Understanding Economic Concepts: Efficiency, Costs, and Markets

COMM394 ~zýùƷƷ çãýùŰĿ Note: Materials in this review package use the slides from Dr. Isaac Holloway as a reference, and it’s required that you do NOT share this review package with anyone without his permission.

Goals of the government ● Economic efficiency and growth ● Macroeconomic stability ● Fairness ● other social objectives: the promotion of ethics, multiculturalism, Canadian culture, social norms of behavior, etc ● “Government decisions are impacted by electoral pressures, special interest groups, and self-serving bureaucrats”

Costs ● What’s the relationship between opportunity costs and accounting costs? ● How about sunk costs? ● An example for opportunity costs TGIF! A second-year Sauder student, Peter is considering different options to celebrate the weekend. For him, the value of studying for an upcoming midterm is $20, the value of watching Spiderman is $50 but would cost him $20, and the value of chatting with a close friend of his is $30. What is the opportunity cost of watching Spiderman? A. 30 B. 50 C. 20 D.80

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Marginalist principle It’s 2022, the City of Vancouver plans to invest money in both creating a greener city and fighting discrimination and biases towards women, BIPOC, and LGBTQ+ communities. For the former, for every dollar spent on “green”-izing the city, the benefit for the society decreases. For the latter, for every dollar spent on making the city more inclusive, the benefit for the society increases. Recently, given that more and more people acknowledge the benefits of equity, diversity, and inclusion (i.e., EDI) in our current society, the benefit associated with every dollar spent on EDI increases more than before. Given its limited budget, how should the City of Vancouver allocate its budget to align with the marginalist principle?

In Country A, employees could apply for emergency benefits when they’re out of job and they can claim for these benefits for 1 year. To better support the unemployed, country A recently increased its emergency benefits from $2000/month to $6000/month. However, unemployment rate increased, rather than decreased, as a result. Which economic concept is most relevant in this post? A. Opportunity Cost B. Marginalism C. Incentives D. Efficiency

Market Economies ● What is a market economy? ● Two-related concepts ● Two kinds of efficiencies Example1: Please provide your argument for the following statement: Capitalism works better than communism. Use course-related concepts and learning to back up your explanation. Example2: Is a perfectly competitive market Pareto-efficient? A. Yes B. No Example3: Does a monopoly market align with 1st theorem of welfare economics? A. Yes B. No

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Example1: Please provide your argument for the following statement: All governmental interventions lead to market failure. Use course-related concepts and learning to back up your explanation. Example2: Assume that the market is right now Pareto-efficient. Please use graphs and your own words to illustrate the influence of subsidy on consumer surplus, producer surplus, and deadweight loss. How about tax?

● Monopoly ● Oligopoly ● Monopolistic competition ● Cartels

Example1: Please use graphs and your own words to illustrate how minimum wage can reduce DWL under monopsony? Example2: After watching Emily in Paris, Lily bought a bottle of perfume at Sephora. What type of good is a bottle of perfume? A. Search good B. Experience good C. Credence good D. Public good E. Common good Example3: For search good, experience good, and credence good, which one is typically associated with the most amount of asymmetric information? A. Experience good B. Search good C. Credence good

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Example1: A huge musical fan, Matt loves buying plane tickets to watch broadway shows in New York. What type of good is a broadway show? A. Common good B. Club good C. Private good D. Public good Example 2: It’s incredibly hard to protect the environment, because the environment is considered as a ______ A. Common good; B. Club good; C. Private good; D. Public good Goods, goods, goods!

