Econ Exam 2

What are welfare effects of imposing a tariff?

- Producer surplus increases because of the higher price. - The government receives tax revenue from imposing the tariff. - Consumers lose consumer surplus due to the higher price.

What to know about the Tax System

-Federal Income taxes are progressive -some investment gains are excluded from income taxes -higher income people get bigger tax breaks -many other taxes aren't progressive -taxes that fund most social insurance programs are not progressive -overall, the tax system is progressive

Sources of Comparative Advantage

-abundant inputs -specialized skills -mass production

Voluntary Exchange

Buyers and sellers exchange money for goods only if they both want to

Which of these is NOT necessarily accomplished by a well-functioning competitive market?

Equitable Outcome

What is NOT ensured by well-functioning markets?

Equity

Specialization

Focusing on specific tasks, spending more time on what they're good at

Ideal Market

Many sellers with identical products

Which of the following statements reflects positive analysis?

Mario's staff identifies four options for reducing costs.

Sources of market failure

Market power Externalities Information problems Irrationality Government regulations

Prediction Markets

Markets whose payoffs are linked to whether an uncertain event occurs

What would happen if the government redistributed until we all got the same income no matter what?

People would have no incentive to work hard or start a new business.

What is a better way of measuring living standards?

Permanent income is more reliable than your income in a given year

Comparative Advantage

The ability to do a task at a lower opportunity cost

Consumer surplus

The economic surplus you get from buying something

Which of the following explains why higher-income people pay more taxes?

The tax rate is determined by the level of taxable income.

How do excise taxes affect buyers?

The total cost of goods to buy is more

Government Failure

When government policies lead to worse outcomes

corrective subsidy

a subsidy designed to induce people to take account of the positive externalities they cause

corrective tax

a tax designed to induce people to take account of the negative externalities they cause

tariff

a tax on imported products

excise tax

a tax on the production or sale of a good

regressive tax

a tax where those with less income tend to pay a higher share of their income on the tax

progressive tax

a tax where those with more income tend to pay a higher share of their income in taxes

marginal social cost

all marginal costs, no matter who pays them = Marginal private cost plus marginal external cost

positive externality

an activity whose side effects benefit bystanders

negative externality

an activity whose side effects harm bystanders

Normative analysis...

assesses what should happen, involves value judgements

What drives international trade?

comparative advantage

Domestic supply curve

shows the quantity of a good that all domestic suppliers added together plan to sell, at each price

A new tax on sellers shifts the....

supply curve left the amount of the tax

Utilitarianism

the political philosophy that government should try to maximize total utility in society

World Price

the price that a product sells for in the global market

An excise tax reduces....

the quantity of goods sold in a market

What to know about income inequality

-Income is distributed unequally -It is rising -The rich are getting richer -The US is more unequal than most developed countries -The distribution of income around the world is even more unequal

Quota

A limit on the maximum quantity of a good sold

In 2016, Hillary Clinton stated the following: "My message to every worker in Michigan and across America is this. I will stop any trade deal that kills jobs or holds down wages, including the Trans-Pacific Partnership [Trade Agreement]." Which of the following is a reason that Clinton's statement is not grounded in economic theory?

Any trade deal that changes the terms of trade between countries will change the composition of jobs within a country.

Many buyers use a futures contract to agree to purchase a commodity at a specific time in the future. What is the benefit of looking at the prices of such futures contracts to businesses that produce these commodities?

Businesses can obtain useful information about future disruptions to input costs.

Centrally planned economies

Cuba, North Korea, China

social insurance

Government-provided insurance against bad outcomes such as unemployment, illness, disability, or outliving your savings.

Dead weight loss

How far economic surplus falls below the efficient outcome (Economic surplus at efficient quantity − Actual economic surplus)

The question "What is going to happen if we adopt this policy?" reflects:

Positive Analysis

How many people are in poverty? Does it change much over time?

Poverty rate in 2017 was 12.3%, so about 1 in 8 people, does not change significantly over time

Rational Rule for markets

Produce more of a good if its marginal benefit is greater than (or equal to) the marginal cost

What reduces incentive to work?

