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56 Cards in this Set

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The fact that we don't know the outcome or what will happen in the future.
uncertainity
uncertainity to which we can assign a probability
risk
willingness of an individual to assume risk
risk aversion
expected value of an indiv's total utility
expected utility
differences in risk aversion result from
preferences and income/wealth
2 principles of insurance industry:
trading risk can produce mutual gains
some risk can be avoided through diversification
investing to reduce the probability of severe losses
diversification
an info problem when one person has info that another doesn't have
adverse selection (Ron Mexico and AIDS)
an info problem where the tendency to incur risks that you are protected against
moral hazard (car rental insurance)
Solutions to info problems:
1. screening
2. search for more info until MB = MC
you know the characteristics of a good before you buy it
search good
you don't know the characteristics of a good before you buy it
experience goods
you don't know the char. before or after you buy it
credence goods
this occurs when indiv. engage in activities that give them more benefit than cost
efficiency
an inefficient allocation of resources that occurs when the market system produces the wrong amounts of certain goods/services or it fails to allocate any resource to the production of goods and services whose output in econ. justified
market failure
When the market produces the wrong amounts of certain goods or services, it results in
externalites
When the market fails to allocate any recourse to the production of goods and sercices whose output is econ. justified, this concerns
public goods
a cost that is imposed on others without compensating them
negative externality (pollution)
Govt wants to make a polluting firm pay the cost of their activity by:
1. passing legislation
2. tax the firm
Effects of the tax:
reduce damage form pollution, provide an incentive to aviod actions that result in neg. externalities
a benefit that is received from someone else without paying them for it
positive externality
govt tries to encourage positive externalities by:
subsidizing consumers and suppliers and providing the good itself (public good)
govt finances the production of the good
public good
public goods are __________ and offer ___________
indivisible, non-excludible benefits
people who can use public good without paying for them
free rider program
the measure or value upon which a tax in leveled
tax base (income)
the percentage of a tax vase that must be paid in taxes
tax rate structure
total tax paid / total income
av. tax rate
tax rate paid on each additional income earned
marginal tax rate
system where tax rate increases and tax base increases
progressive
system where tax rate decreases as value of tax base increases
regressive (Social Security)
Tax rate remains the same as the value of the tax base increases
proportional (sales tax)
those who benefit from govt supplied goods and services should pay the taxes necessary to finance them
the benefit principle
those with higher incomes should pay more than lower incomes
the ability to pay principle
everyone pays the same %
flat tax
tax people when they buy goods
consumption tax
tax goods at every level of production
value-added tax
set of institutional arrangements and a coordinating mechanism from econ activity
econ. system
consumers dictate what will be produced or not produced
consumer sovereignty (laissez-faire)
individuals own all of the property and resources. econ activity is cooridinated through exchange in the market
both laissez-faire and capitalism
role of govt is to protect pricate property and establish a fair market system
capitalism
public ownership, econ decisions made by centralized planning, firms owned by govt.
communism
private ownership of firms but govt directs production
fascism
govt ownership and highly regulation
socialism
what is US's system?
mix of fascism and socialism
actions taken by households or firms to preserve profits
rent-seeking (tariffs on foreign cars)
cost of lobbying activities (expensive rest. in DC), gamble, distortion of the voting process, loss of consumer surplus
costs of rent-seeking
these operate outside the legal system b/c invasion of price controls and taxes or legal prohibition. These reflect govt interference.
black markets
prices that are not explicit (involve money)
shadow prices
the effort and qualities that win someone over
social price
people marry someone similiar to themselves
assortative mating
in public choice, choices are made by
majority voting
an agent doesn't always act in the interest of the principal
agency problem (stockholder)
the trading of votes on different issues
log rolling
spending projects benefitting residents of a politcians represenative district
pork-barrel spending
results in misallocation of resources
short sightedness effect