ECO 211 - FINAL EXAM

What happens when there's a negative externality?

A corrective tax in the amount of the marginal external cost of an externality is levied to reduce the equilibrium quantity to the social optimum

________ will vote in favor of the display

Anne: she is willing to pay the most

What two ways do governments respond to externalities?

Command and control policies: the government directly regulates the allocation of resources Market-based policies: the government provides incentives for private organizations to internalize this externality

What's one disadvantage of a command-and-control approach?

Creates few incentives for innovation

What happens when the free market fails to generate maximum social surplus? List three.

Externalities Common Pool Resources Public Goods

In a free market, efficient firms will produce where ________ equals ________

Marginal Cost Marginal Revenue

What's the burden of a tax dependent on?

Price Elasticity

List three approaches supported by economic-based externality theory.

Private bargaining Government command and control Market-based regulatory approach

The U.S. has what type of income tax?

Progressive

Why are externalities called "market failures"?

They cause markets to produce suboptimal social outcomes

_______ is maximized when firms produce at equilibrium in a free market

Total Surplus

Negative externalities impose an additional cost that:

is not explicitly recognized by the buyers and sellers in the market

To reduce inequality and poverty in an economy, the government uses a _________

progressive tax system to fund transfer payments

A​ three-person city is considering a fireworks display. Anne is willing to pay​ $50 to see the​ fireworks, Bob is willing to pay​ $15, and Charlie is willing to pay​ $15. The cost of the fireworks is​ $60. In terms of efficiency, the fireworks _________ be offered.

should Explanation: the cost they're willing to pay is hire than the cost

What are government deficits dependent on?

spending and tax revenue

The government runs a budget surplus when _______

tax revenue exceeds its spending

When bargaining to deal with negative externalities:

the cost falls on the party with the most to gain

Tax incidence refers to _______

who bears the burden of a tax