ECON 2113 Midterm: ECON 2113 Exam 3 study guide - updated, detailed

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ECON 2113
Dr.Vera Tabakova

ECON Exam 3: Chap. 79 Study Guide Externality: when private costbenefit diverges from social costbenefit Social costs: sum of internal and external costs Internal costs: the costs of an activity paid by an individual engaging in the activity External costs: the cost of an activity paid for by someone else not directly involved in the activity ThirdParty Problems: people not directly involved experience positivenegative externalities Social optimum: the price and quantity combination that would exist if there were no externalities Internalizing an externality: the individual involved in the activity takes account for social costs (or benefits) Coase theorem: If there are no barriers to negotiations, interested parties will bargain to correct any externality Excludability: the good must be purchased before use Rivalry: the good cannot be enjoyed by more than one person at the same time Private goods: Are both excludable and rival in consumption Public goods: Can be consumed by many; difficult to exclude nonpayers from consumption (ex: Public defense, public parks, public fireworks display) Club goods: Nonrival and excludable (ex: Satellite TV, gym membership) Common resources: Rival but nonexcludable (ex: Fishing, hunting (specific animals fished and hunted), public campsites) Free rider: someone has the ability to receive the benefit of a good without paying for it (ex: Letting a classmate do all the work in a group project) Costbenefit analysis: process to determine whether the benefits of providing a public good > the costs Tragedy of the commons: occurs when a rival (but nonexcludable) good becomes depleted or ruined Total revenue: the amount a firm receives from the sale of goods and services Explicit cost: tangible expenses, bills that the owner has to pay; (ex: wages, insurance, ingredients) Implicit cost: opportunity costs of doing business 1. Opportunity cost of capital a. Bought a franchise for a large sum of money. How could the money have been invested otherwise? 2. Opportunity cost of owners time above salary paid 1
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