Economics at National University Of Singapore | Flashcards & Summaries

Lernmaterialien für Economics an der National University of Singapore

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Define externality

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An external refers to a byproduct of consumption or production that affects a third-party other than the buyer or seller. It can be positive or negative. 

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What do the demand and supply curves indicate in welfare economics?

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The supply curve is the private marginal cost, or the costs directly incurred by sellers

The demand curve is the private marginal benefit, or the price the buyers are willing to pay

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What is the social marginal cost?

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It is the sum of the private marginal cost to sellers and external marginal cost to society (SMC=PMC+EMC)

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What is the relative levels of social benefit and cost before and after the equilibrium quantity?

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Below the equilibrium quantity, the social benefit exceeds the social cost, vice versa. 

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How is the externality internalized?

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Impose a tax by the amount of the external marginal cost, to shift the supply curve up

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What is the social benefit?

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Social benefit is the sum of the private marginal benefit and the external marginal benefit. (SMB=PMB+EMB)

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Define social benefit

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It is the sum of private marginal benefit and external marginal benefit

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What are some of the policies used to handle externalities?

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Command and control policies -> Limiting regulations, mandate to make a particular technology compulsory.


Market-based policies -> Provide incentives for private decision makers to take into account external cost / benefits of their actions

- Corrective taxes, subsidies

-Tradeable permits

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Define the ideal corrective tax and subsidy

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Tax = external marginal cost

Subsidy=external marginal benefit

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What are the effects of corrective taxes and subsidies?

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1) To align private incentives with society's interests

2) To induce private decision makers to take into account the external costs of their actions

3) To allocate resources more efficiently in the economy

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State the Coase Theorem

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If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own 

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What are the 3 assumptions under the First Fundamental Theorem of Welfare Economics?

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- There are markets and market prices for all goods

- All buyers and sellers are competitive price takers

- Each person's utility depends on his own consumption

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Q:

Define externality

A:

An external refers to a byproduct of consumption or production that affects a third-party other than the buyer or seller. It can be positive or negative. 

Q:

What do the demand and supply curves indicate in welfare economics?

A:

The supply curve is the private marginal cost, or the costs directly incurred by sellers

The demand curve is the private marginal benefit, or the price the buyers are willing to pay

Q:

What is the social marginal cost?

A:

It is the sum of the private marginal cost to sellers and external marginal cost to society (SMC=PMC+EMC)

Q:

What is the relative levels of social benefit and cost before and after the equilibrium quantity?

A:

Below the equilibrium quantity, the social benefit exceeds the social cost, vice versa. 

Q:

How is the externality internalized?

A:

Impose a tax by the amount of the external marginal cost, to shift the supply curve up

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Q:

What is the social benefit?

A:

Social benefit is the sum of the private marginal benefit and the external marginal benefit. (SMB=PMB+EMB)

Q:

Define social benefit

A:

It is the sum of private marginal benefit and external marginal benefit

Q:

What are some of the policies used to handle externalities?

A:

Command and control policies -> Limiting regulations, mandate to make a particular technology compulsory.


Market-based policies -> Provide incentives for private decision makers to take into account external cost / benefits of their actions

- Corrective taxes, subsidies

-Tradeable permits

Q:

Define the ideal corrective tax and subsidy

A:

Tax = external marginal cost

Subsidy=external marginal benefit

Q:

What are the effects of corrective taxes and subsidies?

A:

1) To align private incentives with society's interests

2) To induce private decision makers to take into account the external costs of their actions

3) To allocate resources more efficiently in the economy

Q:

State the Coase Theorem

A:

If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own 

Q:

What are the 3 assumptions under the First Fundamental Theorem of Welfare Economics?

A:

- There are markets and market prices for all goods

- All buyers and sellers are competitive price takers

- Each person's utility depends on his own consumption

Economics

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