Micro Exam 2

Market -based

Align private incentives with social efficiency

What is an item that falls more heavily with sellers

entertainment

A tax placed on a necessary good for consumers will

fall more heavily on buyers

the sellers cost production

is the minimum amount they are willing to accept

Tax collected from buyers in a market

is the same as tax collected from sellers

A buyers willingness to pay is

the max amount for the good

Excludable

the property of a good whereby a person can be prevented from using it. food in a grocery store

Rivalry in Consumption

the property of a good whereby one persons use of a good diminishes other peoples use. Food, not rival - streetlight

Positive Externality

Education:generates benefits to people beyond just buyers of education. Social value exceeds private value. The optimal quantity that maximizes total surplus is greater than equilibrium quantity

If equilibrium price of gas is $1/gal and the govt places a price ceiling on gas of $1.5/gal the result will be a shortage of gas

False, a price ceiling that is set above isnt binding

A 10% increase in minimum wage causes 10% in teenage employment

False, it causes a 1-3% reduction

A price floor in the market always creates a surplus

False, only if it is set above the equilibrium price

A price ceiling set below cause a surplus

False, shortage

the minimum wage helps all teenagers because they receive higher then they would have

False, some may become unemployed and others quit school to earn what they think is good money

Public

Goods that are neither excludalbe or rival. national defense and streetlights

What is an example of a price floor

Minimum wage

An apple orchard uses pesticides the fumes drift across to a nearby neighborhood

Negative, the social cost exceeds the private cost

If the externality is not internalized does the market overproduce or underproduce

Overproduced. To overproduce means the true cost exceeds the true value. To underproduce means the true value exceeds the true cost

Negative Externality

Pollution: costs to society are beyond those to the firm ( social cost exceeds private)

If the government places a price ceiling on gas at $1.50 and the equilibrium is $1.00

Price ceiling becomes a binding constraint because of increase in demand

What is not a function of prices in a market system?

Prices ensure an equal distribution of goods and services among consumers.

To internalize a negative externality a policy would be

Tax the good

What is not a short run effect of rent control on the housing market

a large shortage

corrective tax

a tax enacted to correct the effects of a negative externality

Why is a tax collected from buyers equivelant to a tax collected from sellers

a tax places a wedge between what the buyers and sellers receieve . Whether the buyer or seller hands the tax to the government makes no difference

Trade pollution permits

allow the holder of the permit to pollute only a certain amount

Total surplus area is

below demand curve and above supply

Private Goods

both excludable and rival. bread and jeans

Under rent control bribery is a mechanism used to

bring the total price of an apartment (including the bribe) closer to the equilibrium price

A tax collected from the buyers of a good shifts the

demand curve downward by the size of the tax

the burden of the tax falls more heavily on the sellers in the market when

demand is elastic and supply is inelastic

the burden of tax falls more heavily on buyers when

demand is inelastic and supply is elastic

When collected from the buyers which way does the demand curve shift

downward by the size of the tax

Common resource

good that are rival but not excludable - fish in the ocean

Club goods

goods that are excludable but not rival - fire protection or cable tv

Is the impact of a binding price ceiling greater in the short run or long run?

greater in the long run because both supply and demand tend to be more elastic in the long run. As a result, the shortage becomes more severe.

technology spillover

high technology production generates a positive externality for other producers

What takes places when a tax is placed on a good

increase in price buyers pay, decrease sellers receive, and decrease in quantity sold

Rent Control

is a price ceiling, leads to larger shortage of apartments in the long run than short, and leads to

When we use the model of supply and demand to analyze a tax that is collected from the sellers, which way do we shift the supply curve

its shifted upward by the size of the tax because the amount the seller requires from the buyer has been increased by the tax

Under rent control tenants can expect

lower rent and lower quality housing

Adam Smiths "invisible hand" suggests that a competitve market outcome

maximizes total surplus

If a tax is levied on the sellers of a product then there will be a

movement up and to the left along the demand curve

When a binding price ceiling is imposed on the market

price no longer serves as a rationing device

Coase Theorm

proposition that if private parties can bargain without cost over allocation of resources they can solve the problem of externalities on their own

Command and control

regulations that requires or limit certain behaviors. The regulator must know all of the details of an industry and alternative technologies to create the efficient rules

What are problems caused by a binding price ceiling

shortages, long lines, bribes, poor quality

What is the impact on the price and quantity if a price is set below equilibrium?

the Qs falls and the Qd rises causing a shortage

What if the price and quantity of the price floor are set above

the Qs rises and the Qd falls causing a surplus

Interalizing of externality

the altering of incentives so that people take into account the external effects of their actions

Why are tradable pollution permits considered superior to corrective tax at reducing pollution

the regulator doesnt need to know anything about the dmenad to pollute in order to arrive at the targeted amount of pollution

Non- excludable

the seller cant exclude non-payers from using it - broadcast television or radio

Suppose a gas- guzzler tax is placed on luxury cars. Who will likely bear the burden of tax

the sellers, because the demand for luxuries tend to be highly elastic. Buyers can easily shift their purchases toward alternatives while sellers cant quickly reduce production when the price they receive falls. The burden falls on the side of the market that is less elastic.

If a social planner chooses to produce less than equilibrium of a good

the value placed on the last unit produced by buyers exceeds the value of the cost of production

What is the impact on the price and quantity if a price is set above the equilibrium

there is no binding constraint and the price can move to equilibrium without restriction

What is the impact on the price and quantity if the price floor is set below equilibrium price?

there is no binding constraint, so no impact

In the short run, rent control causes quantity supplied

to fall and quantitiy demanded to rise

A price floor set above is a binding constraint

true

the shortage of housing caused by binding rent is more severe in the long run

true