Taxes and means-tested programs

Absolute Advantage

The ability to do a task using fewer inputs

Economic burden

The burden created by the change in after-tax prices faced by buyers and sellers

Which of the following claims reflects normative analysis?

The minimum wage should be higher so that workers earn a living wage.

Economic surplus

The total benefits minus the total costs flowing from a decision (measures the gains generated whenever a good or service is bought or sold)

How do Chinese tea farmers learn about a rise in the popularity of tea in the West?

They communicate with buyers through the price.

How do excise taxes affect sellers?

They have to raise the total price so they can cover their production costs

Which best explains when economic surplus should not be measured as the area between the supply and demand curves and left of the efficient quantity?

When any market failure exists

Which of these is true of both deadweight loss resulting from overproduction and deadweight loss resulting from underproduction?

When graphed, the deadweight loss seems to point to the efficient quantity.

Distributional Consequences

Who gets what (Winners and losers)

nonrival good

a good for which one person's use doesn't subtract from another's

rival good

a good for which your use of it comes at someone else's expense

club good

a good that is excludable, but nonrival in consumption ex: audio book

common resource

a good that is rival and also nonexcludable

import quota

a limit on the quantity of a good that can be imported

Price ceiling

a maximum price that sellers can charge

Quantity regulation

a minimum or maximum quantity that can be sold

Price floor

a minimum price that sellers can charge

public good

a nonrival good that is nonexcludable and hence subject to the free-rider problem

Subsidy

a payment made by the government to those who make a specific choice

cap and trade

a quantity regulation implemented by allocating a fixed number of permits, which can then be traded

externality

a side effect of an activity that affects bystanders whose interests aren't taken into account

"winning the ovarian lottery" to refers to:

being born in a supportive family.

A subsidy can induce people to consider the external _____ of the _____ externalities they create.

benefits; positive

The socially optimal outcome is the most efficient outcome for _____.

buyers, sellers, and bystanders

Price Ceilings often end up...

causing shortages as the lower price discourages sellers from supplying the good or service

A tax on a good leads to a

decline in the quantity sold of that good

Positive analysis....

describes what is going to happen

Some income inequality reflects differences between younger and older people because:

people tend to earn more as they get older and more experienced.

Gains from trade

the benefits that come from reallocating resources, goods and services to better uses

Statutory burden

the burden of being assigned by the government to send a tax payment

free-rider problem

when someone can enjoy the benefits of a good without bearing the costs

nonexcludable

when someone cannot be easily excluded from using something

Market Failure

when the forces of supply and demand lead to an inefficient outcome

Efficient Production

when we produce a given level of output at the lowest possible cost. This requires allocating production so that each item is produced at the lowest marginal cost.

The factor that is more elastic....

will have a smaller share of the economic burden

An efficient outcome...

yields the largest possible economic surplus

utility

your level of well-being

What are examples of private bargaining to internalize an externality?

-Google builds high-speed wireless internet networks to reach people outside of major cities. -A health insurance company pays people to exercise. -Google buys another internet service provider.

The richest quintile of the population receives 13 times as much income as the poorest quintile. However, the richest quintile only spends 4 times as much as the poorest quintile. What are possible reasons for this?

-Individuals experiencing temporary fluctuations in their incomes are more likely to maintain moderate spending habits. -The richest quintile has the ability to save a larger percentage of its income.

What are considered risks that leads to poverty?

-Losing a full-time job -Getting a divorce -The death of a breadwinner

What is true about Poverty?

-More than half of all Americans experience poverty at some point in their lives. -Some people spend much of their lives in poverty, while others fall on hard times briefly. -Children and single moms are the most likely to be in poverty.

What reasons explain why the side payment can restore the socially optimal outcome?

-People who create the externality are now forced to confront the full social cost of their choice. -The opportunity cost of people who create the externality refers to the possibility of losing a side payment. -The cost of creating the externality includes private cost plus an opportunity cost.

What are reasons that prediction markets precisely produce useful forecasts?

-Price is a means of effectively communicating a prediction. -Prices are able to aggregate information. -It uses information embedded in the price to communicate a prediction.

