Econ Exam 2

north American Free Trade Agreement NAFTA

1993 example of multilateral approac h that lowered trade barriers among US, mexico, and canada

laffer curve

A curve illustrating the relationship between the tax rate and tax revenues. Tax revenues will be low at both very high and very low tax rates. When tax rate are quite high, lowering them can increase tax revenue.

supply side economics

An economic philosophy that holds the sharply cutting taxes will increase the incentive people have to work, save, and invest. Greater investments will lead to more jobs, a more productive economy, and more tax revenues for the government (reagan film laffer)

not building new apartments or maintain existing ones; more people find and own own places and move into city; more; greater

On the supply side of long-run rent control, landlords respond to low rents by ____. On the demand side, low rents _____ therefore, both supply and demand are ___ elastic in the long run. As a result, there is a ____ shortage.

revenue; market outcomes

Policymakers use taxes to raise _____ for public purposes and to influence market

GATT

Successfully reduced the average tariff among member countries from about 40% aqfter wwii to 5%

inelastic; landlords have fixed number of apartments & can't adjust #r quickly and people searching for houses aren't highly responsive to rents in short run because they take time to adjust their housing arrangements: small; reduce rents

The short run supply and demand for housing are reltively ____ because _______________. Because the supply and demand are this in the short run, the initial shortage caused by rent control is ___. The primary effect in the short run is to ______

eager; refuse; indifferent

a buyer would be ____ to buy a good below his willingness to pay, and would ____to buy a good at a price greater than his WTP. At a price equal to his WTP, the buyer would be ____ about buying the good

raises; sellers always want to make more money

a higher price ____ producer surplus because

minimum wage

a kind of price floor that regulates the lowest price for labor that any employer may pay

price ceiling

a legal maximum on the price at which a good can be sold

price floor

a legal minimum on the price at which a good can be sold

raises; buyers always want to pay less

a lower price _____ consumer surplus because

reduces; closer

a tariff ______ the quantity of imports and moves the domestic market _____ to its equilibrium

will

a tariff on a good ____ have an impact if the country is an importer of the good

no effect

a tariff on a good will have ___ if the country is an exporter of the good

less; steeper

a tax burden falls more heavily on the side of the market that is ____ elastic. This means that the slope is _____

corrective taxes

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

reduces.

a tax on a good _____ producer surplus

reduces

a tax on a good ______ consumer surplus

tariff

a tax on goods produced abroad and sold domestically

payroll tax

a tax on the wages that firms pay their workers

technology spillover

a type of positive externality: the impacts on one firm's research and production efforts on other firms' access to technological advance

initial allocation of pollution permits doesn't matter. if firms can reduce pollution at a low cost they sell whatever permits they get, if they can reduce pollution only at a high cost they buy whatever permits they need. efficient final allocation

advantage of free market for pollution permits

potential to result in freer trade than unilateral approach (reduce trade restrictions abroad and at home), political advantage: producers are fewer and better organized than consumers and therefore have greater political influence

advantages of the multilateral approach

raises the income of working poor, unemployment is negative but small effect

advocates of minimum wage say

don't reduce quantity of housing supplied and therefore don't cause shortage

advocates of rent subsidies

raise living standards of working poor without discouraging firms from hiring them

advocates of wage subsidies

smaller, higher, higher

after international trade, an exporting country has ____ consumer surplus, _____ producer surplus, and _______total surplus

higher, smaller, higher

after international trade, an importing countryhas _____ consumer surplus, _____ producer surplus, and _____ total surplus

internalizing the externality

altering incentives so that people take account of the external effects of their actions

positive analysis

an analysis on what is

normative analysis

an analysis on what should be

national security argument

an argument for restricting trade that states "the industry is vital for national security" when there are legitimate concerns over national secuirty (ie steel )

unfair competition argument

an argument for restricting trade that states free trade is desirable only if all countries play by the same rules

