Economics 201 Exam 3 Toran

Chapter 10 Which of the following is not a negative externality associated with driving cars on new circle road?

Engine repair the driver would be responsible to pay for it

Chapter 7 If the price of the iPhone would had been $250, her consumer surplus would have been $0

If the price of the iPhone had been $250, Melissa would not have purchased one because that price is greater than her willingness to pay. Therefore, she would have received no consumer surplus in this case.

Chapter 10 Suppose that the government decides to issue tradable permits for a certain form of pollution. In terms of economic efficiency in the market for pollution, it does not matter whether the government distributes the permits or auctions them off.

In terms of economic efficiency in the market for pollution, it does not matter if the government distributes the permits or auctions them off, as long as firms can sell the permits to each other. The only difference would be that the government could make money if it auctioned the permits off, thus allowing it to reduce taxes, which would help reduce the deadweight loss from taxation in other markets. Some deadweight loss could also occur if firms use resources to lobby for additional permits.

Chapter 10 Protective function of government

The government's role as the enforcer of property rights and a legal system that allows the enforcement of private contracts, and protection of individuals and their property

Chapter 6 What is the "actual incidence" or burden of the tax to consumers?

$1 per unit - the tax burden to consumers is reflected by the increase in the market price

Chapter 7 If there is only one unit of the good and if the buyers bid against each other for the right to purchase it, then the consumer surplus will be

$10 or slightly less

Chapter 6 What is the dollar amount of excise tax?

$3 - the tax is the distance the supply curve shifts up vertically. We can see this on the Y axis as the difference between p1 and p2

Chapter 10 Suppose that the president of the university of kentucky decides to host a private firework show in his backyard on campus. Assuming that students love to watch fireworks, this would be an example of a positive externality because it...

...is a benefit to a market bystander

Chapter 10 Tradable pollution permits will be more valuable to firms that can reduce pollution only at high costs

An energy company that pollutes will need them much more than an arts and crafts company

Chapter 10 The coase theorem does not apply is transaction costs make negotiating difficult.

According to the Coase theorem, if private parties can bargain over the allocation of resources at no cost, then the private market will always solve the problem of externalities and allocate resources efficiently. Therefore, the Coase theorem does not apply if transaction costs make negotiating difficult.

Chapter 7 The city government of lexington is concerned with both efficiency and equality. They need an economist to help them understand what each of those concepts entail. How would you compare efficiency and equality.

Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society.

Chapter 7 Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyers willingness to pay is positive but less than the marginal seller's cost.

Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus. Producing a quantity larger than the equilibrium quantity results in the value to the marginal buyer being less than the cost to the marginal seller. In this case, decreasing the quantity raises total surplus, and this continues to be true until quantity falls to the equilibrium level.

Chapter 10 In what sense do externalities cause the invisible hand of the marketplace to fail?

Markets fail to produce the maximum total benefit to society when positive or negative externalities are present. Because with externalities, the incorrect amount from societies point of view is produced

Chapter 6 The Kentucky legislature imposed a $10 excise tax on dogs sold in pet stores through professional kennels. The average market price of dogs rose by %8. This implies that the demand for dogs is

Relatively more inelastic than the supply of dogs

Chapter 8 When a good is taxed both buyers and sellers of the good are made worse off

Sellers receive less surplus than they would have without the tax, and buyers receive less surplus than they would have without the tax

Chapter 8 In KY, there is a $.60 tax per pack of cigarettes. The greater price elasticities of demand and supply for cigarettes in Kentucky, the greater the deadweight loss from the tax

The more consumers and producers respond, the greater the deadweight loss.

Chapter 6 Tax incidence

The manner in which the burden of a tax is shared among participants in a market

Chapter 8 When a good is taxed, the burden of the tax falls more heavily on the side of the market that is more inelastic

The more elastic the response, the greater the decrease in the quantity consumed or produced, and thus the greater the loss of surplus to that side.

Chapter 6 Which of the following is not one of the goals of taxation?

To finance political campaigns.

