EXAM 2: Modules 6-8
Who gains from international trade?
both the importing and the exporting nations
Which of the following is an example of a product that is nonexcludable and rivalrous?
free concert (with limited seating) in a park
Economic profit
profit would include the cost/benefits that don't necessarily have a traditional monetary value
Proportional Tax
It has constant average tax rates. -income change/same tax
Average Tax Rate
Total tax paid divided by total income.
A rent ceiling results in a shortage. As a result, which of the following do you expect?
-A black market for apartments whereby higher rents are obtained through various other charges. -Discrimination as landlords choose their tenants, possibly based on race, age, or gender. -The shortage will persist as long as the ceiling is in effect. As a result, there is a decrease in the producer surplus in the housing market
Tariff
-a tax on imported goods. -makes domestic consumers worse off. - tariff placed on a foreign good will increase the price of a competing domestic good. -Given job losses in U.S. manufacturing, some Americans have called for an increase in tariffs on Chinese products coming into America. If higher tariffs are imposed on clothing produced in China, the price of clothing in America would increase
Private solutions to externalities
-are most effective if transaction costs associated with bargaining are low -The transactions costs to negotiate a solution must be relatively low. (must be present to reach a private solution to an externality problem)
Total surplus (TS)
= producer surplus (PS) + consumer surplus (CS) -We can determine the amount of total surplus created by each unit by looking at the gap between the demand and the supply curve -gap between the height of the demand curve and the height of the supply curve -to get the total surplus, just shade the entire gap between the demand curve and the supply curve
Externality
A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. -Someone outside of transaction being affected by it -negative: factory in town; keeping a junked car parked on your front lawn The externality causes a difference between the private cost of production and the social cost -positive: gives rise to external benefits; The production of a certain fertilizer emits a gas that keeps away mosquitoes and other insects from the surrounding community The externality causes a difference between the private benefit from consumption and the social benefit.
Public Good
A good that is both nonrival and nonexcludable.
Private Good
A good that is both rival and excludable.
Common Resource
A good that is rival but not excludable.
Price Ceiling
A legally determined MAXIMUM price that sellers may charge. -A price ceiling exactly at the equilibrium price would result in competitive equilibrium outcome -If a price ceiling is set above the equilibrium price, then there will be neither a shortage nor a surplus of the good. -A price ceiling leads to a(n) _decrease in total surplus_ if below equilibrium price.
Price Floor
A legally determined MINIMUM price that sellers may receive.
Black Market
A market in which buying and selling take place at prices that violate government price regulations.
Economic Efficiency
A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum -Economic efficiency in a competitive market is achieved when the marginal benefit equals the marginal cost from the last unit sold.
Arrow Impossibility Theorem
A mathematical theorem that holds that no system of voting can be devised that will consistently represent the underlying preferences of voters.
Public Choice Model
A model that applies economic analysis to government decision making.
Command-and-control Approach
A policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.
Which of the following is an example of a public good?
A radio broadcast
Market Failure
A situation in which the market fails to produce the efficient level of output.
Regressive Tax
A tax for which people with lower incomes pay a higher percentage of their income in tax than do people with higher incomes (It has decreasing average tax rates). -income decrease/tax decrease -EX: Jamal earns $160,000 per year and Josephina earns $80,000 per year. They both pay the same price to buy the identical automobile and each pays $1,600 in sales tax. In relation to their relative incomes, this is an example of a regressive -EX: A family that earns $20,000 a year pays $400 a year in taxes on clothing. A family that earns $40,000 a year pays $200 a year in taxes on clothing. The tax on clothing is regressive
Progressive Tax
A tax for which people with lower incomes pay a lower percentage of their income in tax than do people with higher incomes (It has increasing average tax rates). -any tax w/ increasing marginal tax rates - income increase/ tax increase -EX: If you pay $2,000 in taxes on an income of $20,000, and a tax of $3,500 on an income of $30,000, then over this range of income the tax is progressive -If, as your taxable income decreases, you pay a smaller percentage of your taxable income in taxes, then the tax is progressive -the marginal tax rate and the average tax rate increase as income levels increase and the marginal tax rate exceeds the average tax rate
Price gouging
Assuming that you're in a competitive market and the increase in price is just from the increased demand, then the price increases are efficient.
Rent Seeking
Attempts by individuals and firms to use government action to make themselves better off at the expense of others. -Regulatory capture is rent seeking behavior
Free Riding
Benefiting from a good without paying for it. -Happen in public goods
How does a free market eliminate a shortage?
By letting the price rise
Which of the following is an example of an ordinary private good?
Furniture
Pigouvian Taxes and subsidies
Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities -induce producers generating negative externalities to reduce production -When a Pigouvian tax is imposed the marginal private cost curve shifts upward
Market-based policies
In which the government provides incentives for internalizing externalities.
Invisible Hand Theorem
Invisible hand theorem states that competitive markets in the absence of externalities will provide the most efficient allocation of resources -The "invisible hand" refers to the notion that competitive markets send resources to their highest valued uses.
Coase theorem
It says that private bargaining will result in socially efficient outcome if property rights are clearly assigned, transactions costs are low, and there is full information. -relies on internalizing externalities through negotiations between the parties involved -For the Coase theorem to work there must be clear assignment of property rights -if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities -Suppose a negative externality exists in a market. If transactions costs are low and parties are willing to bargain then, according to the Coase theorem an efficient solution can be reached regardless of the initial assignment of property rights. -EX: Offering to pay the passenger in front of you to keep her from reclining her airplane seat (coasian solution)
social value
Measure value for willingness to pay -EX: -Amanda pay $100 for jeans -BFF is happy for her but doesn't want to jeans = value $0 -Us (viewer) doesn't care = $0 -Add all them up; social value of jeans = $100
In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). Where will it be easier to find parking: in Freedonia or Meterville?
