Econ Exam 2
north American Free Trade Agreement NAFTA
1993 example of multilateral approac h that lowered trade barriers among US, mexico, and canada
laffer curve
A curve illustrating the relationship between the tax rate and tax revenues. Tax revenues will be low at both very high and very low tax rates. When tax rate are quite high, lowering them can increase tax revenue.
supply side economics
An economic philosophy that holds the sharply cutting taxes will increase the incentive people have to work, save, and invest. Greater investments will lead to more jobs, a more productive economy, and more tax revenues for the government (reagan film laffer)
not building new apartments or maintain existing ones; more people find and own own places and move into city; more; greater
On the supply side of long-run rent control, landlords respond to low rents by ____. On the demand side, low rents _____ therefore, both supply and demand are ___ elastic in the long run. As a result, there is a ____ shortage.
revenue; market outcomes
Policymakers use taxes to raise _____ for public purposes and to influence market
GATT
Successfully reduced the average tariff among member countries from about 40% aqfter wwii to 5%
inelastic; landlords have fixed number of apartments & can't adjust #r quickly and people searching for houses aren't highly responsive to rents in short run because they take time to adjust their housing arrangements: small; reduce rents
The short run supply and demand for housing are reltively ____ because _______________. Because the supply and demand are this in the short run, the initial shortage caused by rent control is ___. The primary effect in the short run is to ______
eager; refuse; indifferent
a buyer would be ____ to buy a good below his willingness to pay, and would ____to buy a good at a price greater than his WTP. At a price equal to his WTP, the buyer would be ____ about buying the good
raises; sellers always want to make more money
a higher price ____ producer surplus because
minimum wage
a kind of price floor that regulates the lowest price for labor that any employer may pay
price ceiling
a legal maximum on the price at which a good can be sold
price floor
a legal minimum on the price at which a good can be sold
raises; buyers always want to pay less
a lower price _____ consumer surplus because
reduces; closer
a tariff ______ the quantity of imports and moves the domestic market _____ to its equilibrium
will
a tariff on a good ____ have an impact if the country is an importer of the good
no effect
a tariff on a good will have ___ if the country is an exporter of the good
less; steeper
a tax burden falls more heavily on the side of the market that is ____ elastic. This means that the slope is _____
corrective taxes
a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality
reduces.
a tax on a good _____ producer surplus
reduces
a tax on a good ______ consumer surplus
tariff
a tax on goods produced abroad and sold domestically
payroll tax
a tax on the wages that firms pay their workers
technology spillover
a type of positive externality: the impacts on one firm's research and production efforts on other firms' access to technological advance
initial allocation of pollution permits doesn't matter. if firms can reduce pollution at a low cost they sell whatever permits they get, if they can reduce pollution only at a high cost they buy whatever permits they need. efficient final allocation
advantage of free market for pollution permits
potential to result in freer trade than unilateral approach (reduce trade restrictions abroad and at home), political advantage: producers are fewer and better organized than consumers and therefore have greater political influence
advantages of the multilateral approach
raises the income of working poor, unemployment is negative but small effect
advocates of minimum wage say
don't reduce quantity of housing supplied and therefore don't cause shortage
advocates of rent subsidies
raise living standards of working poor without discouraging firms from hiring them
advocates of wage subsidies
smaller, higher, higher
after international trade, an exporting country has ____ consumer surplus, _____ producer surplus, and _______total surplus
higher, smaller, higher
after international trade, an importing countryhas _____ consumer surplus, _____ producer surplus, and _____ total surplus
internalizing the externality
altering incentives so that people take account of the external effects of their actions
