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