Principles of Microeconomics (extension)

• 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