Chapter 5

-Stocks- Shares of ownership of a corporation

-Bonds- Promises to repay a loan
-Corporations- Limited liability, Tech advancements. Double taxation- corpate profit
that is shared among stockholders is taxed twice
-Principal- agent problem: Principals are stockholders, agents run the companies.
There are different interests.
-Government Intervention- Provides legal framework. MB= MC. Little regulation is
when MB> MC. Too much regulation MB<MC. 3 strategies- Transfer payments
(welfare, food stamps), Market Intervention (Modify prices), Taxation.
-Market failure- Produces the wrong amounts of certain goods or services, fails to
allocate any resources to production of goods or services.
-Spill over occurs when some of the costs or benefits of a good are passed
on to some other than the immediate buyer or seller (Also known as
externalities) - Third party individuals.
EX: Pollution = Spill over costs/ Negative externalities (Overallocation of
resources), Price too low and output is too large b/c supply curve moves up (The
firm avoids costs by polluting). You want to tax them, so decreases supply.
Corrections of this
1. Legislation/ direct controls- reduces output. Raise MC of production because
firms must operate and maintain pollution control equipment.
2. Specific taxes- changes price
Spill over benefits/Positive externalities. (Underallocation of resources)Immunization, education. Demand decreases, small amount, lower price.
Corrections of this
Subsidies- Consumers, suppliers. (Ex: coupons, Lowering taxes)
Government provision- large spillover benefits, gov may decide to provide product
as a public good.
Individual bargaining
Private good tests- rivalry and excludability. Rivalry= when one person buys and
consumes a product, its not available for purchase and consumption by another
person. Excludability means- buyers who are willing and able to pay obtain benefits.
Public goods- nonrivalry, non excludability. Free-rider problem- people can receive
benefits.

Chapter 30
In a supply demand curve, demand is marginal benefit. Supply is marginal cost.
Coase theorem- government is not needed where property ownership is clearly
defined, the number of people involved is small, and bargaining costs are
negligible.- Cut forest, forest surrounds a popular resort. They can resolve them
itself. The resort owner might be willing to pay the tree cutting company money.
Tragedy of the commons- air, rivers, lakes, coeans, public lands are all
owned by common people. Private companies dont have monetary
incentive. They have no incentive dealing with costs to stop shit like
pollution.
Moral Hazard problem: Tendency of one party to contract or agreement to alter
her or his behavior after the contract is signed in ways that could be costly to other
parties= under allocation of resources. Ex: Insurance provides money for divorce,
then couples would go out of their way to get divorces. Means that insurer has to
charge high premiums and few policies would be bought.
Adverse Selection Problem: information known by the first party to a contract or
agreement is not known by the second, as a result the second incurs major costsArises AT THE TIME YOU SIGN A CONTRACT, NOT AFTER. Those who are super sick
get insurance then.
Cost Benefit Analysis: Everything has a cost and a benefit. TB-TC= positive
and largest amount.

Chapter 31
1. Progressive taxes: average RATE INCREASES AS INCOME INCREASES, income
tax, federal tax system
2. Regressive: average rate declines as income increases, Sales tax, payroll
taxes (Social security and medicare), property taxes, state tax system
3. Proportional- Average rate remails the same, corporate income tax
Chapter 34
Lorenz Curve- Distribution of personal income- quintile (20%). Straight line- pefect
equality.
GIni ratio- Area between Lorenz curve and diaglona/ total area below the diagonal.
Income equality= 0, complete inequality= 1.