Econ B-251 IU Exam 2 Graded A+
3 conditions why a free market is efficient - ANSWER-1) supply of goods is bought by
buyers with the highest willingness to pay
2) supply of goods is sold by the sellers with the lowest costs
3) between buyers and sellers, there are no unexploited gains from trade or any
wasteful trades
a restriction on trade wastes __________________ and creates
___________________ from trade - ANSWER-resources, lost gains
a subsidy on a good with an external benefit will reduce ____________, increasing
_____________ - ANSWER-deadweight loss, social surplus
a tax on a good with an external cost reduces ___________ and raises ____________ -
ANSWER-deadweight loss, revenue
a tax set equal to the level of external costs would: - ANSWER--shift supply up so that it
overlays the social cost curve
-market quantity would fall from q market to q efficient
-market equilibrium would be the efficient equilibrium
a tax set equal to the level of the external cost is equivalent to - ANSWER-tradable
allowances
alternative to a pigouvian tax - ANSWER-regulate quantity
arbitrage - ANSWER-Taking advantage of price differences for the same good in a
different market by buying low in one market and selling high in another
behavioral symmetry - ANSWER-we assume that institutions differ but people are the
same
bid rigging - ANSWER-firms agree to submit high bids, one submits low, and identity
rotates
cartel - ANSWER-small number of firms that cooperate to raise prices. tend to be
unstable due to cheating by cartel members, new entrants, and U.S. govt. prosecution
and regulation
clayton act of 1914 - ANSWER-prohibited predatory price cutting and tie-in sales. called
the laborer's magna carta, because it declared that unions are not conspiracies in
restraint of trade
, club goods - ANSWER-excludable but nonrival. (i.e. cable TV, wifi). may need a fee to
get service, or receive a free service with ads. club goods often used as incentive to get
business (coffee shops with free wifi)
coase theorem - ANSWER-if the transaction costs are low and property rights are
clearly defined, then private bargains will ensure the market equilibrium is efficient even
when there are externalities
Coasian Solution - ANSWER-externalities are reciprocal in nature, not from one
person's actions, but the combined actions of 2+ parties
collective action problem - ANSWER-just because all members of a group would benefit
if all members of the group did something does not mean that it benefits any individual
member to do so
command and control - ANSWER-when the government orders firms to do something to
reduce externalities
command and control is effective when - ANSWER-the best approach to a problem is
well known and if success requires very strong compliance
common resources - ANSWER-nonexcludable but rival (i.e. tuna in the ocean, the
environment)
conditions for a competitive industry - ANSWER-1. Similar products across sellers
2. Many buyers and sellers, each small relative to total market
3. Many potential buyers and sellers
constant cost industry - ANSWER-An industry in which industry costs don't change with
greater output, shown with a flat supply curve
danger of pigou - ANSWER-could lead to less efficient outcome rather than fixing the
inefficiency caused by the externality, misses opportunity cost
decreasing cost industries - ANSWER-An industry in which industry costs decrease with
greater output (supply curve slopes down). Costs are TEMPORARY reductions (ex.
Silicon Valley CA). Once cluster is established, industry will turn to constant or
increasing costs.
demand is most elastic in the ________________ - ANSWER-long run
efficient equilibrium - ANSWER-the price and quantity that maximizes social surplus
efficient quantity - ANSWER-quantity that maximizes social surplus
3 conditions why a free market is efficient - ANSWER-1) supply of goods is bought by
buyers with the highest willingness to pay
2) supply of goods is sold by the sellers with the lowest costs
3) between buyers and sellers, there are no unexploited gains from trade or any
wasteful trades
a restriction on trade wastes __________________ and creates
___________________ from trade - ANSWER-resources, lost gains
a subsidy on a good with an external benefit will reduce ____________, increasing
_____________ - ANSWER-deadweight loss, social surplus
a tax on a good with an external cost reduces ___________ and raises ____________ -
ANSWER-deadweight loss, revenue
a tax set equal to the level of external costs would: - ANSWER--shift supply up so that it
overlays the social cost curve
-market quantity would fall from q market to q efficient
-market equilibrium would be the efficient equilibrium
a tax set equal to the level of the external cost is equivalent to - ANSWER-tradable
allowances
alternative to a pigouvian tax - ANSWER-regulate quantity
arbitrage - ANSWER-Taking advantage of price differences for the same good in a
different market by buying low in one market and selling high in another
behavioral symmetry - ANSWER-we assume that institutions differ but people are the
same
bid rigging - ANSWER-firms agree to submit high bids, one submits low, and identity
rotates
cartel - ANSWER-small number of firms that cooperate to raise prices. tend to be
unstable due to cheating by cartel members, new entrants, and U.S. govt. prosecution
and regulation
clayton act of 1914 - ANSWER-prohibited predatory price cutting and tie-in sales. called
the laborer's magna carta, because it declared that unions are not conspiracies in
restraint of trade
, club goods - ANSWER-excludable but nonrival. (i.e. cable TV, wifi). may need a fee to
get service, or receive a free service with ads. club goods often used as incentive to get
business (coffee shops with free wifi)
coase theorem - ANSWER-if the transaction costs are low and property rights are
clearly defined, then private bargains will ensure the market equilibrium is efficient even
when there are externalities
Coasian Solution - ANSWER-externalities are reciprocal in nature, not from one
person's actions, but the combined actions of 2+ parties
collective action problem - ANSWER-just because all members of a group would benefit
if all members of the group did something does not mean that it benefits any individual
member to do so
command and control - ANSWER-when the government orders firms to do something to
reduce externalities
command and control is effective when - ANSWER-the best approach to a problem is
well known and if success requires very strong compliance
common resources - ANSWER-nonexcludable but rival (i.e. tuna in the ocean, the
environment)
conditions for a competitive industry - ANSWER-1. Similar products across sellers
2. Many buyers and sellers, each small relative to total market
3. Many potential buyers and sellers
constant cost industry - ANSWER-An industry in which industry costs don't change with
greater output, shown with a flat supply curve
danger of pigou - ANSWER-could lead to less efficient outcome rather than fixing the
inefficiency caused by the externality, misses opportunity cost
decreasing cost industries - ANSWER-An industry in which industry costs decrease with
greater output (supply curve slopes down). Costs are TEMPORARY reductions (ex.
Silicon Valley CA). Once cluster is established, industry will turn to constant or
increasing costs.
demand is most elastic in the ________________ - ANSWER-long run
efficient equilibrium - ANSWER-the price and quantity that maximizes social surplus
efficient quantity - ANSWER-quantity that maximizes social surplus