Chapter 6: When the government imposes a binding price floor, it causes a surplus of the good to develop

When the government imposes a legal minimum on the price of a good, this is known as a price floor. if the price floor being imposed is above the equilibrium price, the price floor is binding and causes a surplus in the market

Chapter 10 corrective tax

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.

sin tax

a tax intended to reduce undesirable behavior

Chapter 10 Internalizing the externality

altering incentives so that people take account of the external effects of their actions

negative externality on society

cigarettes drugs

command and control policy vs market-based policy

command and control policy - require or forbid certain behaviors with the goal of addressing an externality market-based externality policies aim to alter behavior through price

Chapter 10 corrective subsidy

government intervention in the form of a transfer payment that is intended to incentivize an increase in a particular economic activity

revenue government is generating

square on graph

Chapter 7 Welfare economics

the study of how the allocation of resources affects economic well-being

Chapter 10 productive function of government

the governments role as the producer of public gods; i.e. goods and services intended to correct market failures

Chapter 8 When a country is on the downward-sloping side of the laffer curves, a cut in the tax rate will increase tax revenue and decrease the deadweight loss

the laffer curve simply illustrates that the optimal tax rate is not infinity

legal incidence

the legal incidence of a tax is the legal obligation of a part to pay the tax. a law stating that the buyer has to pay the tax refers to the legal incidence

chapter 10 efficient scale of provision

the level of provision or a public good where marginal benefit equals marginal cost

Chapter 7 willingness to pay

the maximum amount that a buyer will pay for a good

chapter 10 socially optimal output level

the point at which the production of a good eliminates the allocative inefficiency. This is often done by government policy, and takes into consideration not just the private supply and demand curves, but the social supply and demand curves

Chapter 7 efficiency

the property of a resource allocation of maximizing the total surplus received by all members of society

Chapter 7 equality

the property of distributing economic prosperity uniformly among the members of society

Chapter 6: What is the actual incidence or burden of the tax to producers?

$2 per unit - consumers pay the $1 price increase so producers are left paying the remaining $2 per unit of the tax out of their pockets.

Chapter 6 When a good is taxed, the burden of the tax falls mainly on consumers if supply is elastic and demand is inelastic.

A tax burden falls more heavily on the side of the market that is less elastic because, in essence, the elasticity measures the willingness of buyers or sellers to leave the market when conditions become unfavorable. A small elasticity of demand means that buyers do not have good alternatives to consuming this particular good. A small elasticity of supply means that sellers do not have good alternatives to producing this particular good. When the good is taxed, the side of the market with fewer good alternatives is less willing to leave the market and must, therefore, bear more of the burden of the tax.

Chapter 6 How is the burden of a tax divided?

A tax burden falls more heavily on the side of the market that is less elastic.

Chapter 10 If the production of a good yields a negative externality, then the social-cost curve lies above the supply curve, and the socially optimal quantity is less than the equilibrium quantity.

Because of the externality, the cost to society of producing the good is larger than the cost to the producers of that good. Therefore, the social-cost curve is above the supply curve because it takes into account the external costs imposed on society by the production of the good. This causes the equilibrium quantity to be larger than the socially optimal quantity because the market equilibrium reflects only the private costs of production.

Chapter 7 John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Emily enters the market and begins tutoring as well. How much does producer surplus rise as a result of this price increase?

Between $100 and $200 When the price of tutoring services rises from $300 to $400, producer surplus rises. This increase in producer surplus has two parts: 1. John now receives 400-300=100 more for the tutoring services he was already providing. 2. Emily enters the market and receives a producer surplus somewhere between $0 and $100. Emily's producer surplus cannot be higher than $100 because if it were, then she would've provided tutoring services when the price was only $300. Therefore, overall producer surplus must rise between $100 and $200 when the price rises from $300 to $400.

Chapter 7 If she had bought the iphone on sale for $90, her consumer surplus would have been $110

Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Chapter 7 Melissa buys an iPhone for $120 and gets a consumer surplus of $80 Her willingness to pay for an iPhone is $200

Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. Therefore, you can compute Melissa's willingness to pay in the following way: Consumer surplus = willingness to pay - price $80= willingness to pay - $120 willingness to pay = $200

Chapter 10 which of the following is an example of a positive externality?

