the benefits of doing so
11. A problem that causes the market economy to deliver an outcome that does not maximize efficency
market failure
12. When a firm's production reduces the well being of others who are not compensated by the firm
negative prodction externality
13. the direct cost to producers of producing an additional unit of a good
private marginal cost (PMC)
14. the private marginal costs to producers + any costs associated with the production of the good that are imposed on others
social marginal cost (SMC)
15. Without market failures, describe the relationship of SMC and PMC.
SMC=PMC
16. Describe the relationship between SMC, PMC and MD when there are externalities.
SMC=PMC+MD
17. What does MD stand for?
marginal damage done to others from each unit of production
18. The direct benefit to consumers of consuming an additional unit of a good by the consumer
Private marginal benefit (PMB)
19. the private marginal benefit to consumers - any costs associated with the consumption of the good that are imposed on others
Social marginal benefit (SMB)
20. When an individual's consumption reduces the well-being of others who are not compensated by the individual
negative consumption externality
21. Describe the relationship between SMB, PMB and MD when there is a negative consumption externality.
SMB=PMB-MD
22. where production benefits parties other than the producer and yet the producer is not compensated
positive production externaities
23. when an individual's consumption increases the well being of others but the individual is not compensated by those others
positive consumption externality
24. In the case of a negative consumption externality, describe the curves displayed on a graph.
SMB curve lies below the PMB curve
25. In the case of a positive consumption externality, describe the curves on a graph.
SMB curve lies above the PMB curve
26. In the case of a negative production externality, describe the curves on a graph.
SMC curve lies above the PMC curve
27. In the case of a positive production externality, describe the curves on a graph.
SMC curve lies below the PMC curve
28. When either private negotiations or government action lead the price to the party to fully reflect the external costs or benefits of that party's actions
internalizing the externality
29. The part theorem where there are well-defined property rights and costless bargaining
Part I Coase Theorem
30. The efficent solution to an externality does not depend on which party is assigned the property rights, as long as someone is assigned those rights
Part II Coase Theorem
31. Shared ownership of property rights gives each owner power over all the others
holdout problem
32. When an investment proposal has a personal cost but a common benefit, individuals will underinvest
free rider problem
33. goods that are perfectly non rival in consumption and are non-excludable
pure public goods
34. goods that satisfy the two public good conditions to some extent, but not fully
impure public goods
35. What is the crowd-out problem?
as the government provides more of a public good, the private sector will provide less
36. Explain the warm glow model.
A model of public goods provision in which individuals care about both the total amount of the public good and their particular contributions as well
37. Discuss the areas around the budget line.
38. What do points A and B represent?
 Author: bheight1 ID: 100098 Card Set: Intro to Policy Analysis Updated: 2011-09-15 00:48:16 Tags: Policy Analysis Microeconomics Folders: Description: Test 1 Intro to Policy Analysis Show Answers: