Principles of Microeconomics (extension)

• Traditional regulations - command & control (e.g. emission limits, technology standards)
• Economic instruments - market-based-policies (e.g. environmental tax, targeted subsidies, tradable permits, assigning property rights)

Government payments not made in exchange for goods or services (e.g. pensions, education programs, transport, intergovernmental transfers within a federal state)

• Average tax rate: total tax paid per income
  \(ATR=\frac{tax\ liability}{taxable\ income}\)
• Marginal tax rate: extra tax paid on an additional $ of income
  proportional (flat rate) - independent of income
  progressive (common) - increases with increasing income
  regressive: decreases with increasing income
  \(MTR=\frac{change\ in\ tax\ liability}{change\ in\ taxable\ income}\)

• Administrative burden on both sides: tax payers spend time and money documenting and computing taxes, tax authority needs to organize payments
• deadweight loss (in case of competitive market): people allocate resources accordiong to tax incentives rather than the true costs and benefits

1. Equality: each person should pay according to their ability to pay
2. Certainty: tax payers need to know what taxes they need to pay; government should be able to estimate tax revenue
3. Convenience: in order to maximize tax revenue, paying taxes should be simple
4. Economic: tax system must be profitable --> tax revenues > administrative costs

• Benefits principle: people should pay taxes based on the benefits they receive from government services (e.g. tax on petrol --> used to finance road system)
• Ability-to-pay principle: people should pay taxes based on their ability to shoulder the burden
  vertical equity: people with greater ability to pay should pay more
  horizontal equity. people with similar ability to pay should pay the same, regardless of their place of residence

• Quantity where MR=MC
• Price according to demand curve

\(P>MR=MC\)

• Classical monopoly: making monopolized industry more competitive (e.g. anti-trust law)
• Natural monopoly: regulating behavior of monopoly (e.g. price regulation)
• Do nothing at all if market failure is small compared to government failure that would arise when introducing a policy

Situation in economy where no competitor can improve its market position by deviating from its strategy. Arises when interacting actors choose their best strategy given the strategies that all other actors have chosen.

Video with ice cream sellers at beach --> both are in the middle of the beach, back on back

• Cooperative behavior: oligopolists may agree on a monopoly outcome by...
  Collusion: agreement among firms about quantity & price
  Cartel: organization of firms deciding to coordinate their activities explicitly
• Non-cooperative behavior: oligopolists do not know exactly how competitors will (re)act --> game theory

In a two-good economy, the producer who has the smaller opporunity cost in producing a good is said to have a comparative advantage --> he will produce & export the good

Assumptions:

• free trade
• perfect competition
• no tariffs
• constant costs
• no economies of scale

Theory by Krugman that overcomes assumptions of comparative advantage by including...

• increasing return to scale
• network effects
• product differentiation
• imperfect competition

Welfare conclusion on the effect of trade policies can be different

• Framing: how a choise is presented strongly affects our decision
• Anchoring: recently received infomration appears to be relevant for decisions
• Status Quo: preference for familiarity, tendency to resist change
• Sunk cost: continue to do something, just because we've already spent resources on it
• Endowment effect: people give more value to things they own
• Loss aversion: prefer avioding losses to acquiring gains --> explains sunk cost, endowment

• Discounting/present bias: near future rewards are valued higher than more distant
• Limited self-control: tendency to decisions that are not according to our long-run interests (e.g. eat and spend too much insead of exercise and save)

People tend to act fair and seek equity in economic outcomes, altough it does not maximize their utility

Visual model of economy that shows how dollars flow through markets among households and firms.

Graph that shows the combinations of output that economy can possibly produce given the available factors of production (inputs) and the available technology

• Positive statements: statements that attempt to describe the world as it is
• Normaitve statements: statements about how the world should/ought be

• One seller who controls/influences the price
• High barriers to entry

• Few sellers
• Firms control the market
• Product differentiation may exist (does not have to)
• Barriers to entry

• Many sellers
• slightly differentiated products
• Free entry & exit
• Firms have no significant influence on the market
• High cost-price elasticities of demand

Sum of all individual demands for a particular good or service

• Substitutes: two goods for which an increase in the price of one --> increase in the demand of the other (e.g. Pepsi & Cola)
• Complements: two goods for which an increase in the price of one --> decrease in the demand of the other (e.g. coffee & sugar)

• Price
• Price of other goods - substitutes & complements
• Incomes - level & distribution
• Tastes and fashions
• Level and structure of population
• Advertising
• Expectations of consumers

• Price
• Profitability of other goods
• Technology
• Natural & social shocks
• Cost of Production
• Expectations of producers
• Number of sellers