positive analysis
an analysis on what is
normative analysis
an analysis on what should be
national security argument
an argument for restricting trade that states "the industry is vital for national security" when there are legitimate concerns over national secuirty (ie steel )
unfair competition argument
an argument for restricting trade that states free trade is desirable only if all countries play by the same rules
infant industry argument
an argument for restricting trade that states that new industries need temporary trade restrictions to help them get started and/or sometimes older industries need temporary protection to help them adjust to new conditions
protection-as-a-bargaining-chip argument
an argument for restricting trade that states trade restrictions can be useful when we bargain with our trading partners
jobs argument
an argument for restricting trade that states trade with other countries destroys domestic jobs. Everything can be produced more cheaply abroud and under free trade they couldn't be profitably employed in any industry
small economy assumption
an assumption required to be made before analyzing the welfare effects of free trade and means that the country's actions have little effect on world marketsand a change in their trade policy won't effect world price
the external benefit from an activity with positive externalities
an idea corrective subsidy would equal
the external cost from an ativity with negative externalities
an ideal corrective tax would equal
dcurve: shifts, s curve: unchanged. tax on buyers makes buying less attractive, demand is smaller; shifts left (downward by exact size of tax). the equilibrium price is lower and the quantity is lowered buyers and sellers both worse
analyze a tax on buyer
d curve: unchanged, s curve: shifts which way does it shift (if higher cost then lower quantity and left/upward by the exact size of the tax) therefore equilibrium price increases and quantity decreases--> reduces size of market: buyers and sellers both worse
analyze a tax on the seller
jobs argument, national-security argument, infant-industry argument, unfair-competition argument, protection-as-a-bargaining-chip argument
arguments for restricting trade
economies of scale
as a company produces larger numbers of a particular product, the cost of each of these products goes down
increases; decreases; reduces
as tax increases, tax revenue initially ______ then _____ because a higher tax drastically ______ the size of the market
increases
as tax increases, the deadweight loss _____ even more rapidly than the size of the tax
marginal buyer.
at any quantity, the price given by the demand curve shows the willingness to pay of the __________
Share
buyers and sellers _____ the burdens of taxes
General Agreement on Tariffs and Trade GATT
continuing series of negotiations among many countries with goal of promoting free trade. US helped to found after WWII in response to high tariffs imposed during Great Depression.
set certain levels
contracts as a driver to private solution to externalities
corrective taxes; regulations;
economists usually prefer _____ to ______ as a way to deal with pollution because they can reduce pollution at a lower cost to society
value to buyers (measured by WTP)-cost to sellers
equation of total surplus
WTO
established in 1995, HQ in geneva, 153 countries accounting for more than 97% of world trade
examples: littering laws not enforced but it's just BAD to do it
example of moral codes and social solutions (one kind of private solution to externalities)
britain 19th century, chile, south korea
examples of unilateral approach
administer trade agreements, provide a forum for negotiations, and handle disputes among member countries
functions of the WTo
domestic sellers better off, domestic buyers worse off, government raises revenue
gains and losses from a tariff
industrial policy
government intervention in the economy that aims to promote technolgy-enhancing industries
Corrective taxes alter incentives to account for the presence of externalities and thereby move the allocation of resouces closer to the social optimum. While they rdo raise revenue for the gov't, they also enhance economic efficiency
how are corrective taxes unlike most other taxes
more regulations that are difficult and expensive to enforce
how do policymakers react to the adverse effects of rent control?
gives the firm a property right over its invention
how does patent law internalize the externality of technological spillover?
