MAE101 Economics

Third parties have to carry costs of economic transactions and are not compensated --> spillovers

An uncompensated cost born by a third party --> lead to oversupply

i.e.

- greenhouse effect

- pollution

- road congestion

An uncompensated benefit born by a third party --> lead to undersupply

i.e.

- education

- health and personal hygiene

- common language

- concerts

Internalising an externality involves altering incentives so that people take account of the external effects of their actions.

Achieving the socially optimal output

The government can internalise an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity.

Internalising externalities with subsidies

Command-and-control policies (regulations, forbid or require certain activities)

Market-based policies (taxation and subsidies to align private incentives)

Pigoian tax

- tax sets the price of (i.e.) pollution which together with the demand curve determines the quantity of pollution

Permit

- Pollution permits set the quantity of pollution which together wich the demand curve determines the price of pollution

Excludability

-property of a good whereby a person can be prevented from using it (i.e. if others haven't paid for it)

Rivalry

-property of a good whereby one person’s use diminishes other people’s use (i.e. if I eat an apple, others can't eat the same apple)

Non-excludability

not possible to prevent people from consuming the public good

Non-Rivalry

not desirable to prevent people from consuming the good as long as the consumer receives some benefit from consuming the good. People can consume the same good (or bad) at the same time

- property right after purchase

- consumption reduces amout available for others --> rivalry

- can exclude others from consuming it --> excludability

- transferable, low information cost and many producers and consumers

- cannot exclude others --> non-excludability

- consumption by one person does not deplete consumption by others --> non-rivalry

i.e. national defence, lighthouses, police

Quasi public goods (exception) as non-rival up to a point, until congestion occurs (roads i.e. if traffic jam) --> therefore introduction of toll or congestion tax

A free-rider is a person who receives the benefit of a good but avoids paying for it.

i.e. Once a public good is produced, it does not cost anything for others to enjoy it; others can’t be excluded from the benefits of the public good. Thats why the free-rider problem prevents private markets from supplying public goods.

Private goods i.e. clothing

are both excludable and rival

Public goods i.e. national defence

are neither excludable nor rival

Common resources i.e. fish in the ocean

are rival but not excludable

Natural monopolies (club goods) i.e. Deakin webpage

are excludable but not rival

Common resources get used more than is desirable from the standpoint of society as a whole

Common resources tend to be used excessively when individuals are not charged for their usage.

i.e. fish, whales, other wildlife, clean air and water

The Coase theorem is a proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

examines determinants of overall economic activity, unemployment, growth, inflation; Impact of fiscal and monetary policy choices

limited resources, we have to give up something in order to have something else (opportunity costs).

As individuals we face constraints such as limited income and limited time, as an economy --> limited resources and knowledge

this creates scarcity, therefore we face opportunity cost

the value of the best alternative given up when making a choice.

due to scarcity we face trade-off's

The PPF is a boundary that shows the alternative combinations of the two goods that can be produced:

- all available resources are fully allocated
- resources are used in the most efficient way

always downward sloping as resources are limited

if a point is below PPF curve then it is inefficient (but attainable)
if a point is above PPF curve then it is unattainable
--> therefore, trade-off's are faced and decisions must be made

As we move from above to the bottom on the PPF, opportunity cost increases
 

statement is objective in nature, validity can be tested

statement includes value judgement, that can be subjective (should can be a hint)

Private ownership of resources and goods

option to make free choices in self-interest and voluntarily trade through markets

voluntary exchanges in markets make all parties better off, even though each party just looks after their own interest

theory of "invisible hand" --> guiding people to make efficient decisions

opportunity to trade in markets encourages people to specialize
--> focus on producing things at which they are relatively better

mutual gains from trade (baker vs teacher example)

the extra benefit of an action vs the extra cost

marginal cost: minimum supply price

a cost already incurred and cannot be recovered

sunk cost are irrelevant to make a decision

e.g. 20$ film ticket, but film sucks. I could go home and watch a tv show that is worth 10$ to me. since I gain a marginal benefit of 10$ through this and do not incur a marginal cost (0$) as the rest of the movie is worth noting to me, the choice is leaving the cinema

A country has an absolute advantage in a good if its productivity (output per unit of input) is higher

Adam Smith proposed that such reciprocal absolute advantage creates the basis for trade between two countries

comparing the opportunity cost of a good, the one country with a lower opportunity cost has a comparative advantage.

We should always take into account the comparative advantage and not the absolute terms. If one country has smaller opportunity cost, there are good conditions for specializing in a particular good and start trading (theorie by david ricardo). it is not possible to have a comparative advantage in both goods (it is reciprocal)

divide numbers to 1 unit of good