Econ 202 Exam 2
When economists speak of a surplus surplus (3 things)
- quantity supplied > quantity demanded - firms have unsold goods piling up -the market price is above equilibrium
problems with price ceilings
- shortages - reductions in quality - surge cost - misallocation
5 Supply shifters
1) Input prices 2) technology 3) prices of related goods 4) # of firms 5) expected future prices
2 invisible hand qualifiers
1) competitive market 2) no externalities
Which of the following occurs when an economic activity has a spillover benefit on third parties not engaged in the activity?
A positive externality
Which of the following is the correct way to describe equilibrium in a market?
At equilibrium, quantity demanded equals quantity supplied.
True or False
Because the demand for illegal drugs is inelastic and the supply is elastic, policies that reduce supply in the illegal drug market reduce revenue for drug dealers.
How does a free market eliminate a shortage?
By letting the price rise
Which of the following gives rise to a positive externality?
Consumption of a drug to cure a communicable disease
________ refers to the reduction in economic surplus resulting from not being in competitive equilibrium.
Deadweight loss
Let D= demand, S = supply, P = equilibrium price, and Q= equilibrium quantity. What happens in the market for walnuts if the Centers for Disease Control and Prevention announces that consuming a half cup of walnuts each week helps to lower bad levels of cholesterol?
D increases, S no change, P and Q increase
________ is maximized in a competitive market when marginal benefit equals marginal cost.
Economic surplus
True or False:Market equilibrium occurs where supply equals demand.
Fale
True or False Because the supply of low-quality guns is very elastic, gun buy-back programs in a single city will reduce the number of guns by a large amount.
False
True or False Government policies will have their intended effect irrespective of the laws of supply and demand.
False
True or False If marginal benefit is greater than marginal cost, output is inefficiently high.
False
True or False The total amount of producer surplus in a market is equal to the area below the supply curve.
False
True or False When there is a positive externality in a free market, too much of the good is produced and consumed.
False
Which of the following is an implication of the Coase Theorem?
Government intervention is not always necessary to solve externality problems.
Which of the following is true of a progressive tax system?
High income households pay a higher percentage of their income as taxes.
Assumptions of the Coase Theorem
Low transaction costs and clear assignment of property rights
Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain.
No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government.
Why do some consumers tend to favor price controls while others tend to oppose them?
Price ceilings generate shortages. Consequently, the consumers who obtain the product at a lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage
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.
When a price ceiling is in place keeping the price below the market price, what's larger: quantity demanded or quantity supplied?
Quantity demanded.
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? Choose one from each pair: retired people or working people
Retired people
Let D= demand, S = supply, P = equilibrium price, and Q= equilibrium quantity. What happens in the market for tropical hardwood trees if the governments restrict the amount of forest lands that can be logged?
S decreases, D no change, P increases, Q decreases.
The tax incidence on buyers is higher if _____________.
The elasticity of the market supply curve is higher than the elasticity of the market demand curve
Which of the following describes how a positive externality affects a competitive market?
The externality causes a difference between the private benefit from consumption and the social benefit.
Which of the following describes how a negative externality affects a competitive market?
The externality causes a difference between the private cost of production and the social cost.
The U.S. government has frequently used a "command-and-control" approach in dealing with pollution. Which of the following describes this approach?
The government imposes quantitative limits on the amount of pollution firms are allowed to generate.
Which of the following happens when a Pigouvian subsidy is provided?
The marginal private benefit curve shifts upward
Which of the following must be present to reach a private solution to an externality problem?
The transactions costs to negotiate a solution must be relatively low.
True or False A price ceiling is a legally determined maximum price that sellers may charge.
True
True or False If the government wants to minimize the welfare loss of a tax, it should tax goods with more inelastic demands or supplies.
True
True or False Marginal cost is the additional cost to a firm of producing one more unit of a good or service.
True
True or False Producer surplus is the difference between the lowest price a firm is willing to accept for a product and the price it actually receives for the product.
True
True or False: A shortage occurs when the market price is lower than the equilibrium price.
True
True or False: When the demand for a product is less elastic than the supply, consumers pay the majority of the tax on the product.
True
True or False:A surplus occurs when the actual selling price is above the market equilibrium price.
True
Offering to pay the passenger in front of you to keep her from reclining her airplane seat is an example of
a Coasian solution to an externality situation.
Government imposed quantitative limits on the amount of pollution firms are allowed to produce is an example of
a command-and-control approach to pollution reduction.
If the demand and supply curves for a commodity both shift to the left and the shift in demand is less than the shift in supply, then in comparison to the initial equilibrium, the new equilibrium will be characterized by:
a higher price and a lower quantity.
Assume that the supply curve for a commodity shifts to the right and the demand curve shifts to the left, both by the same degree. Then, in comparison to the initial equilibrium, the new equilibrium will be characterized by:
a lower price and the same quantity.
If the social benefit of consuming a good or a service exceeds the private benefit
a positive externality exists.