Meterville
If Congress wanted to change the Social Security tax so that firms paid most of the tax, they would need to
None of the above because the incidence of the Social Security tax does not depend on the tax laws but instead depends on the elasticities of the demand for labor and the supply of labor.
Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia?
Quantity demanded will decrease, quantity supplied will increase, and a surplus will result.
Price controls distribute resources in many unintended ways. In the following cases below, who will probably spend more time waiting in line to get scarce, price-controlled goods?
Retired people
Tax Incidence
The actual division of the burden of a tax between buyers and sellers in the market. -Who bears tax incidence: Whichever side of the market is more inelastic will bear a larger tax burden -Whoever is LESS able to escape the tax will bear it
Marginal Benefit
The additional benefit to a consumer from consuming one more unit of a good or service
Marginal Cost
The additional cost to a firm of producing one more unit of a good or service.
Private Benefit
The benefit received by the consumer of a good or service.
Private Cost
The cost borne by the producer of a good or service.
Consumer Surplus
The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays. -The difference between the maximum amount a person is willing to pay for a good and its current market price -Consumer surplus measures the net benefit/value of item & is the area below demand curve & above the price -Consumer surplus measures the net benefit from participating in a market.
Producer Surplus
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. -the area above the supply curve below the good's price. -Producer surplus is the price of the good minus the marginal cost of producing it summed over the quantity produced. -The area _above__ the market supply curve and __below__ the market price is equal to the total amount of producer surplus in a market. -Graphically, producer surplus is the area under the price and above the supply curve, up to the relevant quantity.
Voting Paradox
The failure of majority voting to always result in consistent choices.
Marginal Tax Rate
The fraction of each additional dollar of income that must be paid in taxes. how much is tax on your next $1 or whats the tax on the next $1
Price Control
The government intervenes in the markets regulations of prices are called Price Controls
Median Voter Theorem
The proposition that the outcome of a majority vote is likely to represent the preferences of the voter who is in the political middle.
Deadweight Loss
The reduction in economic surplus resulting from a market not being in competitive equilibrium -Caused by destroyed transactions => Destroyed = when they really change their behavior => When demand is elastic -Inelastic demand => dwl = 0
Property Right
The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell.
Excludability
The situation in which anyone who does not pay for a good cannot consume it.
Rivalry
The situation that occurs when one person's consumption of a unit of a good means no one else can consume it.
Economic Surplus
The sum of consumer surplus and producer surplus
Tragedy of the Commons
The tendency for a common resource to be overused.
Social Benefit
The total benefit from consuming a good or service, including both the private benefit and any external benefit.
Social Cost
The total cost of producing a good or service, including both the private cost and any external cost.
Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?
There was no price control on gasoline at the time.
If a rent ceiling is below the equilibrium rent, some allocation scheme must be used. The allocation methods include all of the following EXCEPT charging the equilibrium rent.
They would do all of these: -the creation of a black market. -requiring a payment, such as key money, in addition to the rent. -refusing to rent to individuals on the basis of sex, race, or some other attribute. -increased search activity.
If the sellers of a good are taxed for each unit sold, ________.
a smaller quantity of the good is sold
Which of the following is an example of a club good?
cable tv
The elasticity of demand for chocolate chip cookies is 0.6 and the elasticity of supply for these cookies is 1.9. If a tax is imposed on purchases of chocolate chip cookies, then the
consumers would pay more of the tax.
Rent ceiling
difficult to abolish because current renters offer political support for ceilings.
When the demand for a product is more elastic than the supply
firms pay the majority of the tax on the product.
Parents who do not have their children immunized and attempt to benefit from other parents who did have their own children immunized are exhibiting an economic behavior known as
free riding
When economists say that a good is nonrival in consumption, they mean that:
more than one person can enjoy the good at the same time
If protective import-restricting tariffs are imposed by a country, in the majority of cases that nation's consumers end up
paying a higher price for the good than they otherwise would
If a local government gives out water filters to low-income families free of charge, they are:
private goods.
Which of the following displays these two characteristics: nonrivalry and excludability?
quasi-public goods
If protective import-restricting tariffs are imposed by a country, in the majority of cases that nation's producers end up
receiving a higher price for the good than they otherwise would.
Goods can be classified on the basis of whether their consumption is
rival and excludable.
The government imposes a sales tax on hot dogs. The tax would be paid entirely by hot dog sellers if the
supply is perfectly inelastic.
To calculate the revenue government receives when a tax is imposed on a good, multiply the
tax by the after-tax quantity.
A sales tax imposed on sellers shifts the supply curve leftward for the taxed good because the
tax is paid by the seller to the government and is, therefore, like a cost of production.
The deadweight loss of taxation on a good is higher if ________.
the demand or the supply of the good is relatively price elastic
tax bracket
the income range within which a particular tax rate applies.
With an increase in the demand for a good, if prices are not allowed to increase:
there will be no incentive for firms to increase the quantity supplied of the good.
Taxes may cause deadweight losses because
they lower the surplus in the market.
After a tariff is imposed, consumers must pay a price equal to the
world market price plus the tariff.
