econ exam 2

how to get an effecient outcome from when an externality has caused market failure

(private solution to externality) internalize the externality (make whoever is ignoring the social effect of their decision take the costs and benefits of their decision into account)

minimum wage

- creates productive ineffeciency because their are ppl that would have worked for less but can't, so their job never gets created

why arguments against minimum wages are wrong

- only a relatively small part of the population rely on the minimum wage -research that shows that unemployment hasn't decreased only analyzes the hours worked in the labor market, when they should be looking at the number of employed ppl. (their could be more employeement, some ppl could just be working part time) -cash wages are only part of compensation -the real world is more complicated than the supply and demand schedule for labor, the change in equilibrium quantity of labor relative to change in wages would be gradual - minimum wage jobs are not only fulfilled by people who need money, a-lot of mimimum wage workers are teenage kids, who take the jobs from people who need them, because there are now less jobs being supplied

government policies to internalize the external costs of driving

-CAFE (makes rules about how fuel efficient a car makers' fleet has to be on average.When these rules are tightened, they only effect new cars, so there's a very slow transition over a number of years before the entire car population meets the standards) -Taxes (Vehicle use fees are usually annual taxes which can be based on the weight of the car, it's engine size, carbon dioxide emissions or fuel usage, but more often they're based on the value of the car instead, so an effecient expensive car gets taxed more than an inefficient unexpensive car) - Gasoline taxes Most effiecient(account for both the efficiency of the vehicle and how much it's being used,

hree key roles that prices play in markets

-Prices aggregate information. -Prices are signals. -Prices create incentives.

public goods

-Type of positive externality problem -non-rival(one persons consumption doesn't impact another -non-excludable(u cant exclude ppl from using it once its been created) - best example is national defense, My enjoyment of freedom does not reduce urs(non-rival) You cant stop someone else from enjoying it

Externalities

-can be negative or positive -costs (or benefits) that affect someone not directly involved in the consumption or production of a good. (ex. Pollution, antibiotic use side effects) private costs and benefits vs. social costs and benefit -think abt private costs and benefits vs social costs and benfits -private costs are the costs of producing the goods (production costs) -social cost is the total cost of producing the good (external costs+private costs)

price floor

-creates surplus. -Consumer surplus decreases to triangle above price and below demand curve. -Producer surplus becomes the area of the trapezoid below price to the left of new quantity

for the labor market when dealing w minimum wage

-demand represents companies -supply represents workers -at minimum wage, quantity supplied of workers is more than qd , causing surplus

reasons for market failure

-externalities -government failure -market power -asymmetric information(private information) -irrationality

private goods

-goods that are both rival and excludable(food ,clothes, gas) If u use them someone else cant ( excludable in the sense that u have to pay for them)

Why rational ignorance matters

-if voters are ignorant of the issues, they cannot make informed choices -voters will often make decisions based on low quality, unreliable or biased information -not everyone is rationally ignorant: special interests

price ceiling

-maximum price -the price ceiling must be set below the equilibrium price -decreases qs -increases qd -causes a shortage -consumer surplus is the trapezoid under the demand curve and above price -deadweight loss is are the trades that would have happened w/out the implement of price controls. ppl want to trade off for more than the market supply, but this cant happen bcuz of the price ceiling, that economic surplus

price gouging laws

-place a temporary ceiling on the prices that sellers can charge during times of emergency -cause misallocation (generators aren't going to ppl w the highest willingness to pay) -ppl that get a good when there is a shortage due to the price ceiling are winners of the price ceiling -the artificially low price leads to overconsumption and underprovision, and deadweight loss -free parking has a price ceiling of zero (there is a huge shortage and people end up paying with their time, which is valued at the willingness to pay that you have for the next best thing you would have done with your time)

price controls: price floors and price ceilings

-price floors: minimum price -price ceilings: maximum price

voters and the incentive to be ignorant

-regarding politics- studying poltician's has little concrete payoff because your vote means so little -if ur prof says that test grades wont be off individual performance, just the average of your class, then you will have less incentive to study because the hour spent studying that would have raised your grade ten points is now only going to raise your grade by (10/# of people in your class) -two biggest government programs are defense and social security

price controls cause

-shortages, lineups, delays, quality reductions, misallocations, bureaucracy, and corruption. -An economy with permanent, universal price controls is in essence a "command economy,"