Solutions to externality problems

-Regulations can often blunt the forces of competition. -A corrective tax raises the direct financial cost of creating externalities. -A cap-and-trade system raises the opportunity cost of creating externalities.

What are drawbacks to redistribution of income?

-The administrative costs will reduce the amount of money to be redistributed. -Income redistribution reduces the incentive to work. -Income redistribution leads to more tax avoidance

What are goals of the government in setting quotas?

-To have the maximum quantity of good close to the socially optimal quantity -To reduce the negative externalities that each firm creates -To limit the maximum quantity of a good or service that can be sold

What is true about the U.S. social insurance programs provided by the government?

-Unemployment insurance is for people who lose their job through no fault of their own. -Disability insurance provides payments if you develop a work-limiting disability. -Worker's compensation is for people who are injured at work.

a sales tax is

-relatively more expensive to the poor than to the rich. -regressive

Laws, rules, and regulations can be used to remove the externalities in all the following situations:

-the law that makes unsolicited "spam" calls to your cell phone illegal. -school rules that require students are up-to-date on their vaccines. -laws banning smoking in public places.

Examples of negative externalities

-trolling on social media sites. -driving an SUV in the suburbs. -being disruptive during an economics class.

Binding price ceiling

A price ceiling that prevents the market from reaching the market equilibrium price, meaning that the highest price sellers can charge is set below the equilibrium price

Binding price floor

A price floor that prevents the market from reaching equilibrium price, meaning that the lowest price that sellers can charge is above the equilibrium price

Mandate

A requirement to buy or sell a minimum amount of a good

3 things a price is

A signal, an incentive, and a bundle of information

example of fairness in the process

A student at the front of the line says that everyone had the same chance to line up, and therefore, those who were goofing around and ended up at the back of the line should have water instead

marginal social benefit

All marginal benefits, no matter who gets them = Marginal private benefit + marginal external benefit

Wealth

All the assets--including savings, cars, a home--that you currently have

Efficient Allocation

Allocating goods to create the largest economic surplus, which requires that each good goes to the person who'll get the highest marginal benefit from it

_____ is important because it leads to market failure, producing _____.

An externality; inefficient outcomes

poverty line

An income level below which a family is defined to be in poverty, in the U.S. it is an absolute measure of poverty, originally set at 3 times the cost of a low-cost food plan

Equity

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

example of economic disadvantage.

If your father earns about 30% less than the typical dad, your income is likely to be about 15% less than the typical child.

Knowledge Problems

When knowledge needed to make a good decision is not available to the decision maker

Permanent Income

Your average lifetime income

external benefit

a benefit accruing to bystanders

A price control on a staple food item places.....

a ceiling on the price

external cost

a cost imposed on bystanders

Price floors often end up....

causing surpluses, as the higher price discourages buyers from purchasing the product

The economic argument that is in favor of international trade is based on:

comparative advantage leading to greater economic surplus.

Buyers bear a smaller incidence of the tax when:

demand is more elastic than supply.

Buyers bear a smaller share of the economic burden when....

demand is relatively elastic

When suppliers _____ external costs, they tend to _____ them.

don't pay; ignore

diminishing marginal utility

each additional dollar yields a smaller boost to your well-being, means that your marginal utility may be large when you are poor, but it gets smaller as you get richer.

You have learned that the demand curve is downward-sloping because of diminishing marginal benefit. When you apply this idea to your total income, you find that:

each dollar you get tends to yield you less benefit than the previous dollar.

According to the idea of efficient production,

each firm independently decides how many laptops to produce, and the marginal cost of the last unit produced will be the same for all firms.

When a country has a lower opportunity cost in producing a good:

economists say that country has a comparative advantage in producing that good

mean-tested

eligibility is based on income and sometimes wealth

example of fairness in equality of outcomes

everyone fill their glasses only two-thirds, so that everyone can have something to drink

To calculate producer surplus...

find the area of the triangle (above the supply curve, below the price, out to the quantity sold)

To calculate consumer surplus...

find the area of the triangle between demand (marginal benefit) and price

Coase Theorem

if bargaining is costless and property rights are clearly established and enforced, then externality problems can be solved by private bargains

An outcome is more economically efficiency.....