Hillary's new cut lawn makers her neighborhood more attractive. A positive externality arises when a person engages in an activity that influences the well-being of a bystander in a beneficial way but that person neither pays nor receives any compensation for that effect. In this case, Hillary having her lawn mowed positively benefits her neighbors by beautifying the neighborhood.

Chapter 7 An efficient allocation of resources maximizes consumer surplus plus producer surplus.

If an allocation of resources maximizes total surplus, we say that the allocation exhibits efficiency. If an allocation is not efficient, then some of the potential gains from trade among buyers and sellers are not being realized. For example, an allocation is inefficient if a good is not being produced by the sellers with lowest cost. In this case, moving production from a high-cost producer to a low-cost producer will lower the total cost to sellers and raise total surplus. Similarly, an allocation is inefficient if a good is not being consumed by the buyers who value it most highly. In this case, moving consumption of the good from a buyer with a low valuation to a buyer with a high valuation will raise total surplus.

Chapter 10 If the government chooses to distribute the permits, the allocation of permits among firms matters for efficiency. False.

If the government allocates the permits to firms that do not value them as highly as other firms, the firms could sell the permits to each other so they would end up in the hands of the firms who value them most highly. Thus, the allocation of permits among firms would not matter for efficiency, but it would affect the distribution of wealth, because those that got the permits and sold them would be better off.

Chapter 6 In response to cheese producers' complaints, the government agrees to purchase all the surplus cheese at the price floor Compared to the basic price floor, producers of cheese benefit from this new policy and tax payers lose.

If the government purchases all the surplus cheese at the price floor, producers benefit and taxpayers lose. According to the graph, producers would produce QS at a price of P1, increasing their total revenue substantially. However, consumers would buy only QD, so they are in the same position as with the basic price floor. Taxpayers lose because they would be financing the purchase of the surplus cheese through higher taxes.

Chapter 10 The government auctions off 500 units of pollution rights. They sell for $50 per unit, raising total revenue of 25,000. this policy is equivalent to a corrective tax of $50 per unit of pollution.

In the case of a corrective tax, the supply curve for pollution rights is perfectly elastic because firms can pollute as much as they want by paying the tax, and the position of the demand curve determines the quantity of pollution. In the case of pollution permits, the supply curve for pollution rights is perfectly inelastic because the quantity of pollution is fixed by the number of permits, and the position of the demand curve determines the price of pollution. Hence, the government can achieve a pollution level of 500 units by setting a corrective tax of $50 per unit or by auctioning off 500 permits.

progressive taxation

means that wealthier people are taxed at higher rates, whereas in this table, everyone has the same tax rate

Chapter 10 Melissa engages in an activity that influences the well-being of a bystander. In order for melissa's activity to give rise to an externality, it must be the case that Melissa neither pays nor recieves any compensation for her activity.

So that someone else gets/pays as a result of her activity

Chapter 10 The externality associated with technology spillovers can be internalized, potentially, through patent protection.

That way, in order to recieve benefits from technology, you must pay a fee to whoever owns the patent.

Chapter 10 Consider two ways to protect your car from theft. The Club (a steering wheel lock) makes it difficult for a car thief to take your car. Lojack (a tracking system) makes it easier for the police to catch the car thief who has stolen it. If a car thief encounters a car with the Club and a car without it, the car with the Club imposes a negative externality on the car without the Club. A policy implication from this result includes a tax on those who use the Club.

The Club conveys a negative externality on other car owners because car thieves will not attempt to steal a car with the Club visibly in place. This means that they will move on to another car. A policy implication includes a tax on those who use the Club.

Chapter 10 Consider two ways to protect your car from theft. The Club (a steering wheel lock) makes it difficult for a car thief to take your car. Lojack (a tracking system) makes it easier for the police to catch the car thief who has stolen it. If a car thief encounters two cars without the Club, but the car thief fears a Lojack system might be installed in one of the cars, the car with the Lojack system imposes a positive externality on the other car. A policy implication from this result includes a subsidy for those who use the Lojack technology.

