ECO 211 - FINAL EXAM
What happens when there's a negative externality?
A corrective tax in the amount of the marginal external cost of an externality is levied to reduce the equilibrium quantity to the social optimum
________ will vote in favor of the display
Anne: she is willing to pay the most
What two ways do governments respond to externalities?
Command and control policies: the government directly regulates the allocation of resources Market-based policies: the government provides incentives for private organizations to internalize this externality
What's one disadvantage of a command-and-control approach?
Creates few incentives for innovation
What happens when the free market fails to generate maximum social surplus? List three.
Externalities Common Pool Resources Public Goods
In a free market, efficient firms will produce where ________ equals ________
Marginal Cost Marginal Revenue
What's the burden of a tax dependent on?
Price Elasticity
List three approaches supported by economic-based externality theory.
Private bargaining Government command and control Market-based regulatory approach
The U.S. has what type of income tax?
Progressive
Why are externalities called "market failures"?
They cause markets to produce suboptimal social outcomes
_______ is maximized when firms produce at equilibrium in a free market
Total Surplus
Negative externalities impose an additional cost that:
is not explicitly recognized by the buyers and sellers in the market
To reduce inequality and poverty in an economy, the government uses a _________
progressive tax system to fund transfer payments
A three-person city is considering a fireworks display. Anne is willing to pay $50 to see the fireworks, Bob is willing to pay $15, and Charlie is willing to pay $15. The cost of the fireworks is $60. In terms of efficiency, the fireworks _________ be offered.
should Explanation: the cost they're willing to pay is hire than the cost
What are government deficits dependent on?
spending and tax revenue
The government runs a budget surplus when _______
tax revenue exceeds its spending
When bargaining to deal with negative externalities:
the cost falls on the party with the most to gain
Tax incidence refers to _______
who bears the burden of a tax