infant industry argument

an argument for restricting trade that states that new industries need temporary trade restrictions to help them get started and/or sometimes older industries need temporary protection to help them adjust to new conditions

protection-as-a-bargaining-chip argument

an argument for restricting trade that states trade restrictions can be useful when we bargain with our trading partners

jobs argument

an argument for restricting trade that states trade with other countries destroys domestic jobs. Everything can be produced more cheaply abroud and under free trade they couldn't be profitably employed in any industry

small economy assumption

an assumption required to be made before analyzing the welfare effects of free trade and means that the country's actions have little effect on world marketsand a change in their trade policy won't effect world price

the external benefit from an activity with positive externalities

an idea corrective subsidy would equal

the external cost from an ativity with negative externalities

an ideal corrective tax would equal

dcurve: shifts, s curve: unchanged. tax on buyers makes buying less attractive, demand is smaller; shifts left (downward by exact size of tax). the equilibrium price is lower and the quantity is lowered buyers and sellers both worse

analyze a tax on buyer

d curve: unchanged, s curve: shifts which way does it shift (if higher cost then lower quantity and left/upward by the exact size of the tax) therefore equilibrium price increases and quantity decreases--> reduces size of market: buyers and sellers both worse

analyze a tax on the seller

jobs argument, national-security argument, infant-industry argument, unfair-competition argument, protection-as-a-bargaining-chip argument

arguments for restricting trade

economies of scale

as a company produces larger numbers of a particular product, the cost of each of these products goes down

increases; decreases; reduces

as tax increases, tax revenue initially ______ then _____ because a higher tax drastically ______ the size of the market

increases

as tax increases, the deadweight loss _____ even more rapidly than the size of the tax

marginal buyer.

at any quantity, the price given by the demand curve shows the willingness to pay of the __________

Share

buyers and sellers _____ the burdens of taxes

General Agreement on Tariffs and Trade GATT

continuing series of negotiations among many countries with goal of promoting free trade. US helped to found after WWII in response to high tariffs imposed during Great Depression.

set certain levels

contracts as a driver to private solution to externalities

corrective taxes; regulations;

economists usually prefer _____ to ______ as a way to deal with pollution because they can reduce pollution at a lower cost to society

value to buyers (measured by WTP)-cost to sellers

equation of total surplus

WTO

established in 1995, HQ in geneva, 153 countries accounting for more than 97% of world trade

examples: littering laws not enforced but it's just BAD to do it

example of moral codes and social solutions (one kind of private solution to externalities)

britain 19th century, chile, south korea

examples of unilateral approach

administer trade agreements, provide a forum for negotiations, and handle disputes among member countries

functions of the WTo

domestic sellers better off, domestic buyers worse off, government raises revenue

gains and losses from a tariff

industrial policy

government intervention in the economy that aims to promote technolgy-enhancing industries

Corrective taxes alter incentives to account for the presence of externalities and thereby move the allocation of resouces closer to the social optimum. While they rdo raise revenue for the gov't, they also enhance economic efficiency

how are corrective taxes unlike most other taxes

more regulations that are difficult and expensive to enforce

how do policymakers react to the adverse effects of rent control?

gives the firm a property right over its invention

how does patent law internalize the externality of technological spillover?

binding, price floor, surplus

if a price floor is above the equilibrium, it is ____. The market price equals the ______. this causes a _____ which can lead to rationing mechanisms

not binding, no

if a price floor is below the equilibrium, it is ____ and has no effect

export; country

if domestic price is less than world price, the country will _____ the good and the _____ has the comparative advantage

exceeds; unemployment; increases; decrease

if minimum wage is above the equilibrium level, the quantity of labor supplied ____ the quantity demanded. The result is _____. Thus, the minimum wage ____ the incomes of those workers who have jobs but it ____ the incomes of workers who cannot find jobs

import; world

if the DP is greater than WP, the country will _____ the good and the _____ has the CA

low; comparitive advantage

if the domestic price is low, the cost of producing the good is ___, suggesting the country has a _____ in producing the good relative to the rest of the world

export

if the world price of a good is higher than the domestic price, the country will _____ that good

import

if the world price of a good is lower than the domestic price, the country will _____ that good

