HW CHAP 11 &12

In summarizing the research on the externalities associated with driving cars, a 2007 Journal of Economic Literature article concluded that the optimal corrective tax on gasoline in the United States would be $_____ per gallon.

$2.10

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, is called the ___________ theorem.

Coase

The payroll tax differs from the individual income tax because the payroll tax is primarily earmarked to pay for _______________ and __________.

Social Security and Medicare.

Which of the following tax systems is the most fair? a. There is no objective way to assess fairness among the three systems. b. progressive taxes c. proportional taxes d. regressive taxes

There is no objective way to assess fairness among the three systems.

A mortgage interest deduction would be considered a...

a tax loophole

Which of the following statements is correct? a. Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost. b. Corrective taxes distort economic incentives. c. Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate. d. Both a and b are correct.

a. Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost.

Which of the following is not a way that a corporate tax on the income of U.S. car companies will affect markets? a.Less deadweight loss will occur since corporations are entities and not people who respond to incentives. b. The wages of auto workers will fall. c. The price of cars will rise. d. Owners of car companies (stockholders) will receive less profit.

a.Less deadweight loss will occur since corporations are entities and not people who respond to incentives.

Tax systems that impose record keeping requirements on taxpayers are said to have an __________________________.

administrative burden

Which of the following is not a characteristic of pollution permits? a. Firms for whom pollution reduction is very expensive are willing to pay more for permits than firms for whom pollution reduction is less expensive. b. Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation. c. Real-world markets for pollution permits include sulfur dioxide and carbon. d. Prices are set by supply and demand.

b. Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation.

Excludability is the property of a good whereby a. a good is public, not private. b. a person can be prevented from using it. c. a good is private, not public. d. one person's use diminishes other peoples' use.

b. a person can be prevented from using it.

Rank the following state and local government expenditure categories from smallest to largest. a. public welfare, education, highways. b. highways, public welfare, education c. education, highways, public welfare d. education, public welfare, highways

b. highways, public welfare, education

The concept that people should pay taxes based on the benefits they receive from government services is called the _____________ principle

benefits

Which of the following statements is true of the tax on gasoline? a. The cost of collecting a gasoline tax outweighs the revenues raised by the tax. b. It is preferred to tolls as the best solution to road congestion. c. It discourages driving on noncongested roads, even though there is no congestion externality for these roads. d. Both b and c are correct.

c. It discourages driving on noncongested roads, even though there is no congestion externality for these roads.

You are the mayor of a town with 20,000 residents. The head of your economic development agency recently conducted a survey in which the 20,000 residents said that a small public library in the center of town would be worth $40 to each of them. Because the cost to build the library is only $500,000, you arrange to have the library built. Everyone in town enjoys the library, but when you asked for donations to pay for the library, you only collected $100,000. You are convinced that a. the library was an example of the Tragedy of the Commons. b. the survey must have overstated how much the library was worth to each resident; otherwise, you would have collected $500,000 in donations. c. most residents of the town are probably free-riders at the library. d. the cost of the library exceeded the social benefits.

c. most residents of the town are probably free-riders at the library.

The deadweight loss associated with a tax on a commodity is generated by the _______________ who choose to _____ ____________ the commodity that is taxed.

consumers not consume

Because taxes distort incentives, they typically result in a. deadweight losses. b. reductions in consumer surplus. c. reductions in producer surplus. d. All of the above are correct

d. All of the above are correct

Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems? a. One neighbor lets his dog run through another neighbor's garden, damaging her flowers. b. One neighbor doesn't mow her yard. c. One neighbor plays his music loudly. d. All of the above are correct.

d. All of the above are correct.

A corrective tax a. can be used to internalize a negative externality. b. imposed on sellers shifts the supply curve to the left. c. imposed on buyers shifts the demand curve to the left. d. All of the above.

d. All of the above.

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement, a. Firm B will spend $3,000. b. Firm B will spend $3,500. c. Firm A will spend $4,500. d. Firm A will spend $4,000.

d. Firm A will spend $4,000.

Which of the following is not true about government spending on national defense? a. It fluctuates over time as the political climate changes. b. It includes salaries of military personnel. c. It is the second-largest spending category for the U.S. federal government. d. It is not financed with tax revenue.

d. It is not financed with tax revenue.

Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $700 to Dick and that Jane bears a cost of $500 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that a. Dick pays Jane $600 for her inconvenience. b. Jane pays Dick $400 to give the dog to his parents who live on an isolated farm. c. Jane pays Dick $550 to give the dog to his parents who live on an isolated farm. d. The current situation is efficient.

d. The current situation is efficient.

Which of the following is a difference between corrective taxes and tradable pollution permits? a. With corrective taxes firms pay for pollution; with tradable pollution permits firms do not. b. Corrective taxes internalize the pollution externality while tradable pollution permits do not. c. Corrective taxes are a market-based solution while tradable pollution permits are a command-and-control policy. d. With a corrective tax the government sets the price of pollution; with tradable pollution permits, demand and supply set the price of pollution.

d. With a corrective tax the government sets the price of pollution; with tradable pollution permits, demand and supply set the price of pollution.

Many health economists believe that it will be very _________ to stem the rise in health care costs because ____________ advances are providing better ways to extend and __________ human lives but at high _______

difficult medical improve costs

High marginal income tax rates _________ incentives to work.

distort

Economists play an important role in the complex debates over tax policy by shedding light on the tradeoff between ___________ and _________ in tax policy.

efficiency equity

Suppose that elementary education creates a positive externality. If the government subsidizes education by an amount equal to the per-unit externality it creates, then the equilibrium quantity of education will __________ the socially optimal quantity of education.

equal

Taxes on specific goods such as cigarettes, gasoline, and alcoholic beverages are called ________ taxes.

excise

Consider the following problems: overcrowded public highways, overfishing in the ocean, polluted air, and the near-extinction of the wild rhinoceros. What do these problems have in common? They are all the result of a __________ to establish clear __________ rights over something of value.

failure property

In general, Democrats tend to prefer __________ marginal tax rates to promote _____________ , while Republicans tend to prefer _________ marginal tax rates to promote __________ to work and save.

higher vertical equity lower incentives

Both public goods and common resources are __________________.

nonexcludable

Governments can grant private property rights over resources that were previously viewed as public, such as fish or elephants. Why would governments want to do so? To prevent __________

overuse

The provision of public goods gives rise to _____________ externalities.

positive

The value and cost of goods are easiest to determine when the goods are ________ goods.

private

A textbook is a ________ good and the knowledge that one gains from reading the book is a _______ good.

private public

If a tax takes a constant fraction of income as income rises, it is ______________.

proportional

The U.S. income tax discourages _____________.

saving

In many cases the Coase theorem does not work well because _______________ costs are too high.

transaction

It is commonly argued that national defense is a public good. Nevertheless, the weapons used by the U.S. military are produced by private firms. We can conclude that ___________ is/are rival in consumption and excludable, but ________________ is/are not rival in consumption and not excludable.

weapons national defense