economics chapter 4

The deadweight loss of taxation is sometimes referred to as the

"excess burden of the tax."

The subsidies often generate harmful secondary effects.

-Subsidized firms are encouraged to spend more time lobbying politicians and less time pleasing customers. -They are also encouraged to undertake wasteful projects that fail to generate revenue sufficient to cover costs.

Who are the minimum wage workers?

1) More than 80 percent are members of households with incomes above the poverty level. 2)About one-half are between the ages of 16 and 24 years. 3) Approximately three-fifths are working part time. 4) Only 15 percent are a sole earner providing support for a family with one or more children.

The primary sources of black markets are:

1) evasion of a price control 2) evasion of a tax 3) legal prohibition on the production and exchange of a good

What are the effects of rent control?

1) shortages and black markets will develop 2) the future supply of housing will decline 3) the quality of housing will deteriorate 4) non price methods of rationing will increase in importance 5) inefficient use of housing will result 6) long term renters will benefit at the expense of newcomers

There are now approximately _ federal subsidy programs, more than twice the number of the mid- 1980s.

2,300

Duringthe1980s,thetopFederalmarginalincometax rate fell from

70% to 33%

When a price floor keeps the price of a good above market equilibrium, it will lead to both direct and indirect effects. what are the indirect effects?

Changes in non-price factors favorable to buyers and unfavorable to sellers.

When a price ceiling keeps the price of a good below market equilibrium, there will be both direct and indirect effects. What is the indirect effect

Quality deterioration and changes in other non-price factors favorable to sellers and unfavorable to buyers are likely to occur.

A price ceiling set below an equilibrium price tends to cause persistent imbalances in the market because

Quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage.

When a price ceiling keeps the price of a good below market equilibrium, there will be both direct and indirect effects. What is the direct effect?

Shortage: the quantity demanded will exceed the quantity supplied. Waiting lines may develop.

When a price floor keeps the price of a good above market equilibrium, it will lead to both direct and indirect effects. what is the direct effects?

Surplus:sellers will want to supply a larger quantity than buyers are willing to purchase.

It imposes a burden of taxation over and above the burden of transferring revenues to the government. It is composed of losses to both buyers and sellers.

The deadweight loss of taxation

If a government-imposed price floor legally sets the price of milk above market equilibrium, which of the following will most likely happen?

There will be a surplus of milk.

A law establishing a maximum legal price for a good or service is known as

a price ceiling

Both price floors and price ceilings lead to

a reduction in the quantity traded

of a tax depends on the elasticity of supply relative to demand.

actual burden

The imposition of price ceilings on a market often results in

an increase in expenditures in the black market.

An increase in the number of students graduating with a major in psychology would result in

an increase in the supply of psychologists that would decrease the wage of psychologists and increase the number employed.

equals tax liability divided by taxable income.

average tax rate

A market that operates outside the legal system, either by selling illegal goods or by selling goods at illegal prices is referred to in economics as a

black market

A market that operates outside the legal system.

black market

_ have a higher incidence of defective products, higher profit rates, and greater use of violence to resolve disputes.

black markets

As demand becomes more inelastic, more of the burden will fall on

buyers

It is important to distinguish between

changes in tax rates and changes in tax revenues.

Households supply them to

earn income

Firms demand resources in order to produce

goods and services

When subsidies are granted to some (the elderly,the poor, certain college students, etc.) but not others the group that is not subsidized is generally

harmed. They often have to pay higher prices than would otherwise be the case.

Subsidies to health care consumers have driven up the cost of health care. Health care prices have risen at twice the rate of other prices since the passage of Medicare and Medicaid.

health care subsidies

An increase in the demand for a product will lead to an _

increase in demand for the resources used to produce it.

A new law requiring plumbers to pass strict certification tests that reduce the number of plumbers would

increase the wage rate of plumbers.

An increase in the price of a resource will

increasethe cost of producing products that use it, shifting their supply curve to the left.

If a $500 tax is placed legally (statutorily) on the buyers of new couches and as a result the price of couches at stores rises by $200, the actual burden of the tax

is $200 on couch buyers and $300 on sellers.