problems w price ceilings

-surpluses -and reductions and quality (landlords have incentives to lower production costs) -search costs(shortages cause ppl to look for longer and greater discrimination between buyers) -misallocation (there is no way to see that the ppl who value the product most get it because their is no way to determine willingness to pay. they encourage overconsumption, if its cheap to buy more stuff, you will over use things)

ppl better off from price ceiling

-those who got apartments at a lower price -price ceilings cause inefficiency

rational ignorance

-when incentives to be informed are less than the costs of being informed, a person may be rationally ignorant -when the oppurtunity cost of becoming informed about something is too high to be worthwhile, while the benefits that other ppl (lobbyists and special interest legislation) get from being informed. Usually a consequence of diffused costs

critiques of economic efficiency

1. Distribution matters so its important to account for equity 2. Willingness to pay reflects ability to pay, not just marginal benefit (kim k is willing to pay three times as much as you not because she has more marginal benefit, but because she has more money) 3. judgments based on economic efficiency focus only on the consequences of a policy, and not on the process that led to that outcome

reasons why we tax

1. Raising revenues 2. Transfer payments 2. Financing operations of the government 4. Correcting Market Failures

Why do governments levy taxes?

1. Raising revenues 2. Transfer payments 2. Financing operations of the government 4. Correcting Market Failures (excise taxes)

A tariff on imports will

1.↑Price, which will: 2.↓Quantity demanded by domestic buyers and ↑Quantity supplied by domestic sellers, 3. Causing ↓imports.

Diamond-Water Paradox

A paradox stating that (1) the things with the greatest value in use frequently have little or no value in exchange and (2) the things with the greatest value in exchange frequently have little or no value in use.xf

allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

pigouvian subsidy

A subsidy in the amount of the external benefit. works for positive externality. shifts marginal benefit curve (demand) and causes the market to produce at the social equilibrium. Causes producers to produce at the new equilibrium

proportional tax

A tax in which the average tax rate is the same at all income levels.

Tarriff

A tax on imported goods

equity

An outcome yields greater equity if it results in a fairer distribution of economic benefits

how to solve trajedy of the commons

Assign ownership rights, Ownership rights can help by facilitating successful private bargaining.The new owner of the commons might sell the right to graze to shepherds with limits on their maximum number of sheep. Importantly, that owner would be careful not to overgraze the common, because doing so would only undermine her ability to sell grazing rights again next year. The costs and benefits of grazing on the commons become the owner's costs and benefits, leading them to effectively internalize the externality.

What is the difference between an average tax rate and a marginal tax rate?

Average tax rates measure tax burden, while marginal tax rates measure the impact of taxes on incentives to earn, save, invest, or spend.

deadweight loss from a tariff

B+D (the transactions that are lost because American consumers are forced to buy steel t higher prices than the market equilibrium at free trade, total welfare id produce. Bi snot included because the government revenue accounts for the economic surplus that is lost)

Why are externalities considered a cause of market failure?

Because they lead to suboptimal outcomes.

excise taxes

Excise taxes are most often levied upon cigarettes, alcohol, gasoline and gambling. These are often considered superfluous or unnecessary goods and services. To raise taxes on them is to raise their price and to reduce the amount they are used. In this context, excise taxes are sometimes known as "sin taxes."

There are three facts about public goods you should know.

Fact one: Just because the government provides it, doesn't mean that it is a public good. Fact two: Just because something is a public good doesn't mean that the government should fund it. Fact three: Just because the government should fund a public good, doesn't mean that the government should provide it.

What example did George Akerlof use to illustrate the potential problems of asymmetric information in his Nobel-Prize winning paper on the subject?

He used the market for used cars as an example for the potential problems of asymmetric information

how a tax influences the supply curve

If the government increases the tax on a good, that shifts the supply curve to the left, the consumer price increases

The Coase theorem states that (mechanism to private solutions to externalities)

If transaction costs are low, private barganining will lead to an efficient solution to externalities . if property rights are clearly assigned and transactions costs are low and there is full information. By paying your neighbor for quiet, you effectively raise the opportunity cost to them of playing loud music because that would mean forgoing your $5 side payment.

price controls

Price controls are a very blunt instrument. They destroy productive exchanges between people who want to purchase an item and those who want to sell it at a price that the government says is against the law. They lead to misallocation of resources, long lines, and black markets.

internalizing the externality

Private bargaining Fix the price: Corrective taxes and subsidies Fix the quantity: Cap and trade Laws, rules, and regulations Government provision of public goods Assign ownership rights

comparative advantage

Rather than thinking about them as a zero-sum competition in which your gain is my loss, the logic of comparative advantage shows how they can enable a win-win outcome for both buyer and seller.