Example 1. Which is not an externality matched to a 3rd party? (*This is a question made by Dr. Isaac Holloway). A. pulp mill effluent—nearby fishery B. fixed location beekeepers—nearby blueberry fields C. wealthy immigrants buying houses—young would-be homebuyers D. carbon emissions from coal burning—residents of Maldives E. Alice’s highway speeding—Bob’s chance of death in accident Example 2: Positive externalities are _____, while negative externalities are _____ A. Underprovided, overprovided B. Overprovided, underprovided C. Underprovided, underprovided D. Overprovided, overprovided Externalities

Example1: Ahhh, it’s midterm season! Is the use of exams “fair” to the students? Please use course-related concepts and learning to backup your argument. Example2: The “footrace metaphor” is used to illustrate: A. Rawl’s theory of justice B. Economic efficiency C. Procedural fairness D. Distributive fairness Example3: Rawl’s theory justice favors _____ in our society. A. The elite B. Everyone C. The disadvantaged D. Middle class Fair or unfair? It’s a great question.

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Example4: Provide your argument for the following sentence. “It is always beneficial and necessary to use public, economic policies to promote fairness in the society”. 6TUVRSTJK HTUVSTUHJKUVWUYZ[YXYZX YZ[YMNFYZ[Y ^_`^^TUVZ[\Z STUJKJKI YZ[YTUV WXYWJK[\][NOPJK\]^\\7 Framing, individual v group fairness, different types of distributive fairness, a deep understanding of Rawl’s theory of justice, fairness v efficiency Fair or unfair? It’s a great question.

Example1: In country A, every single person votes to elect their leader. This is an example of representative democracy. True/False Example2: Direct democracy is preferred over representative democracy. True/False Example3: Voting perfectly reveals aggregate preferences. True/False Example4: According to the Hotelling’s theory, there is ____ difference between the major parties, and the overall platform will gravitate towards the ______ voter. A. Little, mean B. Large, median C. Little, median D. Little, mean Politics

Example4: In light of COVID-19, the Kitsilano community center is pondering upon three choices to help its residents: x, handing out masks for free; y, providing stipends to those who recently lose their jobs; z, buying more beds and medical facilities for the hospitals in the community. Suppose the voting group comprises of 3 people: A, B, and C. Given limited budget, they can only vote for one choice. 1)If we let A, B, and C first choose x or y (i.e., they can only vote x or y), and then these voters choose between the chosen choice (x or y) and the remaining choice (z). Choice ___ will be chosen in the end. Politics

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Example5: There are two parties in country Z: The liberal party and the conservative party. Assume that 51% of the electorate (95 people in total) in 51% of the states elect the liberal party while 100% of the electorate in the remaining states (200 people in total) elect the conservative party. Under the majoritarian electoral system, the winning party is _____; under the plurality electoral system, the winning party is _____. A. The conservative party, the liberal party B. The conservative party, no one C. The liberal party, no one D. The liberal party, the conservative party Example6: Recently, we see an increase in social activist groups in support of a greener, more sustainable Earth. Please provide your comment on this phenomenon from an economical standpoint. Example7: In COMM295, we learned that monopolists gain more profits than perfect competitors. Do your views change following our learnings in COMM394? Explain below. Politics

Environment Reasons behind externalities, the Coase theorem We should eliminate environmental pollution to promote a greener Earth True/False

● Four policy solutions for environmental externalities ● Of the policy solutions that we just discussed, which solutions allow the market to “work out its magic” and which solutions prevent the market from achieving pareto efficiency? ● BC tax Environment

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Q1. What is firm 1’s total cost of abatement? Q2. Explain the dynamic of a tradable pollution permit Q3. How many tradable permits would firm ____ want to buy if the MAC=____, and the universal emission standard is ____? Q4. Suppose again that the equilibrium permit price is $100 and a firm is given 100 permits for free to start with. This firm’s abatement cost curve is 200-2E. The overall cost of compliance for this firm would be ____, the profit of this firm would be _____. Environment

Resource management Hotelling’s rule v Hartwick’s Rule

● Different values from an ecosystem ● Different valuation methods from an econsystem Eco-system valuation methods

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Example1: From an economic standpoint, provide your argument on the US-China trade war. Example2: The pros and cons of a tariff The relevant calculations pertinent to a tariff Trade policy

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Thank you! Best of luck with your exams!

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