The Lojack system conveys a positive externality because thieves do not know which cars have this technology. Therefore, thieves are less likely to steal any car for fear that this technology is in place. A policy implication includes a subsidy for car owners that use the Lojack technology.

Chapter 6 If the government places a $500 tax on luxury cars, the price paid by consumers will rise by less than $500.

The burden of any tax is shared by both producers and consumers. The price paid by consumers rises, and the price received by producers falls, with the difference between the two equal to the amount of the tax. Therefore, if the government places a $500 tax on luxury cars, the price paid by consumers will rise by less than $500. The only exceptions would be if the supply curve were perfectly elastic or the demand curve were perfectly inelastic, in which case, consumers would bear the full burden of the tax, and the price paid by consumers would rise by exactly $500. (Note: The fact that luxury cars likely have elastic demand is irrelevant in this case. Even if a good has inelastic demand, the burden is still shared between consumers and producers unless they are in a perfectly elastic or perfectly inelastic situation.)

Chapter 10 Suppose that a University of Kentucky MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies to the University of Kentucky for MBAs, then which of the following statements is correct?

The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs. There will be no benefits out there to society that are not able to be earned by the holder of the MBA degree.

It is illegal to buy cigarettes in Kentucky and drive to New York and sell them. Why would anyone want to do this?

The excise tax rate for cigarettes is much higher in New York than in Kentucky - New York imposes a $4.35 per pack excise tax on cigarettes, while Kentucky imposes only a $.60 per pack excise tax on cigarettes.

Chapter 6 Producers of cheese complain that the price floor has reduced their total revenue. That is possible if demand is elastic.

The farmers' complaint that their total revenue has declined is correct if demand is elastic. With elastic demand, the percentage decline in quantity would exceed the percentage rise in price, so total revenue would fall.

Chapter 6 Suppose that the equilibrium price of an eye exam, (to check your vision) by an eye doctor is $100. Suppose that the government imposes a price ceiling of $75 for eye exams. As a result of the price ceiling

The quantity demanded of eye exams increases and the quantity supplied of exams decreases, resulting in a shortage.

Chapter 10 In a market economy, government intervention may improve market outcomes in the presence of externalities.

There must be a solution that public intervention can feasibly implement

Chapter 6 Economists have argued that rent control is "the best way to destroy a city, other than bombing." Why would economists say this?

They anticipate that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city.

Chapter 10 Which of the following statements about corrective taxes is not true?

They cause deadweight losses. When the government levies a corrective tax in the presence of a negative externality, it increases the price paid by consumers, reduces the quantity sold in a market, and raises government revenue. Although many kinds of taxes distort the market and cause deadweight losses, corrective taxes alter incentives that market participants face to account for the presence of externalities and, thereby, move the allocation of resources closer to the social optimum, which reduces the deadweight loss already present with the negative externality. Additionally, economists usually prefer corrective taxes to regulations as a way to deal with pollution because they can reduce pollution at a lower cost to society.

Chapter 6 When hurricane Sandy hit the Jersey Shore, there was a shortage of gasoline. Many consumers were forced to wait in line at the pump. The local government considered imposing a price ceiling on gasoline temporarily. Why might they do this?

To decrease the price of gasoline

Chapter 10 Allocative efficiency and market failure

When the costs/benefits faced by the producer/consumer, but impact the rest of society. This results in an allocative inefficiency because either too much or too little is produced

Chapter 6 In a market with a binding price ceiling, an increase in the ceiling will increase the quantity supplied, decrease the quantity demanded, and reduce the shortage.

When the government imposes a legal maximum on the price of a good, this is known as a price ceiling. If the price ceiling being imposed is below the equilibrium price, the price ceiling is binding and causes a shortage in the market. An increase in the price ceiling will raise the market price. This will lead to an increase in the quantity supplied and a decrease in the quantity demanded, thereby reducing the shortage.

