Fundamentals of Economic Policy Quiz

Positive economics focuses on describing and explaining economic phenomena without making value judgments. It analyzes how the economy works.

Normative economics deals with value judgments, making recommendations based on what should be done. It involves setting goals and evaluating policies based on desired outcomes.

The Pareto Criterion states that a change in allocation is socially beneficial if at least one person is better off and no one is worse off. It emphasizes individual well-being.

A Pareto Optimum is a situation where it's impossible to make anyone better off without making someone else worse off. The Pareto Criterion helps identify such points.

The Kaldor-Hicks Compensation Criterion (KHCC) suggests that a change in allocation is socially beneficial if the gains to the winners could potentially compensate the losses of the losers.

The Timbergen Rule states that an optimal policy requires as many instruments (policy tools) as there are goals or objectives to be achieved.

A situation where it's impossible to make everyone better off without making someone else worse off. This is a key concept in efficiency analysis.

The gains from a change outweigh the losses, even if compensation isn't actually made. This focuses on overall welfare improvement.

A social contract refers to an implicit agreement where individuals give up some freedoms in exchange for security and order provided by the state.

The purpose of the state is to ensure protection of its citizens, provide legal certainty, and manage common goods like infrastructure and resources.

The legitimacy of a state is derived from the consent of its citizens, meaning it's accepted as a legitimate authority by those it governs.

Rawls' principle of justice focuses on maximizing the wellbeing of the least advantaged members of society.

The 'Calculus of Consent' by Buchanan and Tullock argues that uncertainty about future outcomes is beneficial for supporting constitutional provisions that generally benefit everyone.

Arrow's Impossibility Theorem states that it's mathematically impossible to create a social ordering (e.g., using social welfare functions) that satisfies all desirable properties if individuals have diverse and non-comparable preferences.

A single-peaked preference implies that individuals prefer outcomes that are closer to their ideal point, with extremes being less desirable. This helps to ensure a Condorcet winner, a candidate preferred to all other options in pairwise comparisons.

To address the limitations of Arrow's theorem, we can introduce intensity of preferences (how strongly people feel about their choices), rather than just ranking them. However, individuals might have incentives to misrepresent their true preferences.

The idea that the likelihood of a single vote being decisive in an election is extremely low, making the act of voting seem irrational from a purely self-interested perspective.

A type of voting behavior where individuals vote not because they expect their vote to be decisive, but because they derive satisfaction or express their values by participating.

In a pairwise voting system with three or more alternatives, the possibility of voting cycles can occur, where no single option consistently wins against all others.

This theorem suggests that in a single-dimensional policy space with single-peaked preferences, the median voter's ideal position will be the winning outcome under majority rule.

A situation where it's impossible to make at least one person better off without making someone else worse off. It's a benchmark for analyzing efficiency in resource allocation.

This criterion suggests that a change in allocation is socially justifiable if the total gains to the winners outweigh the total losses to the losers, implying a potential for compensation.

The process of making decisions about public policies and resource allocation, often involving voting, compromise, and competing interests.

A legal principle where the party responsible for causing harm (the polluter) is also responsible for paying the costs associated with that harm.

A legal standard where liability arises from a proven act of negligence compared to the common standard of care.

A legal standard where liability is assigned regardless of negligence, meaning the act itself triggers responsibility.

A situation where the cost of damage exceeds the financial resources of the liable party, making them unable to fully compensate for the harm.

Government-mandated insurance to ensure financial coverage for specific risks, protecting victims from financial losses.

When the actions of those affected by a risk (victims) influence the severity of the damage caused by that risk.

A situation where the behavior of individuals changes in response to changes in liability rules, like increased risk-taking with insurance.

Costs or benefits that a decision-maker does not consider when making a decision, but which affect others.

A tax imposed on goods or services deemed harmful to society, often to discourage consumption and raise revenue for related public services.

Type of nudge that aims to influence people's decisions based on their emotions, instincts, and biases.

Type of nudge that focuses on rational thinking by presenting information clearly and providing choices.

A person's internal motivation to pay taxes, driven by a sense of duty, fairness, or civic responsibility.

The ranking of electricity generation units based on their production costs, from least expensive to most expensive.

An approach to policy design that focuses on influencing choices through design, framing, and defaults, rather than direct regulation.

The idea that individuals may feel less compelled to pay taxes if they believe that others are avoiding their obligations.

A situation where individuals may feel more inclined to pay taxes if they perceive a strong connection between their tax contributions and public benefits.

The cost of producing one additional unit of electricity.

The price set for electricity in a market where demand is met by power plants with varying production costs.

A policy mechanism that limits the price paid to power plants, preventing excessive price spikes during high demand.

Financial assistance to power plants with high production costs, aimed at reducing electricity prices.

A policy that sets a maximum price for electricity, with any shortfall covered by the government.

Financial support provided to energy consumers, often based on a specific level of usage.

A graphical representation showing the cumulative share of income held by different segments of the population, ranging from the poorest to the richest.

A measure of income inequality that adjusts income for household size and composition.