binding, price floor, surplus
if a price floor is above the equilibrium, it is ____. The market price equals the ______. this causes a _____ which can lead to rationing mechanisms
not binding, no
if a price floor is below the equilibrium, it is ____ and has no effect
export; country
if domestic price is less than world price, the country will _____ the good and the _____ has the comparative advantage
exceeds; unemployment; increases; decrease
if minimum wage is above the equilibrium level, the quantity of labor supplied ____ the quantity demanded. The result is _____. Thus, the minimum wage ____ the incomes of those workers who have jobs but it ____ the incomes of workers who cannot find jobs
import; world
if the DP is greater than WP, the country will _____ the good and the _____ has the CA
low; comparitive advantage
if the domestic price is low, the cost of producing the good is ___, suggesting the country has a _____ in producing the good relative to the rest of the world
export
if the world price of a good is higher than the domestic price, the country will _____ that good
import
if the world price of a good is lower than the domestic price, the country will _____ that good
Reduced the supply of gasoline; long lines at gas station. OPEC: shorttage of gasoline, Government regulations (price ceiling)
in 1973 when OPEC raised the price of crude oil, the result was __________ and __________. The second of which was caused by OPEC because they ___ and the US government's regulations because they ___
equilibrium
in a competitive market free of government regulation, price goes to the ____
price
in a free market the _)____ serves as the rationing mechanism and sellers can sell all they want at the equilibrium price
1. free markets allocate the supply of goods to the buyers who value them most highly measured by their WTP 2. free markets allocate the demand for goods to the sellers who can produce them at the least cost 3. free markets produce the quantity of goods that maximiszes the sum of consumer and producer surplus
in a market equilibrium, the market outcomes are
some decision maker fails to take account of the external effects of his or her behavior and the government responds by trying to influence this behavior to protect the interests of bystanders
in all cases of both positive and negative externalities
waiting lists preference to corruption discrimination
in cites with rent control: what are some mechanisms landlords use to ration housing
exceeds, smaller
in the presense of a negative externality such as pollution the social cost of the good ____ the private cost. the optimal quantity is therefore _____ than the equilibrium quantity
inefficient; keeps the p and q away from equilibrium
market power can be _______ because it
consumer surplus.
measures the benefit buyers receive from participating in a market
teenage labor
minimum wage has greatest impact on the market for
larger; taxing
negative externalities lead markets to produce a ___ quantity than is socially desirable. to remedy the problem, the gov't can internalize the externality by ____ goods
we can't give anyone the option of polluting for a fee. b/c people face tradeoffs, we can't entirely eliminate pollution because it would reverse many of the technological advances that llow us to enjoy a high SOL. clean environment is a normal good and therefore has a positive income elasticity, meaning richer countries can afford a clearner environment and therefore usually have more rigorous environmental protection
objections to the economic analysis of pollution
increased competition
one benefit from international trade that states a company shielded from foreign competitors is more likely to have market power which in turn gives it the ability to raise prices above a competitive level (market failrte).
lower costs through economies of scale
one benefit from international trade that states a firm in a small country can't take full advantage of economies of scale if it can only sell in a small domestic market. free trade gives access to larger world market and allows to realize economies of scale more fully
increased variety of goods
one benefit from international trade that states goods produced in diffreent countries are different, free trade gives consumers greater variety from which to choose
enhanced flow of ideas
one benefit from international trade that states the transfer of technologi al advances around the world is linked to trading of goods that embody those advances.
command and control policies
one way that the government can remedy an externality that regulates behavior directly.
market based policies
one way the government can remedy an externality. it provides incentives to that private decision makers will choose to solve the problem on their own
high minimum wage causes unemployment, encourages teens to drop out, and prevents some unskilled workers from getting the on-the-job training they need. Poorly targeted policy.
opponents of minimum wage say
difficult to implement in practice, temporary policy is hard to remove, protection is not necessary for an industry to grow
opposition to infant industry argument
free trade also creates jobs because when you buy from another country, those countries obtain the resources to buy other goods from YOU. may impose hardship on some workers in short run but allows for higher standard of living. also, gains from trade are comparative not absolute advantage
opposition to jobs argument
companies exaggerate role in national defense to obtain protection from foreign competition
opposition to national security argument
the threat may not work
opposition to the protection as a bargaining chip argument
increased variety of goods, lower costs through economies of scale, increased competition, enhanced flow of ideas
other benefits from international trade
smaller; subsidizine
positive externalities lead markets to produce a ___ quantity than is socially desireable. to remedy the problem, the government can internalize the externality by ____ goods.
