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