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22 Cards in this Set
- Front
- Back
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Monopoly
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single seller, example of market deviation from the competitive equilibrium that’s results in a deadweight loss which reduces consumer surplus.
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Asymmetric Information
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market failure: information about a product or a job may not be equal on both sides of the market. Resulting in a dead weight loss. Transfer from consumers to producers/sellers.
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Consumer Surplus
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Is the difference between the price consumers are willing to pay for a good and what they actually pay
-If demand curve is linear CS is the area above the price curve but below the demand -decreases as price increases |
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Natural Monopolies
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example roads and bridges. Fixed costs are very large relative to variable costs. The average cost is greater than the marginal
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Pareto Efficiency
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when no alternative allocation can make at least one person better off without making anyone else worse off
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Producer Surplus
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If the price charged for the unit is greater than the MC of producing the unit, then there is a net benefit to the producer
Producer Surplus – the difference between the minimum price they can sell for and the price actually charged |
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Discounting
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Future Values (compounding)
FV = X * (1 + i)n Present Values PV = Y / (1 + i)n 1 / (1 + i)n is the present value factor or discount factor |
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Inflation
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Nominal interest rates: interest rates that are not adjusted for inflation
Real interest rates: interest rates that are corrected for inflation Analysts may project benefits and costs in either real euros or nominal euros / real interest rate or nominal interest rate |
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Sensitivity Analysis
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Face uncertainty about predicted impacts and values assigned to them
Most plausible estimates = base case Purpose To show how sensitive predicted net benefits are to changes in assumptions Looking at all combinations of assumptions is infeasible |
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CBA Steps
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Define the problem
Decide whose benefits and costs count Catalogue impacts Estimate costs Estimate benefits Discounting Interpret results Sensitivity Analysis Gains and losses of different groups Make a recommendation |
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Dead Weight Loss
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DWL equals the lost net gains due to a market inefficiency or government policy.
It equals the total net gains under perfect competition minus the total net gains under another market situation |
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Ex Ante
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happens before the project is started and while it is being considered
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Ex Post
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happens at the end of a project, when all costs are sunk
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In Media Res
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Performed during the life of a project
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Marginal Social Cost
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the change in societies total cost for a given change in the total output. Also it equals marginal private cost + marginal social cost
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Government restriction of a monopoly
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Allow the monopoly to max profits by producing at the monopoly level
Require the monopoly to set its price where the average cost curve crosses the demand curve Require the monopoly to set its price where the marginal cost curve crosses the demand curve Require the monopoly to charge a zero price |
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Externalities
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is an effect that production or consumption of a good has on third parties not involved in the production or consumption of the good
Negative externality One that imposes social costs Positive externality One that produces benefits |
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Negative Externality
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Market fails to take account of effect on third parties
Price set too low Too much output produced Deadweight loss Govt option to reduce deadweight loss Producer taxes Pollution permits |
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Positive Externality
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Not enough output produced
Deadweight loss Govt options: Subsidize production of the good Produce some of the good itself |
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Search Goods
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products with characteristics that consumers can learn about by examining them prior to purchasing them
ex. online reviews of dishwasher |
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Experience Goods
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products about which consumers can obtain full knowledge, but only after purchasing and experiencing them (e.g., cinema tickets, restaurants)
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Post Experience Goods
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goods that consumers they may not learn about for a long time, if ever, even after purchasing and consuming them (e.g., adverse health effects associated with a prescription drug or a new car with a defective part
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