WP plus the amount of the tariff
price of good after tariff
market equality
property of distributing economic prosperity uniformly among the members of society
patent law
protect the rights of inventors by giving them exclusive use of their inventions for a period of tme.
burden of tax largely on suppliers because luxury goods are elastic
result of 1990 luxury tax
WTO
rules established under GATT enforced by
pigovian taxes
same as corrective taxes, a tax designed to induce private desicion makers to take account of the social costs that arise from a negative externality
the coase theorem
says that private economic actors can potentially solve the problem of externalities among themselves. Whatever the initial distribution of rights, the interested parties can reach a bargain in which everyone is better off and the outcome is efficient
one way is to integrate businesses: example: apples and bees,
self interest as a driver to private solution to externalities
both pay for pollution (CT: pay to gov't PP: pay to buy permits) both internalize the externality of pollution
similarities between corrective tax and pollution permits
1. decide whether law affects the supply or demand curve 2. decide which way the curve shifts 3. examine how shift effects equlibrium price and quantity
steps to analyze supply and demand
demand schedule
table relating to demand curve derived from WTP of the possible buyers
price takers
take the world price as given
wage received by workers falls, wage paid by firms rises, workers and firms share the tax burden (not necessarily 50/50)
tax incendence analysis on the introduction of payroll tax
discourage
taxes ____ market activities
equivilant
taxes levied on sellers and taxes levied on buyers are ______
the market equilibrium
the ______ is an efficient allocation of resources
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
producer surplus
the amount a seller is paid minus the cost of production. measures the benefit sellers receive from participating in a market
consumer surplus
the area below the DC and above the price measures the _____ in a market
producer surplus
the area below the price and above the supply curve measure the______ in a market
willingness to pay
the benefits of buyers who participate in a market and the maximum amount that a buyer will pay for a good.
cannot; cannot
the benevolent social planner ___ increase economic well being by changing the allocation of consumption among buyers or by changing the allocation of production among sellers. It _____ raise total economic well being by increasing or decreasing the quantity of the good
marginal buyer
the buyer who would leave the market first if the price were any higher
exceeds
the cost of taxes to buyer and sellers ___ the revenue raised by the government`
transaction costs
the costs that parties incur in the process of agreeing to and following through on a bargain
opportunity cost
the domestic price of a good reflects the __________ of the good.
consumer surplus: smaller, producer surplus: bigger, government tax revenue , total surplus is smaller
the effects after a tariff on: consumer, producer, total surplus, government tax revenue
deadweight loss
the fall in total surplus that results from a market distortion such as a tax
help the poor by making housing more affordable
the goal of rent control policy is to
greater
the greater the elasticities of supply and demand, the _____ the deadweight loss of a tax
skill and experience
the impact of the minimum wage depends on the _____ and _____ of the worker
market failure
the inability of some unregulated markets to allocate resources efficiently
larger
the larger the deadweight loss of taxation the ___ the cost of any government program
tax incidence
the manner in which the burden of a tax is shared among participants in a market
is not
the market equilibrium _____ efficient when there are externalities because the equilibrium fails to maximize the toal benefit to society as a whole
who sends the money to the government
the only difference in who pays for the tax is____
world price
the price of a good that prevails in the world market of that good
social cost
the private cost of producers and the cost of producers plus the price of bystanders affected
efficiency
the property of resource allocation of maximizing the total surplus received by all members of society
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.
efficient; impersonal
the rationing mechanism in a free, competitive market is both ____ and _____
marginal seller
the seller who would leave the market first if the price were any lower
tax revenue
the size of the tax times the quantity of the good sold. Goes to government but those whom the government uses on is actually who benefits.
