micro midterm #2
A tax imposed on the sellers of a good will lower the
effective price received by sellers and lower the equilibrium quantity
demand = inelastic
the deadweight loss of a tax is smaller than when demand is relatively elastic.
The term tax incidence refers to
the distribution of the tax burden between buyers and sellers
In some cases, tradable pollution permits may be better than a corrective tax because
the government can set a maximum level of pollution using permits
disadvantage of government provision of a public good?
the government lacks info about what people are willing to pay for the good
benefits principle
the idea that people should pay taxes based on the benefits they receive from government services. ex: gas tax
ability to pay principle
the idea that taxes should be levied on a person according to how well that person can shoulder the burden (abilities and income)
vertical equity
the idea that taxpayers with a greater ability to pay taxes should pay larger amounts
horizontal equity
the idea that taxpayers with similar abilities to pay taxes should pay the same amount
If good x is available free of charge, then
the private market cannot ensure an efficient allocation of resources in the market for good x
When motorcycles are taxed and sellers of motorcycles are required to pay the tax to the government,
the quantity of motorcycles bought and sold in the market is reduced.
average tax rate
total taxes paid divided by total income
Tradable permits vs regulating
tradable permits are more efficient
The U.S. federal government collects about
two thirds of the taxes in our economy
Tradable pollution permits
will be more valuable to firms that can reduce pollution only at high costs
Part of the deadweight loss from taxing labor earnings is that people
will work less
In 2011, the average American paid approximately how much to the federal government in taxes?
$8,000
The marginal tax rate for an unmarried taxpayer in the highest taxable income category for 2013 is approximately
40 percent
regressive tax
A tax for which the percentage of income paid in taxes decreases as income increases
progressive tax
A tax for which the percentage of income paid in taxes increases as income increases
proportional tax
A tax in which the average tax rate is the same at all income levels.
tax triples
DWL increases by a factor of 9
Who pays for public schools?
Local governments
example of price floor
Minimum wage law and agricultural price supports
Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government gives a $5 per-unit subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?
The equilibrium quantity is greater than the socially optimal quantity.
imposition of a tax on gasoline
The incidence of the tax depends upon the price elasticities of demand and supply.
the size of a tax increases from a small tax to a medium tax and finally to a large tax, the deadweight loss and the amount of tax revenue =
The size of the deadweight loss increases, but the tax revenue first increases, then decreases.
If a tax shifts the demand curve upward, we can infer that the tax was levied on
We cannot infer anything because the shift described is not consistent with a tax
The difference between a corrective tax and a tradable pollution permit is that
a corrective tax sets the price of pollution and a permit sets the quantity of pollution.
The term market failure refers to
a market that fails to allocate resources efficiently
When the production of a good results in a positive externality, the social value curve is
above the demand curve, indicating that the total value to society is greater than the private benefit.
tax structure consistent w/ vertical equity
any (proportional, progressive, regressive)
It does not matter whether a tax is levied on the buyers or the sellers of a good because
buyers and sellers will share the burden of the tax
Rebecca values dog sitting for the weekend at $200. Susan is willing to dog sit for Rebecca so long as she receives at least $175. Rebecca and Susan agree on a price of $185. Suppose the government imposes a tax of $30 on dog sitting. What is the deadweight loss of the tax?
c. the lost benefit to Rebecca and Susan because after the tax, Susan will not dog sit for Rebecca
Goods that are not excludable include both
common resources and public goods
Allows government to minimize the deadweight loss(es) from the tax?
demand is very inelastic or supply is very inelastic
If the government wants to reduce the burning of fossil fuels, it should impose a tax on
either buyers or sellers of gasoline
club goods
excludable and non-rival
private goods
excludable and rival
Private parties are usually more successful in achieving efficient outcomes than government policies in the presence of externalities.
false
excludable, but not rival in consumption
fire protection in a small town
command-and-control policy =
government regulation
The U.S. federal government spends its revenues in a number of ways.
income security, health, national defense, net interest
a binding rent control law is repealed. As a result, we would expect the total number of units rented in the city to
increase
tax doubles
increases DWL by a factor of 4
The largest source of revenue for the federal government is the
individual income tax
better to tax goods with an
inelastic demand
If a government simplified its tax system the likeliest result would be a decrease in
its deadweight loss
daadweight losses
larger the more elastic the demand curve
lump sum tax
marginal tax rate = 0, not equitable, most efficient (NO DWL)
Suppose an excise tax is imposed on luxury boats and yachts. Economists argue that such a tax
may burden workers in the luxury-boat-and-yacht industry more than it burdens the buyers of luxury boats and yachts
When a tax is placed on the buyers of a product, a result is that buyers effectively pay
more than before the tax and sellers effectively receive less than before the tax
If a tax is levied on the buyers of a product, then there will be a
movement down and to the left along the supply curve.
decrease in price
new buyers enter market, increasing consumer surplus
public goods
non-rival and non-excludable
non-rival
one person's consumption of it does not diminish another person's
price = 200. price ceiling = 150
quantity demanded = increases. quantity supplied = decreases.
example of price ceiling
rent control
Consumer surplus is a good measure of economic welfare if policymakers want to
respect the preferences of buyers
The two types of taxes that are most important to state and local governments as sources of revenue are
sales tax and property tax
Internalizing a positive externality will cause the demand curve to
shift to the right
For a good that is taxed, the area on the relevant supply-and-demand graph that represents government's tax revenue is
smaller than the area that represents the loss of consumer surplus and producer surplus caused by the tax.
The federal government uses the revenue from the FICA (Federal Insurance Contribution Act) tax to pay for
social security and medicare
When a binding price floor is imposed on a market to benefit sellers
some sellers will not be able to sell any amount of the good
Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the
supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20.
Suppose that a tax is placed on books. If the sellers pay the majority of the tax, then we know that the
supply is more inelastic than demand
marginal tax rate
tax rate that applies to the next dollar of taxable income