Reduced the supply of gasoline; long lines at gas station. OPEC: shorttage of gasoline, Government regulations (price ceiling)

in 1973 when OPEC raised the price of crude oil, the result was __________ and __________. The second of which was caused by OPEC because they ___ and the US government's regulations because they ___

equilibrium

in a competitive market free of government regulation, price goes to the ____

price

in a free market the _)____ serves as the rationing mechanism and sellers can sell all they want at the equilibrium price

1. free markets allocate the supply of goods to the buyers who value them most highly measured by their WTP 2. free markets allocate the demand for goods to the sellers who can produce them at the least cost 3. free markets produce the quantity of goods that maximiszes the sum of consumer and producer surplus

in a market equilibrium, the market outcomes are

some decision maker fails to take account of the external effects of his or her behavior and the government responds by trying to influence this behavior to protect the interests of bystanders

in all cases of both positive and negative externalities

waiting lists preference to corruption discrimination

in cites with rent control: what are some mechanisms landlords use to ration housing

exceeds, smaller

in the presense of a negative externality such as pollution the social cost of the good ____ the private cost. the optimal quantity is therefore _____ than the equilibrium quantity

inefficient; keeps the p and q away from equilibrium

market power can be _______ because it

consumer surplus.

measures the benefit buyers receive from participating in a market

teenage labor

minimum wage has greatest impact on the market for

larger; taxing

negative externalities lead markets to produce a ___ quantity than is socially desirable. to remedy the problem, the gov't can internalize the externality by ____ goods

we can't give anyone the option of polluting for a fee. b/c people face tradeoffs, we can't entirely eliminate pollution because it would reverse many of the technological advances that llow us to enjoy a high SOL. clean environment is a normal good and therefore has a positive income elasticity, meaning richer countries can afford a clearner environment and therefore usually have more rigorous environmental protection

objections to the economic analysis of pollution

increased competition

one benefit from international trade that states a company shielded from foreign competitors is more likely to have market power which in turn gives it the ability to raise prices above a competitive level (market failrte).

lower costs through economies of scale

one benefit from international trade that states a firm in a small country can't take full advantage of economies of scale if it can only sell in a small domestic market. free trade gives access to larger world market and allows to realize economies of scale more fully

increased variety of goods

one benefit from international trade that states goods produced in diffreent countries are different, free trade gives consumers greater variety from which to choose

enhanced flow of ideas

one benefit from international trade that states the transfer of technologi al advances around the world is linked to trading of goods that embody those advances.

command and control policies

one way that the government can remedy an externality that regulates behavior directly.

market based policies

one way the government can remedy an externality. it provides incentives to that private decision makers will choose to solve the problem on their own

high minimum wage causes unemployment, encourages teens to drop out, and prevents some unskilled workers from getting the on-the-job training they need. Poorly targeted policy.

opponents of minimum wage say

difficult to implement in practice, temporary policy is hard to remove, protection is not necessary for an industry to grow

opposition to infant industry argument

free trade also creates jobs because when you buy from another country, those countries obtain the resources to buy other goods from YOU. may impose hardship on some workers in short run but allows for higher standard of living. also, gains from trade are comparative not absolute advantage

opposition to jobs argument

companies exaggerate role in national defense to obtain protection from foreign competition

opposition to national security argument

the threat may not work

opposition to the protection as a bargaining chip argument

increased variety of goods, lower costs through economies of scale, increased competition, enhanced flow of ideas

other benefits from international trade

smaller; subsidizine

positive externalities lead markets to produce a ___ quantity than is socially desireable. to remedy the problem, the government can internalize the externality by ____ goods.

