Card Set Information
For Test 4
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.
What are the types of Market Failure?
1. Monopoly Power
2. Public Goods
4. Information Failure
Define Public Goods.
A good that is available for everyone to consume, regardless of who pays and who doesn’t.
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
What are some examples of Public Goods?
National Defense, law enforcement, space exploration, lighthouse
What is Public-choice economics?
A field of economics that uses models of rational choice to explore decision making in the public sector.
Explain Free-rider problem.
A person who gets the benefit from a good but does not pay for it.
This occurs whenever a third party is affected.
Explain the different types of externalities.
Positive-benefit from something
Negative-cost imposed on third party
What is an example of a positive externality?
What is an example of a negative externality?
What is the government correction for externalities?
Explain the Coase Theorem.
The government might not need to intervene.
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
What is optimal provision?
No zero, where benefits and costs equal.
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
Define Adverse Selection.
A situation in which the uninformed side of the market must choose from an undesirable or adverse selection of goods.
What is an example of Adverse Selection?
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.
What is an example of moral hazard?
Define Deive Demand.
Demand from labor is derived from the demand.
What is Marginal Revenue Product?
Additional revenue a firms receives from hiring one more worker.
In a competitive labor market what is the marginal resource cost equal to?
To the wage rate
What is the relationship between Marginal Revenue Product and Marginal Resource Cost?
A market in which there is a single buyer of an input.
When does monopsony power exist?
if restriction of an input reduces the price the buyer must pay (control over wage rate)
What are the determinants of demand labor?
1. The Demand for Output
2. Price of other inputs (ex. Capital)
3. Changes in technology
What is the Profit Maximizing Rule?
What is the ideal combination of land, labor and capital.
What is the formula for profit maximizing rule?
l-labor, k-capital, n-land
What is the formula for Least Cost Rule?
What is the formula for Elasticity of Demand for Labor?
(% change of demand of labor)/(% change in wage)
1. Elasticity of output
2. Substituability of Labor
3. Labor shares of Total cost