Introductory Economics Cheatsheet
Problems by Command 1. Information collection 2. Principal-agent 3. Disagreement among multiple decision-makers. Arrows’ impossibility theorem. Paradox of voting. 4. Enforcement
Coordination by Market
Princes as signals of scarcity/abundance
Induces coordination
Requires much less info
No enforcement costs
No principal-agent problem
No problem with multiple decision makers
Qualification: some command systems exist within a market (eg firms)
Public Good
Has free-rider problem due to non-excludability.
Can only be provided by a coercive authority that can force users to pay for these goods. Taxes.
Collective Goods
Provide benefits for a group.
Cartels and Unions
Has free riding problem.
Prevent by sanctions
Common Resources
Non-excludable but exhaustible
Natural resources goods
Lack of well-defined property rights encourages overuse. The tragedy of the commons.
Solve by asserting ownership rights over common resources.
Coarse theorem
Markets generate themselves for property transfer that internalize externalities.
Adverse selection & Moral hazard
Market price based on expected quality
Reward people for not maintaining quality
High quality sellers drop out
Cycle continues
Market collapse
FDI promotes technology transfer without moral hazard.
Equilibrium – no one has an incentive to change their behavior.
Price ceiling
Cause a shortage due to excess demand
Leads to rationing or preferential allocation, long queues, inefficiency. Those who do get will benefit from the lower prices.
Price floor
Eg Minimum wage
Only those workers who don’t lose their jobs benefit from the higher wages.
Consumer surplus
When price goes down, CS increase due to 2 reasons. Existing buyers pay less. More buyers are able to enter market.
Producer surplus
Markets select low cost suppliers.
Only those whose costs of production are below the market price enter.
When price goes down, ‘marginal seller’ drops out.
When
Coordination by Market
Princes as signals of scarcity/abundance
Induces coordination
Requires much less info
No enforcement costs
No principal-agent problem
No problem with multiple decision makers
Qualification: some command systems exist within a market (eg firms)
Public Good
Has free-rider problem due to non-excludability.
Can only be provided by a coercive authority that can force users to pay for these goods. Taxes.
Collective Goods
Provide benefits for a group.
Cartels and Unions
Has free riding problem.
Prevent by sanctions
Common Resources
Non-excludable but exhaustible
Natural resources goods
Lack of well-defined property rights encourages overuse. The tragedy of the commons.
Solve by asserting ownership rights over common resources.
Coarse theorem
Markets generate themselves for property transfer that internalize externalities.
Adverse selection & Moral hazard
Market price based on expected quality
Reward people for not maintaining quality
High quality sellers drop out
Cycle continues
Market collapse
FDI promotes technology transfer without moral hazard.
Equilibrium – no one has an incentive to change their behavior.
Price ceiling
Cause a shortage due to excess demand
Leads to rationing or preferential allocation, long queues, inefficiency. Those who do get will benefit from the lower prices.
Price floor
Eg Minimum wage
Only those workers who don’t lose their jobs benefit from the higher wages.
Consumer surplus
When price goes down, CS increase due to 2 reasons. Existing buyers pay less. More buyers are able to enter market.
Producer surplus
Markets select low cost suppliers.
Only those whose costs of production are below the market price enter.
When price goes down, ‘marginal seller’ drops out.
When