A progressive tax

is one that taxes those with higher incomes at a higher rate than those with lower incomes.

the _ market is an important resource market

labor

illustratestherelationship between tax rates and tax revenues.

laffer curve

shows that tax revenues are low for both high and low tax rates.

laffer curve

higher tax rates reduce the level of the tax base because they make the activity

less attractive

calculated as the change in tax liability divided by the change in taxable income.

marginal tax rate

is highly important because it determines how much of an additional dollar earned must be paid in taxes (and therefore, how much one gets to keep). In this way, the marginal tax rate directly impacts an individual's incentive to earn.

marginal tax rate

Politicians often use subsidy programs to

obtain votes and political contributions from interest groups benefiting from the subsidies.

When the price of a good is legally set below the equilibrium level, a shortage often results. This shortage

occurs because the price ceiling prevents the market mechanism from establishing an equilibrium price.

The quantity exchanged will fall and the gains from trade will be less than if the good were allocated by markets.

price ceiling

establishes a maximum price that sellers are legally permitted to charge.

price ceiling

The quantity exchanged will fall and the gains from trade will be less than if the good were allocated by markets.

price floor

establishes a minimum legal price for the good or service.

price floor

one in which the average tax rate rises with income.

progressive tax

Markets will exist in any environment, but they can be counted on to function efficiently only when

property rights are secure and contracts enforced in an evenhanded manner.

one in which the average tax rate stays the same across income levels.

proportional tax

The basic postulate of economics indicates that a higher minimum wage will

reduce the employment of low-skill workers.

A deadweight loss results from the imposition of a tax on a good because the tax

reduces the quantity of exchanges between buyers and sellers.

a reduction in the demand for a product will lead to a

reduction in the demand for resources used to produce it.

one in which the average tax rate falls with income.

regressive tax

As in the case of a tax, the division of the benefit from a subsidy is determined by the

relative elasticities of demand & supply rather than to whom the subsidy is actually paid.

an example of a price ceiling is

rent control

markets for _ and _ are closely linked

resources, products

In the resource market, businesses demand_ and households

resources, supply them

Even though the top Federal income tax rates were cut sharply during the 1980s, the tax revenues and the share of personal income tax paid by high earners

rose during the decade

As supply becomes more inelastic, more of the burden will fall on

sellers and resource suppliers.

When supply is highly inelastic relative to demand,

sellers will derive most of the benefits of a subsidy.

The legal assignment of who pays a taxis called the

statutory incidence

Grants and loans to college students have grown substantially in recent decades. While these subsidies have helped students pay for college, they have also driven up the cost of college.

subsidies to college students

what are some examples of real world subsidy programs

subsidies to college students and health care subsidies

A payment the government makes to either the buyer or seller, usually on a per-unit basis, when a good or service is purchased or sold is called a

subsidy

a payment to either the buyer or seller of a good, usually on a per unit basis.

subsidy

The primary beneficiaries of subsidy programs are often different than the group receiving the subsidy. • For example,

suppliers derive substantial benefits when the purchasers are subsidized, particularly when the supply of the service is highly inelastic

The _ framework can be used to analyze the impact of a subsidy as it was used to analyze the impact of a tax.

supply and demand

A regressive tax

takes a higher percentage of the income of those with lower incomes than for those with higher incomes.

The level or quantity of an economic activity that is taxed.

tax base

The average tax rate is defined as

tax liability divided by taxable income.

defined as the rate (%) at which an activity is taxed.

tax rate

defined as tax rate multiplied by tax base.

tax revenues

When demand is highly inelastic relative to supply,

the buyers will reap most of the benefits of a subsidy.

The marginal tax rate is defined as

the change in tax liability divided by the change in taxable income.

the loss of the gains from trade as a result of the imposition of a tax.

the deadweight loss of taxation

The actual burden of a tax is determined primarily by

the elasticities of demand and supply.

As tax rates increase from low levels, tax revenues will also increase even though the tax base is shrinking. As rates continue to increase, at some point, the shrinkage in the tax base will dominate and the higher rates will lead to a reduction in tax revenues.

the laffer curve

A legal system that provides secure property rights and an unbiased enforcement of contracts enhances

the operation of markets

Other things constant, as the price of a resource increases,

the quantity of the resource demanded falls.

While a higher minimum wage increases the wages of low-skill workers

their on-the-job training, non-wage benefits, working conditions, and employment will decline.

If drugs such as marijuana and cocaine were legalized, it would be likely that

there would be less violence occurring in drug transactions, there would be a reduction in tainted or poor quality drugs, and their prices would decrease

According to the Laffer curve,

when marginal tax rates are high, a reduction in tax rates may increase tax revenue.

The actual burden of a tax (actual incidence) may differ substantially. The actual burden does not depend on

who legally pays the tax