welfare economics
the study of how the allocation of resources affects economic well being
total surplus
the sum of consumer and producer surplus (value to buyers minus amount paid by buyers) + (amount received by sellers minus cost to sellers) aka {value to buyers - cost to sellers]
marginal tax rate
the tax on the last dollar of earnings (now is about 40%)
externality
the uncompensated impact of one person's actions on the well-being of a bystander
cost
the value of everything a seller must give up to produce a good
earned income tax credit
this is one type of wage subsidy. it is a government program that supplements the incomes of low-wage workers
CS, PS, TR
to calculate total surplus with a tax, you add together _____, _____, and ______
taxes and subsidies
two pathways of market based policies
Pollution permits
type of marked based policy: voluntary transfer of the right to pollute from one firm to antoher. firms willingness to pay depends on its cost of reducing pollution
corrective taxes and subsidies, tradable pollution permits
types of market based policies
moral codes and social solutions charities self-interest contracts
types of private solutions
fair labor standards act of 1938
what act of congress instituted minimum wage?
price elasticities of supply and demand
what determines whether the deadweight loss from a tax is large or small?
the benefit that buyers receive from a good as the buyers themselves perceive it
what does consumer surplus measure?
once trade is allowed, domestic price of a good will equal world price
what happens to price of good when international trade allowed
unilateral approach
when a country chooses to approach and remove its trade restrictions on its own
multilateral approach
when a country chooses to reduce its trade restrictions while other coutnries do the same
positive externality
when a person engages in activity that is beneficial tot he well-being of a bystander but neither pays nor receives any compensation of that effect
negative externality
when a person engages in an activity that is adverse to the well-being of a bystander but neither pays nor receives any compensation for that effect
price ceiling; greater; shortage; rationing mechanism;
when a price ceiling is below the equilibrium , the market price is the _____, the quantity demanded is _____ than the quantity supplied (known as a ____) and as a result a ________ _______ ddevelops that are rarely desireable
market power
when a single buyer/seller (or small group of them) can control market prices.
when a good isn't being produced with lowest-cost and when a good isn't consumed by buyers who value it the highest
when is total surplus inefficient
don't respect the prefrences that drive buyer behavior: example, drug addicts--> willingness to pay doesn't measure buyers benefit and consumer surplus isn't a good measure of economic well-being
when might policymakers not choose to care about consumer surplus?
high transaction costs, bargaining breaks down large number of interested parties
when private solutions don't always work
shortage;
when the government imposes a binding price ceiling on a competitive market, a ____ of the good arises and the sellers must ration the scarce goods among the large number of potential buyers.
large, small
when there is a relatively inelastic (steep) supply curve and a realtively elastic (flat) demand curve then sellers bear a ____ burden of the tax and buyers bear a ____ burden
small; large
when there is a very elastic supply curve (more flat) and a relatively inelastic demand curve (more steep) then sellers have ___ burden of tax and buyers have a ____ burden.
a comparitive advantage in producing the good
when you compare the world price and the domestic price before trade, it shows wheter a country has:
highly skilled and experienced workers
who isn't affected by minimum wage (for who is minimum wage not binding)
many are estabilished to deal with externalities and governments encourage by offering tax deductions
why charities are a private solution to externalities
because they prevent buyers and sellers from realizing some of the gains from trade
why do taxes cause deadweight loss
domestic producers are better off, domestic consumers are worse off. gains of the winners exceed the losses of the losers
winners and losers from an exporting country with international trade
domestic producers are worse off, domestic consumers are better off, gains of winners are eceeded by losses of the losers
winners and losers from an importing country with international trade
taxation, subsity
with a negative externality, the appropriate response to internalize the externality would be ____. with a positive externality, the appropriate response would be a _____
supply
with a negative externality, the social cost curve is above the _______ curve
not binding;
with a price ceiling is above the equilibrium, the effect is __________ and has no effect on price or quantity sold
smaller
with negative externalities, the optimum quantity produced maximizes total welfare and is _____ than market equilibrium quantity
greater, demand
with positive externalities, the social value is _____ than the private value and the social value curve is above the ____ curve