if it yields more economic surplus

Free trade agreements may lead to reduced output and the loss of American jobs in certain industries because

in industries in which a trading partner has a comparative advantage, domestic firms typically lose market share.

market failure

inefficient outcomes that are not in society's best interest

The five arguments for limiting international trade that are the discussed in the chapter all argue whether or not international trade....

is good for Americans

marginal utility

is the boost to utility you get from an extra dollar

The advantage of the absolute standard approach is that:

it tracks through time how many people are below an unchanging standard.

relative poverty

judges poverty relative to the material living standards of your contemporary society

Absolute poverty

judges the adequacy of resources relative to an absolute standard of living

When the price elasticity of supply is _____ relative to the price elasticity of demand, then sellers bear _____ of the economic burden of a tax.

large; a smaller share

Once we take taxes and transfers into account, there is:

less inequality and less poverty.

Internal Markets

markets within a company to buy and sell scarce resources

There is _____ inequality in annual income than in measured permanent income because some of income inequality in annual income reflects _____.

more; temporary ups and downs

An example of gains from trade is that people sell their labor for money and spend that money on food because:

people want that food more than they want another hour of time.

Most of the leakage in federal assistance programs comes from...

peoples' responses to financial incentives.

Solutions to negative externalities should be addressed by _____, instead of _____, whenever possible.

private bargaining; government intervention

rational rule for society

produce more of an item if its marginal social benefit is greater than (or equal to) the marginal social cost

Efficient production

producing a given quantity of of output at the lowest possible cost, which requires producing each good at the lowest marginal cost

The more inelastic side of the market....

shares most of the tax burden

A tax on buyers....

shifts the demand curve

Domestic demand curve

shows the quantity of a good that all domestic consumers added together plan to buy, at each price

helping infant industries argument

suggests that governments can help create new industries by shielding fledgling businesses from international competition.

A subsidy for a seller of a product shifts the:

supply curve to the right.

Only binding floors create....

surpluses in markets

The U.S. trade policy has been different from what it was over a century ago. The average tariff charged on imports into the United States:

tends to decrease over time

effective marginal tax rate

the amount of each extra dollar you earn that you lose to higher taxes and lower government benefits

social safety net

the cash assistance, goods, and services provided by the government to better the lives of those at the bottom of the income distribution

Tax incidence

the division of the economic burden of a tax between buyers and sellers

Producer surplus

the economic surplus you get from selling something

Intergenerational mobility

the extent to which the economic status of children is independent of the economic status of their parents

marginal private benefit

the extra benefit enjoyed by the buyer from one extra unit

marginal private cost

the extra cost paid by the seller from one extra unit

trade costs

the extra costs incurred as a result of buying or selling overseas, rather than domestically

marginal external benefit

the extra external benefit accruing to bystanders from one extra unit

marginal external cost

the extra external cost imposed on bystanders from one extra unit

Globalization

the increasing economic, political, and cultural integration of different countries

Market failures arise because:

the interests of bystanders are ignored or underweighted.

In a well-functioning market, the supply curve is also _____ and the demand curve is also _____.

the marginal cost curve; the marginal benefit curve

Income

the money you receive in a period of time, such as a year

socially optimal

the outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders

poverty rate

the percentage of people whose family income is below the poverty line

Efficient quantity

the quantity that produces the largest economic surplus

The more inelastic the market is....

the smaller the effect the tax has on market quantity, more government revenue

Data shows that the United States has less intergenerational mobility than Germany. That means that:

the success of U.S. children depends more on parents' economic status than the success of German children does.

Sellers bear a smaller share of the economic burden when....

the supply is relatively elastic

tragedy of the commons

the tendency to overconsume a common resource

World supply and world demand determine....

the world price

Rival goods are subject to market forces because:

there is competition over who can consume the good.

import

to buy goods or services from foreign sellers

The goal of price ceilings is

to make a good or service more accessible to low income residents

The goal of price floors is

to promote higher incomes for suppliers

export

to sell goods or services to foreign buyers

One of the blind spots of the economic thought about trade is that:

trade is a threat, and not just an opportunity.

Because free-riders are bystanders who receive benefits from goods, these types of goods tend to be:

underproduced