Why might an efficient outcome be reached even without Coasian bargaining?

Social norms can lead people to consider the impact on others, even without bargaining and payments.

calculating comparative advantage

Step one: Determine how long each task would take each person (as in the top panel of Figure 1). This measures the cost of producing each good, in hours. Step two: Convert this into a measure of opportunity cost, by calculating how much of the alternative good you could have produced in that time. Step three: Evaluate who has a comparative advantage at each task by assessing who can produce each good at the lowest opportunity cost.

problem with command approach to internalizing externalities

The problem here is that the government may not have complete information on the best method to achieve the goal, so their may be forcing people to use the least effecient method to solving a problem, when the producers creating the externalities are forced to use a certain method to internalize it, they have no incentive to look for more efficient approaches

Katie is much faster than her husband, Brett, at putting up a tent and starting a fire. Who should take care of these tasks on their camping trip if they want to maximize their time sitting around a campfire?

They each have a comparative advantage in a particular task, and they should focus on doing that. Katie can help Brett when she finishes her task.

Lawsuits, norms, and social sanctions are like corrective taxes.

This is easiest to see when you realize that the damages that courts award are effectively a corrective tax

Theft of Game Act 1991

This policy allowed for private ownership of any wild animal that could be identified according to certain criteria such as a brand or ear tag. The combined effect of market pricing through auctions and the creation of stronger property rights over rhinos changed the incentives of private ranchers. It now made sense to breed rhinos rather than shoot them as soon as they were received.

bargaining to solve externalities

We've already seen that externality problems typically lead markets to fail to achieve the socially optimal outcome, so everyone should be motivated to achieve that better outcome

What aspect of a public good causes the demand curves to be summed vertically instead of horizontally?

Whether we sum vertically or horizontally depends only on whether the good is rival in consumption.

positive economic analysis

a description and explanation of facts and cause-and-effect behavioral relationships (describing what is happening, or explaining why or predicting what will happen)

Quota

a limit on the maximum quantity of a good or service that can be sold. The quota is the quantity at the social equilibrium. Your choice between corrective taxes or quantity regulation depends on the information you have. If you know the marginal external cost, then use it as the basis for setting your corrective tax and the market will find the socially optimal quantity. And if you know the socially optimal quantity instead, use that in setting your quota.

individual transferable quotas(virtual property right)

a set amount of a common resource that the government distributes that can be sold or traded down the line. Since their quotas have value(bc they can sell them) the ppl that would generally overuse common resources will try to abide by their quotas because if the good runs out then their quota will be worth nothing, so the ppl that are given a quota generally try to abide by them. this can be observed in a farm, the farmer benefits from the crops that they sell and the value of their land in the future, if they don't take care of their land it's worth less and less

Externality

a side-effect of an activity that affects bystanders whose interests are not taken into account.

Autarky

a situation in which a country does not trade with other countries

pigouvian tax

a tax on a good with external costs that is equal to the amount of the external costs. FOrces the taxed to internalize the externality. forces the buyer and the seller to pay the full cost (social cost) their transaction and thus lower the equilibrium quantity

a tariff is

a tax on the world price of a product (at every quantity of an import, the product gets $T more expensive)

how to find demand curve for public goods

add up individual demand curves (ex. if carlos is demand curve is P= 2- Q and Brianna's is P=3- 2Q then the market demand curve for the public good is P=5-3Q. here u explicitly find their WILLINGNESS TO PAY because they will never actually pay for this good due to it being public good

Marginal Tax Rate (MTR)

additional taxes you pay on every extra dollar earned

laws against price gouging after natural disasters

after a natural disaster, their is a great shortage of supplies. So the government sets a price ceiling for . in a normal market, the increase in demand for would lead to an increase in price signal to the suppliers that they need to raise supply. The new higher equilibrium price would cover the higher marginal price of transporting a good during a natural disaster. However w price gouging laws in effect: - suppliers will not supply more because they can't charge more to cover their increased marginal cost of getting goods out during a natural disaster

analysis of supply and demand is a positive analysis because

analysis of supply and demand is quantifiable

how economics defines what is best for society

any trade that increases total surplus is a good trade (buying or selling goods and services isn't a zero sum game)

