ECON 212 -- Exam 2

Market failure is said to occur whenever:

private markets do not allocate resources in the most economically desirable way.

Market Failures

result in overproduction or underproduction of a good

Supply-side market failures occur when:

supply curves don't reflect the full cost of producing a good or service

The US Tax Structure

-Federal tax system is progressive -State and local tax structures are largely regressive -Overall U.S. tax system is progressive and is considered to be more progressive that other rich countries

quasi-public goods

A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an underallocation of resources.

Regressive Tax

A tax for which the percentage of income paid in taxes decreases as income increases Examples: Payroll taxes, Sales taxes, and Property Taxes

Progressive Tax

A tax for which the percentage of income paid in taxes increases as income increases Example: Personal Income Tax

Some sellers of used cars provide warranties to buyers, with the aim of reassuring buyers that the car is of good quality. These warranties help reduce the chance of what occurring?

Adverse Selection

Upon learning that his auto transmission is about to fail, Ray Roma sells his car to an unsuspecting buyer. This circumstance illustrates what?

Adverse Selection Problem

Public Choice Theory

An economic theory that the public officials who set economic policies and regulate the players act in their own self-interest, just as firms do.

Owners of defective, used cars have more information about the condition of their vehicles than potential buyers of those used cars. This is an example of what?

Asymmetric Information

Government Failure

When government intervention leads to an inefficient allocation of resources and a net welfare loss.

The government of Southland wants to improve resource allocation in the country. What gets accomplished?

taxing polluters and subsidizing firms that are creating significant positive externalities

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer Surplus

the amount a seller is paid for a good minus the seller's cost of providing it

Externalities

the costs or benefits of a market activity that affect a third party

When congressional representatives vote on an appropriate bill, they most vote yea or nay, taking the bad with the good. The statement best reflects:

Concept of limited and bundled choices

The government failure refers to the what?

Economically inefficient outcomes caused by voting problems or incentive structures in government

Which of the following would be the best example of regulatory Capture?

Executives from Ford, General Motors, and Chrysler companies write the rules regulating automobile safety and the fuel requirements

Government purchases are:

Exhaustive

free rider problem

For a group, the problem of people not joining because they can benefit from the group's activities without joining.

Public Goods

Goods, such as clean air and clean water, that everyone must share.

"Pork Barrel" legislation that contains funding for hundreds of earmarks throughout numerous states often reflects:

Logrolling

Market Failures

Markets fail to produce the right amount of the product

When voters have different opinions about an issue, the position that is most likely to be adopted is that of the

Median Voter

It is observed that the person representing the middle position on an issue will most likely determine the outcome of an election. This view most closely associated with the

Median-Voter model

In a television advertisement for AFLAC supplemental health insurance, an ice skater says to his skating partner, "Do you want to try a triple jump" She responds, "Why not I have AFLAC" The response illustrates what?

Moral Hazard Problem

Government Transfer Payments are:

Non exhaustive

Federal Expeditures

Pensions, Income Security, National Defense, Health, and Interest on Public Debt

Personal Income Tax

Progressive Tax, Marginal Tax Rate, and Average Tax Rate

The pursuit through government of a "transfer of wealth" at someone else's expense refers to:

Rent-Seeking behavior

"Regulatory Capture" refers to the situation where a government agency charged with supervising and regulating a particular industry is:

Strongly influenced by the firms in the very industry that is regulating

Which of the following is the best example of rent-seeking behavior?

Students at a University lobby the administration to improve dorms and reduce class sizes without increasing tuition

Paradox of Voting

The question of why citizens vote even though their individual votes stand little chance of changing the election outcome.

Median-Voter Model

The theory that under majority rule the median (middle) voter will be in the dominant position to determine the outcome of an election.

Tax Incidence

Who is paying the tax

Negative Externalities

a cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: a manufacturer dumps toxic chemicals into a river, killing the fish sought by sports fishers; an external cost or a spillover cost

Asymmetric Information

a situation in which one party to an economic transaction has less information than the other party

Proportional Tax

a tax for which the percentage of income paid in taxes remains the same for all income levels Example: Corporate Income Tax

Excise Tax

a tax on the production or sale of a good

Positive Externalities

benefits created by a public good that are shared by the primary consumer of the good and by society more generally

How does governments power to coerce behavior tend to reduce private-sector risk?

by enforcing contracts and discouraging illegal behavior that threatens private property

Rivalry

competition for the same objective or for superiority in the same field.

Imperfect Institutions

criticisms of public sector inefficiency. markets and governments both imperfect. difficult to assign a good to public or private sector.

Private Goods

goods provided by private businesses that can be used only by those who pay for them

Reallocation Process

government taxes individuals and businesses, takes the money and spends on production of public goods

At the optimal quantity of a public good

marginal benefit equals marginal cost

Benefits-Received Principle

people who benefit directly from public goods should pay for them in proportion to the amount of benefits received

Federal Tax Revenues

personal income tax, payroll tax, corporate income tax, excise 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

Because of the free rider problem

the market demand for a public good is nonexistent or understated.

Marginal Tax Rate

the percentage of each additional dollar of income that goes to the tax

Exludability

the property of a good whereby a person can be prevented from using it if someone else is using it

Coarse Theorem

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

Optimal Reduction of an Externality

the reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal

Political Corruption

the use of powers by government officials for illegitimate private gain

Average Tax Rate

total taxes paid divided by total income

Quadratic Voting

voters allowed to purchase and cast as many votes as desired

Chronic budget deficits can be attributed to:

voters wanting government programs but not wanting to pay taxes.