A surplus is eliminated by
a price decrease, decreasing the quantity supplied and increasing the quantity demanded
Market Equilibrium
a situation when neither buyers nor sellers have incentive to change their behavior
If the sellers of a good are taxed for each unit sold, ________.
a smaller quantity of the good is sold
The area ________ the market supply curve and ________ the market price is equal to the total amount of producer surplus in a market.
above; below
The area ________ the market supply curve and ________ the market price is equal to the total amount of producer surplus in a market.
above; below
When the government taxes a good or service, it
affects the market equilibrium for that good or service.
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.
Which of the following would cause both the equilibrium price and equilibrium quantity of cotton (assume that cotton is a normal good) to increase?
an increase in consumer income
Which of the following would cause both the equilibrium price and equilibrium quantity of cotton (assume that cotton is a normal good) to increase?
an increase in consumer income
Which of the following would cause a decrease in the equilibrium price and an increase in the equilibrium quantity of salmon?
an increase in supply a decrease in demand and an increase in supply
Which of the following would cause an increase in the equilibrium price and an increase in the equilibrium quantity of watermelons?
an increase in supply and an increase in demand greater than the increase in supply
Private costs
are borne by producers of a good while social costs are borne by society at large.
Coase theorem
bargaining will result in socially efficient outcome if - property rights are clearly assigned - transaction costs are low - there is full information
marginal tax rate
change in taxes/change in income
When the federal government orders firms to use particular methods to reduce pollution, it is said to be using
command-and-control policies.
proportional tax
constant
When the demand for a product is less elastic than the supply
consumers pay the majority of the tax on the product.
pigouvian tax
corrective tax in the amount of the externality would lead to efficient outcome (can be positive or negative)
private cost
cost borne by producer of the good
A price ceiling leads to a(n) ________ if below equilibrium price.
decrease in total surplus
As the price of a good rises, consumer surplus _________ , and as the price of a good falls, consumer surplus ____________ .
decreases, increases
regressive
decreasing
Each point on a ________ curve shows the willingness of consumers to purchase a product at different prices.
demand
The government proposes a tax on imported champagne. Buyers will bear the entire burden of the tax if the
demand curve for imported champagne is vertical.
less willingness to pay will shift:
demand curve left
If there is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and consumer surplus plus producer surplus is maximized, then
economic efficiency is achieved.
If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set
equal to the marginal external cost at the economically efficient level of pollution.
producer revenue
exact amount of $ consumers spend
A price floor set above the equilibrium price leads to a(n) ________.
excess supply of goods in the market
When the demand for a product is more elastic than the supply
firms pay the majority of the tax on the product.
A positive externality ________.
gives rise to external benefits
Commmand-and-Control policies
government directly regulates allocation of resources
market-based policies
government provides incentives for internalizing externalities
tax/economic incidence
has nothing to do with who government says writers the check but everything to do with laws of supply and demand
marginal benefit (buyers)
height of demand curve - what is received
progressive tax
increasing avg tax rate
Assume that production from an electric utility caused acid rain. If the government imposed a tax on the utility equal to the cost of the acid rain, the government's action would
internalize the externality.
An economic agent ________ when he accounts for the full costs and benefits of his actions.
internalizes an externality
Economic surplus
is equal to the sum of consumer surplus and producer surplus.
If there is pollution in producing a product, then the market equilibrium price
is too low and equilibrium quantity is too high.
An advantage of imposing a tax on the producer that generates pollution is that
it forces the polluting producer to internalize the external cost of the pollution.
The marginal social cost curve ________ when production involves negative externalities.
lies above the supply curve
A price floor is the ________.
lower limit on the price of a good
The difference between the ________ and the ________ from the sale of a product is called producer surplus.
lowest price a firm would have been willing to accept; price it actually receives
demand curve =
marginal benefit curve
In a competitive market the demand curve shows the ________ received by consumers and the supply curve shows the ________.
marginal benefit; marginal cost
supply curve=
marginal cost curve
inefficient markets
monopoly externalities private does not equal social with externality
who pays less of the incidence?
more elastic side
When a negative externality exists, the private market produces
more than the economically efficient output level.
marginal social cost equation
mpc(marginal private cost)+mec(marginal external cost)
To affect the market outcome, a price ceiling
must be set below the equilibrium price.
In order to be binding, a price ceiling
must lie below the free market equilibrium price.
A Pigouvian tax is a tax designed to ________.
nduce producers generating negative externalities to reduce production
pigouvian subsidy
negative tax for the negative externalities
The Coase Theorem states that ________.
negotiation between economic agents leads to an efficient allocation of resources
The Coase theorem relies on internalizing externalities through ________.
negotiations between the parties involved
If a market is in equilibrium , is it necessarily true that all potential buyers and sellers are satisfied with the market price?
no
deadweight social loss
occurs because unites are not produced when valid more than the alternative good
marginal cost (sellers)
opportunity cost - what is given up by the seller
MB<MC
output is inefficiently high not consume
MB>MC
output is inefficiently low keep consuming
When marginal social benefit is greater than marginal private benefit
positive externality
non binding
price ceiling is greater than equilibrium
Binding
price ceiling is less than equilibrium
DONT REASON FROM A PRICE CHANGE
price is determined from movement of supply and demand curve
tax drives a wedge between
price paid by consumer and price received by producer
Marginal cost (buyers)
price paid/what is given up
marginal benefit (sellers)
price received by sellers
A market demand curve reflects the
private benefits of consuming a product.
