Microecon 2023 Exam 2

What is the tax incidence for consumers and producers?

$5.25 = 50.25 per pack • Producers pay into tax: $5.50 - Consumers pay into tax: $6.50-$5.50 = $1.00 per pack

What price to producers receive for cigarettes before and after the tax?

Before the tax, producers received $5.50 per pack. After the tax, producers received $5.25 per pack.

How does a competitive market achieve economic efficiency?

By maximizing the sum of consumer surplus and producer surplus. BUT ONLY IF THERE ARE NO EXTERNALITIES.

What difference does an externality cause?

Causes a difference between the private cost of production and the social cost.

According to the graph below, who is legally obligated to pay for the tax? How can you tell from looking at a graph who is legally obligated?

From the graph below, we know that the supplier is legally obligated to pay for the tax. We can tell based on what moves because of the tax, the demand curve, or the supply curve.

What makes a equilibrium economically efficient?

If economic surplus (sum of consumer surplus and producer surplus) is a maximum.

private cost

Is the cost borne by the producer of a good or service. UNLESS THERE IS A EXTERNALITY, THE PRIVATE COST AND SOCIAL COST ARE EQUAL.

social cost

Is the total cost of producing a good or service, and it is equal to the private cost plus any external cost, such as the cost of pollution. UNLESS THERE IS A EXTERNALITY, THE PRIVATE COST AND SOCIAL COST ARE EQUAL.

Does who is legally responsible for paying a tax (consumers or producers) make a difference to the tax incidence?

No. There is an important distinction between who is legally required to pay the tax and who actually bears the burden of the tax. Tax incidence tells us how the burden of a tax is divided between buyers and sellers in the market. Legal obligation tells us who the revenue is collected from and not how that money was collected between the buyer and seller.

What is the tax incidence for consumers and producers?

Producers pay into tax: $5.50 - $5.25 = $0.25 per pack Consumers pay into tax: $6.50-$5.50 = $1.00 per pack

What does a supply curve represent on graph?

Represents the marginal cost of producing a good or service.

What is meant by tax incidence?

Tax incidence is the actual division of the burden of a tax between buyers and sellers.

What are Pigovian taxes?

Taxes that address externalities and will eliminate deadweight loss and improve economic efficiency.

According to the graph above, what area(s) represent the deadweight loss and government revenue from imposing a tax?

The deadweight loss is represented by area D+ G O Government revenue is represented by area E+B+C+F

Impact of a negative externality in the market:

The market may produce a quantity of the good that is greater than the efficient amount

Impact of a positive externality in the market:

The market may produce a quantity that is less than the efficient amount.

According to the graph below that shows the market for cigarettes before and after a tax o how much is the government tax on cigarettes?

The tax is $1.25 per pack of cigarettes. Remember that the total amount of the tax is the amount the supply curve moves up and NOT the difference between the original price and the current price. Here, we find the correct amount by taking the difference between $6.50 and $5.25.

Conclusion of positive externality

When there is a positive externality in

Can a tax ever make a market more efficient? Why?

Yes, a Pigovian tax that addresses a product that is overprovided by the market due to an externality will increase market efficiency.

Externality

a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service

Price Floor

a government- or group-imposed price control or limit on how low a price can be charged for a product, good, commodity, or service. A price floor must be higher than the equilibrium price in order to be effective.

Price Ceiling

is a government-imposed price control or limit on how high a price is charged for a product. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive.

Give an example of a positive externality and a negative externality

o Positive externality: getting a flu shot will result in a positive externality. The individual getting the flu shot will reduce the likelihood that they themselves get the flu and reduces the likelihood that people not vaccinated will contract the flu. Negative externality: Air pollution. People with asthma may bear a health cost as a results of air pollution even if they did not participate in the activities that caused the air pollution. Note: This is a key point. For something to be an externality, it HAS to involve someone not directly involved in the production or consumption of the good or service that creates the externality.

According to the graph below that shows the market for cigarettes before and after a tax o how much is the government tax on cigarettes?

• The tax is $1.25 per pack of cigarettes. Remember that the total amount of the tax is the amount the supply curve moves up and NOT the difference between the original price and the current price. Here, we find the correct amount by taking the difference between $6.50 and $5.25.