public choice

applies economic analysis to the government

empirical analysis

ask yourself; compared to what (this makes the price of something equal to its next best alternative)

tragedy of the commons solutions

assigning property rights or assigning individual transferable quotas

Public Choice: rent-seeking behavior, special interest legislation, diffused costs, concentrated benefits

attempts by individuals and firms to use government action to benefit themselves at the expense of others. Rents are profits in excess of the competitive markets. Special interest legislation is the legislation that heres from these special interest groups because the politician may be taking bribes, contributing to their campaign, or gaining the support of an industry. The politician isn't bombarded by ppl who are mad at them because of diffused benefits costs to consumers and concentrated benefits to producers. Because the producers get all the gains from the special interest legislation, while the consumers only a portion of a higher price (because they may have to pay a less efficient price) the consumers don't care enough to put up a fight

Usually, the marketplace decides how the tax burden is divided between buyers and sellers

based on which party is more sensitive to changes in prices (economists call this "relative price elasticities").

why is the supply curve a marginal cost curve

because the minimum that a supplier is willing to accept just covers their costs including oppurtunity costs

externalities from driving

benefits of driving: getting where u want to go costs: getting into an accident, gas, wear and tear. You make the decision on how much to drive when the marginal costs and benefits are equall

buyers and sellers bear the economic burden of tax on...

buyers

to determine who is better off from a tariff

compare producer and consumer surplus

how to put a price on driving when there is no market for it

congestion pricing or even pay as you drive policies

proportional tax code

constant average rates

tariffs on factors of production

costs jobs as the price of producing the good rises, so putting a tarrif on an import to save one industry will cost jobs in industries that buy those goods as a bigger proportion of the budget is spent on inputs

price ceiling

creates shortages

regressive tax

decreasing average rates (lower your income, the higher your taxes

market demand

determines prices, so individual demanders usually pay the market price which they had little influence in.

marginal tax rates

effect decsions, because decision are made on the margin

the concept of normative and positive economic analysis is closely tied to the core idea of economics; the tradeoff between efficiency and equity.

efficiency insinuates that you can't make yourself better off without making someone else worse off. Efficient work gives you the largest economic surplus, but it doesn't tell u how this surplus is divided up. We describe efficiency using quantities that involve positive analysis. Equity is the desire for fairness, which involves normative analysis in that you have to ask yourself if you would PREFER to be fair

who really pays the cost of payroll taxes

employees pay almost the entire cost of payroll taxes

the statuary burden of social security is split evenly between employers and workers

employers and workers

no deadweight loss at

equilibrium

public goods

face the challenge of not making any money (free-rider problem- individuals have no incentive to pay for a public good) No company would provide a public good so the gvnmt provides them.

the entire incidence of a tariff

falls on American consumers as foreign producers get the same world price and American producers don't have to supply at such competitive price, thus increasing their total revenue

Efficiency Criterion

favors the economic value that is most in surplus, and they might not make everyone happy (ex. I could have a million dollars and you could be starving)

payroll taxes are used to

fund social security programs -12.4% to fund social security -2.9% to fund medicare -the 13% is diveded evenly between workers are employers

All of the solutions to externality problems involve:

getting buyers and sellers to consider marginal external costs and benefits.

common resources

goods that are rival in consumption but not excludable, -Fish in the ocean is the best example. Its not excludable bc u cant keep ppl from fishing, but its semi-rival because there are only so many fish in the ocean -have private gains but shared costs (you gain privately from eating the fish, but the whole world shares the cost of that fish because it is a rival good) -tragedy of the commons- the tendency to overconsume a common resource

special interest groups

have a strong incentive to be rationally informed relative to consumers because their concentrated benefits are much higher than the diffused costs paid by consumers

marginal private cost

how much each additional unit of a good costs the producer w/o accounting for external costs

marginal private benefit

how much each additional unit of something is benefited, without considering the social benefits (ex. How much someone values listening to music in the park w/o considering how much value others get from hearing their music)

relative elasticities when deciding who will pay more of a tax

if both supply and demand are elastic, then the more elastic one will find it easier to escape the tax

When does it not matter that a price floor or ceiling has been introduced?