Chapter 6 Suppose the demand for classical music concert tickets is downward sloping and the supply of classical music concert tickets is upward sloping. Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. Suppose the demand for classical music concert tickets is downward sloping and the supply of classical music concert tickets is upward sloping. Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. $30 = same $40 = same $50= fewer

When the government imposes a legal maximum on the price of a good, this is known as a price ceiling. If the price ceiling being imposed is below the equilibrium price, the price ceiling is binding and causes a shortage in the market. So, if the equilibrium price is $40 or below, a price ceiling of $40 is not binding and has no effect on the number of people attending musical concerts. However, if the equilibrium price in the absence of price controls is above $40 per ticket, then imposing a price ceiling of $40 will cause quantity demanded to exceed quantity supplied, causing a shortage of tickets and a decrease in the number of people who attend classical music concerts.

Chapter 6 The government has decided that the free-market price of cheese is too low. The following graph shows the market for cheese and two possible price controls at P1 and P2. If the government wants to impose a binding price floor in the cheese market, it should set a price control at P1. With the price floor, there is a surplus of cheese.

When the government imposes a legal minimum on the price of a good, this is known as a price floor. If the price floor being imposed is above the equilibrium price, such as P1 , the price floor is binding and causes a surplus in the market because quantity supplied is greater than quantity demanded.

Chapter 10 When the government levies a tax on a good equal to the external cost associated with the goods production, it increases the price paid by consumers and makes the market outcome more efficient.

When the government levies a corrective tax in the presence of a negative externality, it increases the price paid by consumers. Although many kinds of taxes distort the market in a negative way, corrective taxes alter incentives that market participants face to account for the presence of externalities and, thereby, move the allocation of resources closer to the social optimum. Thus, while corrective taxes raise revenue for the government, they also enhance economic efficiency.

benefits to taxing

generate revenue for government protectionist trade policy to alter a behavior or activity that generates negative externalities

Chapter 6 3 reasons for taxation

generate revenue for new government protectionist trade policy (tariff) alter behavior or activity that generates negative externalities

Chapter 10 Government corrections for market failures

intervention that is intended to correct allocative inefficiency, i.e. the production of goods or services, and/or the implementation of taxes or subsidies in order to achieve economic outcomes that the private market will not produce on its own

marginal social cost vs marginal private cost

marginal social cost is greater than marginal private cost

laffer curve

shows the relationship between the size of a tax and the amount of revenue the government generates from the tax

find tax rate

take what you pay in tax divided by what you earn will tell you your tax percentage

costs to taxing

tax revenue to government (which is removed from tax payers) administrative costs loss of consumer and producer surplus (deadweight loss)

Chapter 7 consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Chapter 7 producer surplus

the amount a seller is paid for the good minus what the seller's cost to produce it was

Chapter 10 Transaction costs

the costs that parties incur in the process of agreeing to and following through on a bargain

Chapter 8 Deadweight loss

the fall in total surplus that results from a market distortion such as a tax

Chapter 10 Coase Theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities of their own

coase theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

deadweight loss

the size of the deadweight loss is determined by the price of elasticities of supply and demand. since the demand is more elastic it will cause a larger deadweight loss.

Chapter 10 special interest effect

the tendency for special interests to mobilize in order to influence government policy to win special favors or privileges

Chapter 10 externality

the uncompensated impact of one person's actions on the well being of a bystander

Chapter 7 cost

the value of everything a seller must give up to produce a good

Chapter 6 Farmer Wendell lives outside of Lexington and grows corn. The state of Kentucky is considering whether or not to enact a new agricultural price support for corn. If the state does enact a binding price floor...

then farmer wendell will most certainly receive a higher price for his corn.

recently you have noticed more people riding around campus on segways without handlebars. when they turn corners quickly they run people off the sidewalks and sometimes knock people over. This activity leads to a type of market failure in the handless segway market. What is the economic term we use when describing this problem? Propose one policy solution to deal with this problem Is the policy you proposed a command and control or market based policy?

this is a negative externality because the 3rd party (one's getting hit by people on segway) are experiencing a cost. The marginal social cost > marginal private cost the policy to deal with the problem is prohibiting segways from being on the sidewalk, so that the externality does not occur. command and control

positive externality on society

vaccines education

chapter 10 lack of information/asymmetric information

where one party in an economic exchange, either the buyer or seller has more information than the other party