The cost borne by a producer in the production of a good or service is called
private cost.
A market supply curve reflects the
private costs of producing a good or service.
In the United States, the federal income tax is an example of a
progressive tax.
In New York City, about 1 million apartments are subject to rent control by the local government. Rent control
puts a legal limit on the rent that landlords can charge for an apartment.
If, for a product, the quantity supplied exceeds the quantity demanded, the market price will fall until
quantity demanded equals quantity supplied. The market price will then equal the equilibrium price.
if price ceiling keeps price below market price then
quantity demanded is greater than quantity supplied
In a ________ tax system, the marginal tax rate declines with income.
regressive
who bears more of the incidence?
relatively inelastic side of the market
producer surplus=
revenue-opportunity cost
dead weight loss
sales that don't happen due to price distortion
when demand is more elastic than supply who pays the larger share of tax?
sellers
Corporate Average Fuel Economy (CAFE)
set of rules regulating how fuel efficient a car makers fleet has to be on average
When production generates a negative externality, the true cost of production is the
social cost of production.
A ________ curve shows the marginal cost of producing one more unit of a good or service.
supply
deadweight loss is greater when
supply and demand are more elastic
The actual division of the burden of a tax between buyers and sellers in a market is called
tax incidence.
Tax incidence indicates
the actual division of the burden of a tax.
Marginal cost is
the additional cost to a firm of producing one more unit of a good or service.
The total amount of producer surplus in a market is equal to
the area above the market supply curve and below the market price.
Consumer surplus in a market for a product would be equal to ________ if the market price was zero.
the area under the demand curve
Consumer surplus in a market for a product would be equal to ________ if the market price was zero.
the area under the demand curve
The supply of milk in Nexus City is perfectly elastic. If a tax is imposed on each gallon of milk sold, ________.
the burden of the tax will fall entirely on the buyers
The tax incidence on sellers is higher if ________.
the buyers are more sensitive to price changes than the sellers
The corporate income tax is ultimately paid by all of the following except
the corporation's debtors in the form of lower rates of return on the corporation's bonds.
A price ceiling does NOT lead to a deadweight loss if ________.
the equilibrium market price lies below the price ceiling
If a tax is imposed on a good,________.
the equilibrium quantity of the good in the market falls
The marginal tax rate is
the fraction of each additional dollar of income that must be paid in taxes
In a competitive market equilibrium
the marginal benefit equals the marginal cost of the last unit sold.
When a Pigouvian tax is imposed, ________.
the marginal private cost curve shifts upward
If positive externalities are present in a free market, ________ at any output level.
the marginal social benefit of production exceeds marginal private benefit
A positive externality causes
the marginal social benefit to exceed the marginal private cost of the last unit produced.
In a progressive tax system, ________.
the marginal tax rate exceeds the average tax rate
If the production of a good involves positive externalities, ________.
the market price of the good is lower than its optimal price
Willingness to pay measures
the maximum price that a buyer is willing to pay for a good.
If the production of a good involves negative externalities, ________.
the optimal price of the good is higher than the price charged in the market
The burden of a tax falls entirely on sellers if ________.
the price elasticity of supply is zero (perfectly inelastic)
uppliers will be willing to supply a product only if
the price received is at least equal to the additional cost of producing the product.
If, in a competitive market, marginal benefit is less than marginal cost
the quantity sold is greater than the equilibrium quantity.
When there is a positive externality
the social benefit received by consumers is greater than the private benefit.
Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which
the sum of consumer surplus and producer surplus is at a maximum.
Assume that the price for swimming pool maintenance services has risen and sales of these services have fallen. One can conclude that
the supply of swimming pool maintenance services has decreased.
The demand for chocolate is perfectly inelastic in Foodieland. If a tax is imposed on chocolate, ________.
the tax burden will fall entirely on buyers
A price ceiling refers to ________.
the upper limit on the price of a good
A demand curve shows
the willingness of consumers to buy a product at different prices.
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.
average tax rate
total amount of taxes paid divide by income
social benefit
total benefits of producing a good including external benefits
social cost
total cost of producing a good including external costs
If the paint on your house was eaten away by the fumes from a factory nearby and you hired a lawyer to sue the polluting firm, your legal fees would be considered
transactions costs
The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are called
transactions costs.
net consumer value
value consumer places on a good - what they have to pay to get the goods
private benefit
value received (benefit) of consumer
total surplus
when consumers value the good more than the opportunity costs of making the good
economic efficiency
when marginal benefit= marginal cost and the total surplus (consumer+producer) is at its maximum
when do externalities occur?
when one person's economic activity affects another's welfare
externalities
when people other than producers or consumers are affected by the trade
A decrease in the equilibrium quantity for a product will result
when there is a decrease in supply and a decrease in demand for the product.
Statutory incidence
who actually writes the check