if the market price is above the price floor or below the price ceiling

concentrated benefits and diffused costs

if you've ever had the thought, probably when you were younger, "if everyone in this town would just give me a dollar, they'd barely notice it but I'd have a ton of money," then you understand concentrated benefits and diffuse costs. When benefits are concentrated and costs diffused, resources can be wasted on projects with low benefits and high costs

goods aren't particularly non-rival or non-excludable

in marginal increments, a good or service can become more rivalrous or excludable (ex. in theory a beach is a public good, but in reality, the more ppl show up at the beach, it becomes a rivalrous good bc ur benefit decreases w every person that shows up)

companies with price floors that want more customers but can't lower price

increase quality

subsidies

increase the quantity demanded and the quantity supplied, they lower the price buyers pay and increase the price buyers recieve

private bargaining to decrease external costs

increases economic surplus, More generally, if loud music—or any negative externality—harms you more than it helps those creating it, there's a price you'll be willing to pay that'll successfully induce them to make a more considerate choice. With positive externalities, you follow a similar logic. If someone has the opportunity to make a choice that would benefit you, then you could pay them to do it.

red tape on an import

increases trade costs, raising the price of import. This reduces the QD and raises the QS by domestic Producers

progressive tax codes

increasing average rates(higher your income is the higher your rates are)

types of taxes

individual income tax payroll taxes corporate income taxes sales tax (local and state decide) property taxes(local and state decide)

the loss of consumer surplus due to a

is much more than the gains to producers

marginal tax rate for a flat tax is

is zero

payroll taxes being paid for completely by employees

it masks the principle of tax transparency: a tenet that states that tax burdens should not be hidden from tax payers in complex structures. Because roughly half of the payroll taxes that fund Social Security and Medicare are hidden in the form of lower wages, rather than being entirely spelled out on our pay stubs, voters may underestimate the true budgetary impact of these social programs.

deadweight loss from overproduction

lost economic surplus from overproduction

deadweight loss from underproduction

lost economic surplus from underproduction

world price is always...

lower than the price in America, otherwise America would start exporting

inelastic supply

makes it difficult for suppliers to escape a tax

marginal social costs (true costs)

marginal private costs+ marginal external costs

negative externalities deal with the_______ while positive externalities deal with the_______

marginal social cost, marginal social benefit

When externalities are present, the socially optimal outcome occurs where the _____ benefit equals the _____ cost.

marginal social; marginal social

marginal social benefit

market marginal benefit (summation of all the individual marginal benefit)

cap and trade system

market-based pollution control system in which the government sets an overall limit on how much of a pollutant is acceptable and issues vouchers to pollute to each company, which companies are then free to trade

at market efficiency

markets will only produce up to the amount where marginal benefit is equal to marginal costs. And markets will allocate goods to those with the greatest willingness to pay and marginal benefit -Markets distribute production across firms in a way that minimizes costs.

efficient allocation

maximizes economic surplus - markets will not have wasteful transactions where it costs more to produce the good than consumers value it (prices above the equilibrium) - the goods go to the person with the greatest willingness to pay (marginal Benefit)

results of effecient markets

maximum economic surplus

invisible hand

millions of buyers and sellers, guided by nothing but their own self-interest, end up doing what an expert committee cannot. They produce the quantity that maximizes the total amount of economic surplus. They ensure that this quantity is produced at the lowest marginal cost. And they ensure that each good goes to the person who draws the largest marginal benefit from it, as revealed by their willingness to pay.

internalizing an externality

moving the amount of something w an externality is consumed at the social optimum (point at social equilibrium)

cost of traffic congestion (value of the time lost, fuel wasted, and increased value of goods that are transported in congested areas) in the US

nearly 150 billion dollars a year

social norms(mechanism to private solutions to externalities)

no financial penalty, more equity based

non-excludable goods create externalities

non-excludable, non-rival goods make the free rider problem -non-excludable rival goods make the tragedy of the commons problem

quasi public goods (club goods)

non-rival but excludable(ex. netflix)

business turn public goods into club goods to try and handle the free loader problem, but...

often under-provide the goods and don't fully solve the problem w public goods

command and control policies

one of the two ways the government solves externalities. Ex: pollution control system in which a government directly regulates the specific amount of pollution each polluting entity is allowed.

ppl most likely to be negatively affected by the minimum wage policy

ppl already on the margins of the labor force who employers would be less likely to hire over a middle class teenager (ex)

So what happens if we switch the statutory burden to buyers?

