Please enable JavaScript.
Coggle requires JavaScript to display documents.
Key concepts (6) - Coggle Diagram
Key concepts (6)
Chapter 12
-
-
-
Transaction cost
Costs that impede the bargaining process or the agreement of a contract. They include costs of acquiring information about the good to be traded, and costs of enforcing a contract
-
-
-
Minimum acceptable offer
In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. Generally applied in bargaining situations to mean the least favourable offer that would be accepted
External effect
A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in a contract. It is called an external effect because the effect in question is outside the contract. Also known as externality
-
-
Pigouvian tax
A tax levied on activities that generate negative external effects so as to correct an inefficient market outcome
Social norm
An understanding that is common to most members of a society about what people should do in a given situation when their actions affect others
External benefit
A positive external effect: that is, a positive effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit in a contract. Also known as external economy
Contract
A legal document or understanding that specifies a set of actions that parties to the contract must undertake
External diseconomy
A negative effect of a production, consumption, or other economic decision, that is not specified as a liability in a contract. Also known as external cost, negative externality
Property rights
Legal protection of ownership, including the right to exclude others and to benefit from or sell the thing owned
External economy
A positive effect of a production, consumption, or other economic decision, that is not specified as a benefit in a contract. Also known as external benefit, positive externality
Private property
The right and expectation that one can enjoy one's possessions in ways of one's own choosing, exclude others from their use, and dispose of them by gift or sale to others who then become their owners
Incomplete contract
A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others)
Social dilemma
A situation is which actions are taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals
Missing market
A market in which there is some kind of exchange that, if implemented, would be mutually beneficial. This does not occur due to asymmetric or non-verifiable information
Chapter 12
Adverse selection
The problem faced by parties to an exchange in which the terms offered by one party will cause some exchange partners to drop out. An example is the problem of asymmetric information in insurance: if the price is sufficiently high, the only people who will seek to purchase medical insurance are people who know they are ill (but the insurer does not). This will lead to further price increases to cover costs. Also referred to as the hidden attributes problem (the state of already being ill is the hidden attribute), to distinguish it from the hidden actions problem of moral hazard
-
Public bad
The negative equivalent of a public good. It is non-rival in the sense that a given individual's consumption of the public bad does not diminish other's consumption of it
Patent
A right of exclusive ownership of an idea or invention, which lasts for a specified length of time. During this time it effectively allows the owner to be a monopolist or exclusive user
-
-
Moral hazard
This term originated in the insurance industry to express the problem that insurers face, namely, the person with home insurance may take less care to avoid fires or other damages to his home, thereby increasing the risk above what it would be in absence of insurance. This term now refers to any situation in which one party to an interaction is deciding on an action that affects the profits or wellbeing of the other but which the affected party cannot control by means of a contract, often because the affected party does not have adequate information on the action. It is also referred to as the hidden actions problem
Private good
A good that is both rival, and from which others can be excluded
-
-
Equity
An individual's own investment in a project. This is recorded in an individual's or firm's balance sheet as net worth
-
Collateral
An asset that a borrower pledges to a lender as a security for a loan. If the borrower is not able to make the loan payments as promised, the lender becomes the owner of the asset
-
-
-
Public good
A good for which use by one person does not reduce its availability to others. Also known as non-rival good
Too big to fail
Said to be a characteristic of large banks, whose central importance in the economy insures they will be saved by the government if they are in financial difficulty. The bank thus does not bear all the costs of its activities and is therefore likely to take bigger risks
Asymmetric information
Information that is relevant to the parties in an economic interaction, but is known by some but not by others
Merit goods
Goods and services that should be available to everyone, independently of their ability to pay
-