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University of Texas at Austin
ECO 304L

Econ notes pg. 84-90, 122-125 and chapter 13 84-90 1. Market Failures a. Accurate Information is not widely Available i. Asymmetric information- occurs when one party to a transaction has significantly better information than another party 1. Buy a used car from someone you don’tknow ii. Adverse Selection- type of asymmetric information that occurs when products of different qualities are sold at the same price 1. High Risk people pay more for insuance than low risk people iii. Moral Hazard- an insurance policy or some other arrangement changes the economic incentives we face, thus leading us to change our behavior, usually in a way that is detrimental to the market. b. Problems with Property Rights i. Property rights provide a powerful inentive to use resources wisely ii. Private goods 1. When we consume a private good no one else can benefi from them, airplane ticket iii. Public Goods-goods that one person can consume without diminishing what is left for others. 1. One person watching PBS 2. Free Rider Problem-once a public good has been provided, other consumers cannot be excluded from it, so many people will choose to enjoy the benefit without paying. They will free ride iv. Common Property Resources- “tragedy of the commons” where the tendency is for commonly held resources to be overused and overexploited when owned by the community at large c. There are significant xternal costs or Benefits: Externalities i. External Cost- socially undesireable effect of economic activity such as pollution, overfishing or traffic coestion ii. External Benefits- positive externalities such as education or vaccinations. 122-125 1. Taxes and Elasticity a. On average, families pay more than 40% of their income in taxes (income, property, estate, sales, and excise) b. Incidence of Taxation- who bears the economic burden of tax. The economic entity bearing the burden of tax will depend on the price elasticities of supply and demand c. Elasticity of Tax Burdens i. If
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