WP plus the amount of the tariff

price of good after tariff

market equality

property of distributing economic prosperity uniformly among the members of society

patent law

protect the rights of inventors by giving them exclusive use of their inventions for a period of tme.

burden of tax largely on suppliers because luxury goods are elastic

result of 1990 luxury tax

WTO

rules established under GATT enforced by

pigovian taxes

same as corrective taxes, a tax designed to induce private desicion makers to take account of the social costs that arise from a negative externality

the coase theorem

says that private economic actors can potentially solve the problem of externalities among themselves. Whatever the initial distribution of rights, the interested parties can reach a bargain in which everyone is better off and the outcome is efficient

one way is to integrate businesses: example: apples and bees,

self interest as a driver to private solution to externalities

both pay for pollution (CT: pay to gov't PP: pay to buy permits) both internalize the externality of pollution

similarities between corrective tax and pollution permits

1. decide whether law affects the supply or demand curve 2. decide which way the curve shifts 3. examine how shift effects equlibrium price and quantity

steps to analyze supply and demand

demand schedule

table relating to demand curve derived from WTP of the possible buyers

price takers

take the world price as given

wage received by workers falls, wage paid by firms rises, workers and firms share the tax burden (not necessarily 50/50)

tax incendence analysis on the introduction of payroll tax

discourage

taxes ____ market activities

equivilant

taxes levied on sellers and taxes levied on buyers are ______

the market equilibrium

the ______ is an efficient allocation of resources

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 minus the cost of production. measures the benefit sellers receive from participating in a market

consumer surplus

the area below the DC and above the price measures the _____ in a market

producer surplus

the area below the price and above the supply curve measure the______ in a market

willingness to pay

the benefits of buyers who participate in a market and the maximum amount that a buyer will pay for a good.

cannot; cannot

the benevolent social planner ___ increase economic well being by changing the allocation of consumption among buyers or by changing the allocation of production among sellers. It _____ raise total economic well being by increasing or decreasing the quantity of the good

marginal buyer

the buyer who would leave the market first if the price were any higher

exceeds

the cost of taxes to buyer and sellers ___ the revenue raised by the government`

transaction costs

the costs that parties incur in the process of agreeing to and following through on a bargain

opportunity cost

the domestic price of a good reflects the __________ of the good.

consumer surplus: smaller, producer surplus: bigger, government tax revenue , total surplus is smaller

the effects after a tariff on: consumer, producer, total surplus, government tax revenue

deadweight loss

the fall in total surplus that results from a market distortion such as a tax

help the poor by making housing more affordable

the goal of rent control policy is to

greater

the greater the elasticities of supply and demand, the _____ the deadweight loss of a tax

skill and experience

the impact of the minimum wage depends on the _____ and _____ of the worker

market failure

the inability of some unregulated markets to allocate resources efficiently

larger

the larger the deadweight loss of taxation the ___ the cost of any government program

tax incidence

the manner in which the burden of a tax is shared among participants in a market

is not

the market equilibrium _____ efficient when there are externalities because the equilibrium fails to maximize the toal benefit to society as a whole

who sends the money to the government

the only difference in who pays for the tax is____

world price

the price of a good that prevails in the world market of that good

social cost

the private cost of producers and the cost of producers plus the price of bystanders affected

efficiency

the property of resource allocation of maximizing the total surplus received by all members of society

coase 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.

efficient; impersonal

the rationing mechanism in a free, competitive market is both ____ and _____

marginal seller

the seller who would leave the market first if the price were any lower

tax revenue

the size of the tax times the quantity of the good sold. Goes to government but those whom the government uses on is actually who benefits.

