All Flashcards
How does the concept of externalities apply to pollution from a factory?
The factory doesn't pay the full cost of its production because it doesn't pay for the pollution it creates, leading to overproduction.
How does the concept of externalities apply to vaccinations?
Vaccinations create a positive externality by protecting not only the individual but also others, leading to underproduction by the free market.
Why are public goods often underprovided by the free market?
Due to the free-rider problem, individuals benefit even if they don't contribute, so the market doesn't produce enough.
How does the concept of market failure relate to insulin pricing?
The market price may exclude those who can't afford it, showing the market doesn't allocate resources to those who need them most, but to those who can pay.
How is a slice of pizza an example of a private good?
A slice of pizza is rivalrous because one person's consumption prevents another from consuming it. It is also excludable because people can be prevented from consuming it if they don't pay.
How is national defense an example of a public good?
National defense is non-rivalrous because one person's consumption doesn't prevent others from consuming it. It is also non-excludable because it's impossible to prevent people from consuming it, even if they don't pay.
How can progressive taxes reduce inequality?
Progressive taxes take a higher percentage of income from higher earners, which can then be redistributed to lower-income individuals through government programs.
How does the concept of externalities relate to a neighbor's opera practice?
A neighbor's opera practice can be a negative externality if it imposes costs (noise) on others who are not involved in the practice.
How does the concept of externalities relate to a neighbor's beautiful garden?
A neighbor's beautiful garden can be a positive externality as it confers benefits (aesthetic pleasure) on others who are not involved in creating the garden.
How does government intervention aim to correct market failures?
Government intervention aims to correct market failures by using policies like taxes, subsidies, and regulations to achieve the socially optimal quantity where MSB = MSC.
How does a sales tax affect lower earners?
A sales tax is a regressive tax because lower earners pay a higher percentage of their income in taxes due to a larger portion of their income being spent on taxable goods.
What are the key differences between private costs/benefits and social costs/benefits?
Private costs and benefits only consider the impact on the individuals involved in the transaction, while social costs and benefits consider the impact on society as a whole.
How do progressive and regressive taxes differ in their impact on different income groups?
Progressive taxes take a higher percentage of income from higher earners, while regressive taxes take a higher percentage of income from lower earners.
What are the differences between rivalrous and non-rivalrous goods?
Rivalrous goods are consumed by one individual and cannot be consumed by another, while non-rivalrous goods can be consumed by multiple individuals simultaneously.
What are the differences between excludable and non-excludable goods?
Excludable goods allow providers to prevent consumption by those who do not pay, while non-excludable goods do not allow providers to prevent consumption.
Compare and contrast positive and negative externalities.
Positive externalities confer benefits on third parties, leading to underproduction, while negative externalities impose costs on third parties, leading to overproduction.
How does the unregulated quantity differ from the socially optimal quantity?
The unregulated quantity is what the market produces without intervention, which is often not socially optimal, while the socially optimal quantity is where MSB = MSC.
How can a per-unit subsidy correct the market failure associated with positive externalities like vaccinations?
A per-unit subsidy can increase the quantity of vaccinations to the socially optimal level by shifting the MPB curve closer to the MSB curve.
What is the impact of progressive taxes on income inequality?
Progressive taxes can reduce income inequality by redistributing wealth from higher earners to lower earners through government programs.
How can government intervention address the underproduction of public goods?
Government intervention can address the underproduction of public goods by directly providing the goods or subsidizing their production.
What is the goal of government intervention in markets with externalities?
The goal is to achieve social efficiency by producing where MSB = MSC, correcting for overproduction (negative externalities) or underproduction (positive externalities).
How might regulations be used to address negative externalities?
Regulations can limit the amount of pollution a factory can emit, forcing the firm to internalize some of the external costs.
How does a flat tax differ from a progressive tax in terms of income redistribution?
A flat tax applies the same percentage to all income levels and does not redistribute income, while a progressive tax redistributes income from higher to lower earners.