ppl will pay the tax at checkout instead of including the tax in the price of the good

producer surplus on a SINGLE unit sold is

price- marginal cost

prices and values

prices are the invisible hand of the market that push us towards that surplus maximizing quantity (they are a signal wrapped in an incentive) -when suppliers see changes in equilibrium prices, it signals to them that their product or service is more valuable -prices are an incentive to increase supply -But prices are not [value]. Prices come from marginal benefit and marginal cost. Value comesfrom marginal benefit, your willingness to pay. -From the consumer's side, value is [subjective] -it depends on how much you want the product.

ways to solve externalities

private bargaining, corrective taxes and subsidies, quantity regulations and cap-and-trade systems, and government regulations—and when there's a non-excludable good involved, direct provision of public goods, or assigning ownership rights to prevent the tragedy of the commons.

economic surplus

producer surplus + consumer surplus (Economic surplus is the area between the demand and supply curves.)

American producers are better off by imposition of a tariff because

producer surplus rises as the price that they have to compete at rises (because not the world price is higher)

Suppose the government of Lilliput voted to increase taxes on the top earners and decrease it on the lowest earners. How would you characterize this new tax system?

progressive

Market-based policies

provide incentives so that private decision makers will choose to solve the problem on their own (taxes and subsidies)

command-and-control policy

regulatory strategy where government sets a requirement and then enforces individual and corporate actions to be consistent with meeting the requirement.

common pool resources (common resources)

rival, non-excludable. ex. food at a party, fish in the ocean, for a common pool resource, ppl only care about their marginal private cost, they dont consider how others are affected. Each individual has an incentive consume as much of a non-excludable good as possible, and since it is rival, it will run out faster. Causes consumers to focus more on being the first to the resource than increasing the amount of the resource and making it less rivalrous. In the example of fishing, one could argue that fisheries could just stop fishing as much, but since it is non-excludable, someone else will just take all of it.

statutary burden on buyers

shifts demand curve down by the amount of the tax

statutary burden on sellers

shifts supply curve left (or up) by the amount of the tax

the issue with the free rider problem and public goods.

since companies can't force ppl to pay for stuff, but ppl still benefit, there is a positive externality for these goods, and they are underprovided by the market this is why the military, police, and public parks are all paid for out of our taxes, rather than being (under) produced by private businesses. It also explains why the government funds so much scientific research. All are examples of public goods. Some people argue that having a literate population is also a public good, and hence this explains why governments fund public education.

Government does not only make public goods...

some government goods a private

tariffs can be caused by

special interests

market failure through governemnt policies

studied by Public Choice understanding that the government - the people who are a part of it -make decisions guided by their own incentives is crucial for understanding even when well-meaning policies may falter - or why seemingly obviously bad policies persist.

why the problem of rent control is worse in the long run

suppliers can adjust more over the long run so that long run supply is more elastic than short run supply. If you're a builder and you know that you can only charge a certain amount for rent, you may not end up building a building

market based policies for inetranlizing externalities

taxes and subsidies

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it

tariffs are an extremely expensive way to save jobs

the amount extra that consumers pay per jobs saved in American pay millions in tariffs per job saved

the quantity demanded at autakry at world price is greater than the quantity supplied domestically at world price and the difference between those two is...

the amount of imports

Government revenue from a tariff

the amount of imports after the tariff was imposed times the price of the tariff

as a tariff is imposed the amount

the amount of imports decrease

when demand is more elastic than supply, and a tax is imposed

the buyer wont be paying much more but the producer will be!

What impact does the statutory burden of a tax have on the tax incidence?

the final incidence of a tax is independent f the statutary incidence. the economic burden will born born by both sides in most cases

feeding america drama

the food banks were all improperly allocated food by a central system controlled by feeding America, without their consent. Feeding America decided what was best without knowing what the food bank wanted or needed. They designed a system in which food banks were allocated a currency called shares that they could use to bid in an eBay-like system on loads of food. This system had the potential to solve the problems of central planning. Prices are important. They serve as signals and as incentives. Under the old system, the price of a pound of food was the same, irrespective of how desirable the food was. Loads are allocated to the highest value consumer creating the most surplus possible. Markets work because people are following their self-interest.

free riders don't actually hurt u bc...

the free ride of a good that is non-rivalrous

market based government solutions to externalities

the government provides incentives for internalizing externalities

fatal conceit of policy makers

the idea that they understand enough about peoples motivations, their alternatives, and their reactions to grasp the outcomes of their policies

In a progressive tax system

the marginal tax rate and the average tax rate increase as income levels increase and the marginal tax rate exceeds the average tax rate.