welfare economics

the study of how the allocation of resources affects economic well being

total surplus

the sum of consumer and producer surplus (value to buyers minus amount paid by buyers) + (amount received by sellers minus cost to sellers) aka {value to buyers - cost to sellers]

marginal tax rate

the tax on the last dollar of earnings (now is about 40%)

externality

the uncompensated impact of one person's actions on the well-being of a bystander

cost

the value of everything a seller must give up to produce a good

earned income tax credit

this is one type of wage subsidy. it is a government program that supplements the incomes of low-wage workers

CS, PS, TR

to calculate total surplus with a tax, you add together _____, _____, and ______

taxes and subsidies

two pathways of market based policies

Pollution permits

type of marked based policy: voluntary transfer of the right to pollute from one firm to antoher. firms willingness to pay depends on its cost of reducing pollution

corrective taxes and subsidies, tradable pollution permits

types of market based policies

moral codes and social solutions charities self-interest contracts

types of private solutions

fair labor standards act of 1938

what act of congress instituted minimum wage?

price elasticities of supply and demand

what determines whether the deadweight loss from a tax is large or small?

the benefit that buyers receive from a good as the buyers themselves perceive it

what does consumer surplus measure?

once trade is allowed, domestic price of a good will equal world price

what happens to price of good when international trade allowed

unilateral approach

when a country chooses to approach and remove its trade restrictions on its own

multilateral approach

when a country chooses to reduce its trade restrictions while other coutnries do the same

positive externality

when a person engages in activity that is beneficial tot he well-being of a bystander but neither pays nor receives any compensation of that effect

negative externality

when a person engages in an activity that is adverse to the well-being of a bystander but neither pays nor receives any compensation for that effect

price ceiling; greater; shortage; rationing mechanism;

when a price ceiling is below the equilibrium , the market price is the _____, the quantity demanded is _____ than the quantity supplied (known as a ____) and as a result a ________ _______ ddevelops that are rarely desireable

market power

when a single buyer/seller (or small group of them) can control market prices.

when a good isn't being produced with lowest-cost and when a good isn't consumed by buyers who value it the highest

when is total surplus inefficient

don't respect the prefrences that drive buyer behavior: example, drug addicts--> willingness to pay doesn't measure buyers benefit and consumer surplus isn't a good measure of economic well-being

when might policymakers not choose to care about consumer surplus?

high transaction costs, bargaining breaks down large number of interested parties

when private solutions don't always work

shortage;

when the government imposes a binding price ceiling on a competitive market, a ____ of the good arises and the sellers must ration the scarce goods among the large number of potential buyers.

large, small

when there is a relatively inelastic (steep) supply curve and a realtively elastic (flat) demand curve then sellers bear a ____ burden of the tax and buyers bear a ____ burden

small; large

when there is a very elastic supply curve (more flat) and a relatively inelastic demand curve (more steep) then sellers have ___ burden of tax and buyers have a ____ burden.

a comparitive advantage in producing the good

when you compare the world price and the domestic price before trade, it shows wheter a country has:

highly skilled and experienced workers

who isn't affected by minimum wage (for who is minimum wage not binding)

many are estabilished to deal with externalities and governments encourage by offering tax deductions

why charities are a private solution to externalities

because they prevent buyers and sellers from realizing some of the gains from trade

why do taxes cause deadweight loss

domestic producers are better off, domestic consumers are worse off. gains of the winners exceed the losses of the losers

winners and losers from an exporting country with international trade

domestic producers are worse off, domestic consumers are better off, gains of winners are eceeded by losses of the losers

winners and losers from an importing country with international trade

taxation, subsity

with a negative externality, the appropriate response to internalize the externality would be ____. with a positive externality, the appropriate response would be a _____

supply

with a negative externality, the social cost curve is above the _______ curve

not binding;

with a price ceiling is above the equilibrium, the effect is __________ and has no effect on price or quantity sold

smaller

with negative externalities, the optimum quantity produced maximizes total welfare and is _____ than market equilibrium quantity

greater, demand

with positive externalities, the social value is _____ than the private value and the social value curve is above the ____ curve