Chapter 6

With tax, what are marginal social benefit & marginal social cost & is the market efficient?

Marginal social benefit exceeds marginal social cost and the tax is inefficient.

Does tax incidence depend on tax law?

No. The law might impose a tax on buyers or sellers, but the outcome will be the same.

What leads to inefficient underproduction of housing services?

A rent ceiling set below the equilibrium rent. The marginal social benefit from housing services exceeds its marginal social cost and a deadweight loss arises

Example of the ability-to-pay principle

A rich person can more easily bear the burden than a poor person can.

What creates a black market in housing?

A shortage of housing

What are the activity & opportunity costs of search activity?

Activity cost is costly and the opportunity cost of housing equals its rent (regulated) plus the opportunity cost of the search activity (unregulated).

Example of goods with inelastic demand

Alcohol, tobacco, and gasoline have, so the buyers of these items pay most the tax on them.

Why does the opportunity cost of housing exceed the unregulated rent?

Because the quantity of housing is less than the quantity in an unregulated market.

Perfectly inelastic demand

Buyer pays the entire tax

Perfectly elastic supply

Buyers pay the entire tax

How efficient are taxes?

Except in the extreme cases of perfectly inelastic demand or perfectly inelastic supply when the quantity remains the same, imposing a tax creates inefficiency.

What happens when rent is above the rent ceiling—and generally above what the rent would have been in an unregulated market?

Illegal arrangements are made between renters and landlords

If the rent ceiling is set above the equilibrium rent, what effect does it have?

It has no effect. The market works as if there were no ceiling.

If the minimum wage is set below the equilibrium wage rate, what effect does it have?

It has no effect. The market works as if there were no minimum wage.

If the minimum wage is set above the equilibrium wage rate,what effect does it have?

It has powerful effects

What type of elasticity of supply does labour have?

Labour has a low elasticity of supply, so the seller—the worker—pays most of the income tax and most of the Social Security tax.

When a rent ceiling decreases the quantity of housing, what are the 3 ways that scarce housing is allocated? Are any of these outcomes fair?

Lottery; First-come, first-served; Discrimination. None of these methods leads to a fair outcome.

If the legal rent price cannot eliminate a housing shortage what 2 other mechanisms operate?

Search activity & black markets

Perfectly elastic demand

Sellers pay the entire tax

Perfectly inelastic supply

Sellers pay the entire tax

What are the two conflicting principles of fairness that economists propose to apply to a tax system?

The benefits principle & the ability-to-pay principle

Total surplus with tax & deadweight loss.

The tax revenue takes part of the total surplus & the decreased quantity creates a deadweight loss.

search activity

The time spent looking for someone with whom to do business with

Total surplus with no tax

Total surplus (the sum of consumer surplus and producer surplus) is maximized

minimum wage.

When a price floor is applied to labour markets

price ceiling/price cap

a regulation that makes it illegal to charge a price higher than a specified level

price floor

a regulation that makes it illegal to trade at a price lower than a specified level

When a price ceiling is applied to a housing market what is it called?

a rent ceiling

What outcome does a minimum wage lead to?

an inefficient outcome. The quantity of labour employed is less than the efficient quantity.

If the price rise by a lesser amount than the tax

buyers and sellers share the burden of the tax

If the price rises by the full amount of the tax

buyers pay the tax

When an item is taxed, what are the 3 ways that its price might rise?

by the full amount of the tax, by a lesser amount, or not at all

Discrimination

gives scarce housing to friends, family members, or those of the selected sex, or those without a dog

lottery

gives scarce housing to the lucky

A first-come, first served

gives scarce housing to those who have the greatest foresight and get their names on the list first

What are taxes usually levied on & what type of elasticity for demand & supply?

goods and services with an inelastic demand or an inelastic supply

black market

illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed

What do most economists believe that minimum wage law do?

increase the unemployment rate of low-skilled younger workers

Tax incidence

is the division of the burden of a tax between buyers and sellers.

According to the fair rules view, are rent ceilings fair?

is unfair because it blocks voluntary exchange, does not generally benefit the poor

If the legal wage rate cannot eliminate the surplus, what does minimum wage end up doing?

it creates unemployment

But if the rent ceiling is set below the equilibrium rent what effect does it have?

it has powerful effects

When a price is regulated and there is a shortage what happens to search activity?

it increases

How can the ability-to-pay principle reinforce the benefits principle?

justifies high rates of income tax on high incomes

With no tax, what are marginal social benefit & marginal social cost & is the market efficient?

marginal social benefit equals marginal social cost and the market is efficient.

If the price doesn't rise at all

sellers pay the tax

What does the division of the tax between buyers and sellers depend on?

the elasticities of demand and supply

If equilibrium rent is $1,000 a month & the rent ceiling is set at $800 a month, what region is the equilibrium rent in?

the illegal region

The more elastic the supply

the larger is the buyers' share of the tax

The more inelastic the demand

the larger is the buyers' share of the tax

What does the demand for labour measure?

the marginal social benefit from labour (value of goods produced)

What does the supply of labour measure?

the marginal social cost of labour to workers (leisure forgone)

The ability-to-pay principle

the proposition that people should pay taxes according to how easily they can bear the burden of the tax.

benefits principle & fairness

the proposition that people should pay taxes equal to the benefits they receive from the services provided by government; this arrangement is fair because it means that those who benefit most pay the most taxes

If the minimum wage is set above the equilibrium wage rate, what happens?

the quantity of labour supplied by workers exceeds the quantity demanded by employers & there is a surplus of labour. The quantity of labour hired at the minimum wage is less than the quantity that would be hired in an unregulated labour market.