when a tax is imposed

the more elastic side of the market will pay a greater share of the tax (yacht example)

when a tax is imposed

the more elastic side of the market will pay a smaller portion of the tax

property rights

the ownership of the resources that can change the amount of an externality that is being produced, this is the solution to the tragedy of the commons (ex. the government can give over-farmed public land for grazing to ranchers who now has an incentive to preserve the farm for future use.

if their is a social cost of incurring a good

the producer should not give up making that good, they should just incurr less of it (you just need to account for the external costs)

market share

the ratio of sales revenue of the firm to the total sales revenue of all firms in the industry, including the firm itself

elastic supply means that

the resources in that industry can be moved around easily to adjust to a change in price, so if you tax that good alot they will just make less of it because they producers are bearing the weight of the tax and they can just switch industries

public finance

the study of the role of the government in the economy

the equilibrium of supply and demand gives us...

the surplus maximizing quantity

gains from trade (economic surplus)

the value of producer surplus plus consumer surplus

only problem with gasoline usage taxes

they don't account for the externalities of when and where u drive (i.e. time, fuel, and effeciency wasted in traffic. To solve this dilemma of people with high values of time having to sit in traffic, we have toll roads (low- side payment market based policy side payment

price changes are not externalities

they produce no change in economic surplus or no change in marginal social cost, they are just a redistr

how positive externalities lead to market failure

they still lead to market failure because people typically make decisions without taking full account of the positive effects of their choices on bystanders. As a result, they'll do less of these socially useful activities than is in society's best interest. That means that even better outcomes could occur if the benefits to society were taken into account.

if the government wants to internalize an externality at a low cost..

they will focus on market based solutions to the externalities

both consumers and producers can benefit from an exchange

this benefit is calculated by the economic surplus equation (MB-p)+(MC-P)

A tax on consumers shifts the demand curve ____.

to the left

average tax rate

total amount of taxes paid over income

deadweight loss from negative externalities

triangle above marginal personal costs and below marginal social costs, to the right of marginal personal benegit

Absolute advantage tells you who's best at a task, but not who should do the task.

true

deadweight loss occurs from

underproduction and overproduction

deadweight loss of a positive externality

value of the outcome that should have happened if the externality was taken into account but didn't. (between MSB and MPB curve, to the left of the supply curve)

normative economic analysis

what someone should do based on their preference of outcome (ex. a fat-phobic person would make a tax on tacos so that people would consume fewer tacos, this decision to tax tacos is based on preference)(Which is the better outcome, and what policy should the government adopt? Answering this question requires a value judgment about which outcome is better.)

unintended consequences of policies

when government officials fall prey the knowledge problem (information is decentralized) part of the fatal conceit of policy makers

Corporate Average Fuel Economy (CAFE)

when it comes to fuel usage most of the government's energy goes into command and control policies. CAFE makes a set of rules regulating how fuel-efficient a car maker's fleet has to be on average.

market failure

when markets don't work as well as they should and supply and demand don't lead to an effecient outcome

changes in price effect buyers

when prices go up, oppurtunity cost goes up

variable tolling

when the toll to drive is higher when the demand (indicated by congestion) is higher (causes traffic to move faster because ppl won't drive if they don't have to) (basically there is a ton of stuff wrong w this: has the government knowing where u are and how fast your going, has people being priced out of driving in towns, and assumes that we don't all need to be at the same place at the same time. The reality is that only half off the ppl on the road don't really need to be there.)

consumer surplus

when you gain economic surplus from buying something(area above equilibrium price under demand curve)

producer surplus

when you gain economic surplus from selling something (price- marginal cost)

command economy

where a central planner tries to allocate resources without the use of the market signals of supply and demand (

social optimum (true equilibrium)

where the equilibrium represents the marginal social quantity and price

high minimum wages lead to slower job growth (ppl aren't getting fired, they just not getting hired)

which is an issue bc entry level jobs are a necessity to gain experience and start a career

efficient allocation

which means those goods are allocated to the people who get the largest marginal benefit from them.

the average tax rate

will always be lower than the marginal tax rate

price is not an indicator of value

willingness to pay is (ex. even if water is virtually free, there will be some instances when you willing to pay alot for water)

winners of the minimum wage

workers who get to keep their job at the higher wage

to determine changes in economic surplus from a tariff, start by comparing the autarky to the economic surpluses (consumer and producer) after the tax

you will find that there is deadweight loss where the government revenue didnot accomodate for the loss in consumer surplus