Chapter 10 The Government in the Economy

What is a price floor?

a price floor is a lower limit on the price of a market good

The term ________ refers to how the burden of the tax is distributed across various agents in the economy.

tax incidence

Property Taxes

taxes on land and structures on which local governments rely on to fund schools, libraries, and public services

What are corporate income taxes?

taxes paid by firms to the government from their profits

The burden of a tax falls entirely on buyers if ________.

the price elasticity of demand is zero

When does a budget deficit occur?

a budget deficit occurs when spending is greater than tax revenues

When does a budget surplus occur?

a budget surplus occurs when tax revenues are greater than spending

The imposition of all taxes, except a Pigouvian tax, leads to ________.

a loss in total welfare

Rent control is an example of

a price ceiling

What is a price ceiling?

a price ceiling is a cap or maximum price on a market good

What does a progressive tax system involve?

a progressive tax system involves higher tax rates on those earning higher incomes

Tax Incidence

refers to how the burden of taxation is distributed

Governments tax to:

- redistribute funds - finance operations - correct market failures and externalities

Why are the four main factors underlying government taxation and spending decisions?

1. raise revenues to pay for public goods 2. redistribute income to address fairness issues 3. finance operations of government 4. correct market failures and externalities

In competitive markets, tax incidence and equilibrium prices and quantities are

independent of whether the tax is imposed on consumers or producers

A regressive tax system

involves lower tax rates on those earning higher incomes

Consumer Sovereignty

is the view that choices made by a consumer reflect his or her true preferences, and outsiders, including the government should not interfere with these choises

What is a payroll tax? (social insurance tax)

it is a tax on the wages of workers

In a proportional tax system,

households pay the same percentage of their incomes in taxes regardless of their income level

What is the marginal tax rate?

how much of the last dollar earned is paid out in tax

Paternalism

is the view that consumers do not always know what is best for them, and the government should encourage or induce them to change their actions

A price floor is the ________.

lower limit on the price of a good

Transfer Payments

occur when the government gives part of its tax revenue to some individual or group

The federal government relies on ________ to limit inequality.

progressive taxes

A ________ system is one in which households pay the same percentage of their incomes in taxes regardless of their income level.

proportional

One reason governments impose taxes is to

redistribute funds via transfer payments

Which of the following is an objective of government taxation? - Reducing the demand for money in the economy - Increasing the supply of money in the economy - Redistribution of funds - Reducing the growth rate of the economy

redistribution of funds

Government Failures

refer to inefficiencies caused by a government's interventions

Refer to the figure above. The consumer surplus before the tax is imposed is given by the area ________.

CAE

Refer to the figure above. The region ________ shows the consumer surplus after the imposition of the tax.

JBC

Refer to the figure above. The loss in consumer surplus due to the imposition of the tax is given by the areas ________.

JBIE and BIA

A ________ occurs when government spending exceeds tax revenue.

budget deficit

Direct Regulation (Command-and-Control Regulation)

refers to direct actions by the government to control the amount of a certain activity

Equity-Efficiency Trade-Off

refers to the balance between ensuring an equitable allocation of resources (equity) and increasing social surplus or total output (efficiency)

Corruption

refers to the misuse of public funds or the distortion of the allocation of resources for personal gain

Refer to the figure above. The region BAH represents the

deadweight loss due to taxation

Welfare State

refers to the set of insurance, regulation, and transfer programs operated by the government, including unemployment benefits, pensions, and government-run and financed healthcare

What does regulation refer to?

regulation refers to actions by the federal or local government directed at influencing market outcomes, such as the quantity traded of a good or service, its price, or its quality and safety

Sales Taxes

sales taxes are paid by a buyer, as a percentage of the sale price of an item

A budget surplus occurs when ________.

tax revenue exceeds government spending

What are tax revenues?

tax revenues (receipts) are the money a government collects through a tax

Excise Taxes

taxes paid when purchases are made on a specific good (alcohol, tobacco, gasoline)

Scenario: There are 4 households in a locality. The annual income of the first household €20,000, the annual income of the second household is €47,000, the annual income of the third household is €50,000, and the annual income of the fourth household is €71,000. If the local government has a progressive tax system, which family pays the largest amount as tax? - The first household - The second household - The third household - The fourth household

the fourth household

A price ceiling refers to ________.

the upper limit on the price of a good

Average Tax Rate

total taxes paid ------------------ total income