ECON Test 2 Study Notes

decrease, and the consumer surplus in the market for red wine decreases

A drought in California destroys many red grapes causing the prices of both red grapes and red wine to rise. as a result, the consumer surplus in the market for red grapes

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

supply curved upward by the size of the tax

A tax levied on the seller of a good shifts the ___

Total surplus

PS+CS

false - the supply curve

T/F Socially optimal quantity for positive externalities can be found by identifying where the social cost curve intersects the demand curve

True

T/F socially optimal quantity for negative externalities can be found by identifying where the social cost curve intersects the demand curve

Buyers bear more of the tax because it is easier for sellers than buyers to leave the market

if the supply is more elastic than demand

the government can set a maximum level of pollution usingg permits

in some cases tradable pollution permits may be better than a corrective tax because

DWL

increase in the size of a tax causes ____ to rise even more

decrease consumer surplus and have ambiguous implications for producer surplus

introducing a binding floor into a market will _____

tax incidence

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

encourages the firms with the lowest costs of reducing pollution to reduce the most

most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because the market-based solution ___

raise total surplus

moving productions from a high-cost producer to a low cost producer will

greater than efficient out levels and positive externalities lead markets to produce smaller than efficient output levels

negative externalities lead markets to produce

command-and-control policy

policy that regulates behavior directly, limits on quantity of pollution emitted

social cost

private cost + external cost

price paid by buyers and lower the equilibrium quantity

suppose a tax is created that the buyers of a good must pay to the government, this will rase the ____

may increase, decrease, or remain unchanged

suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market

increase producer surplus

suppose that a market is allowed to adjust freely to its equilibrium price and quantity, then an increase in demand will ___

demand is more inelastic than the supply

suppose that a tax is placed on books. if the buyers pay the majority of the tax, then we know that

supply, raising the equilibrium price and lowering the equilibrium quantity in the market for artificially sweetened beverages

suppose the government imposes a 20 cent tax on the sellers of artificially sweetened beverages. The tax would shift

smaller the deadweight loss from the tax

suppose the government places a per-unit tax on a good. The smaller the price elasticities of demand and supply for the good, the ____

buyers will bear most of the burden of the tax

suppose the government puts a tax on a market with inelastic demand and elastic supply, then

they subsidize the production of goods with positive externalities

which of the following is not an advantage of corrective taxes?

a smaller quantity of the good is bought and sold

which of the following observations would be consistent with the imposition of a binding price ceiling on a market? After the price ceiling is established, ____

might increase or decrease

1. Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus

Erin will not clean her own house

Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. Suppose Erin is required to pay a tax of $40 when she hires someone to clean her house for a week. Which of the following is correct?

Deadweight Loss (DWL)

Fall in total surplus

higher

Higher elasticities imply ______ DWL

a surplus of video games will develop

If a binding price floor is imposed on the video game market, than

increase, and the quantity sold in the market will increase

If the government removes a binding price ceiling from a market, then the price paid by buyers will

the effective price received by sellers is $0.40 per bottle less than it was before the tax

Suppose sellers of perfume are required to send $1.00 to the government for every bottle of perfume they sell. Further, suppose this tax causes the price paid by buyers of perfume to rise by $0.60 per bottle. Which of the following statements is correct?

the equilibrium quantity is greater than the socially optimal quantity

Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the government offers a $11-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

1000<Q optimum< Q market

The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1000th gallon of gasoline entails the following A private cost of $3.10, a social cost of $3.55; a value to consumers of $3.7 Let QMarket represent the equilibrium quantity of gasoline and let QOptimum represent the socially optimal quantity of gasoline. Which of the following inequalities is correct

B . all of the above are correct

The majority of economist prefer corrective taxes to command-and-control regulation as a way to correct the problem of pollution because a. the market based solution raises revenue for the government b. All of the above are correct c. the market based solution is less costly to society d. the market based solution can result in a greater reduction in pollution

higher the DWL

The more elastic supply the ______

smaller the DWL

The more inelastic supply the ____

decrease, and producer surplus decreases

The surgeon general announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate

breakfast cereal

Which product would have the highest DWL if taxed? a. breakfast cereal b. insulin c. cigarettes d. land

Zaria pays Hannah $16 so that Zaria can smoke

Zaria and hannah are roommates . Zaria assigns a $30 value to smoking cigarettes. Hannah values smoke free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

Willingness to Pay (WTP)

a buyer's willingness to pay for a good

a benefit to someone other than the producer and consumer of the good

a positive externality

cost of bargaining is small

according to the Case theorem, private parties can solve the problem of externalities if

tradeable permits

are permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable. Firms may trade these permits for money.

command and control

if the government were to limit the release of air pollution produced by a glue factory to 75 parts per million, the policy would be considered a

negative externalities

bad impact on bystanders (costs)

smaller is the price elasticity of supply

consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax is smaller, the ____

South American cocoa bean producers refuse to ship to chocolate producers in the US

consider the US market for chocolate, a market in which the government has imposed a nonbonding price ceiling. Which of the following events could convert the price ceiling from a non binding to a binding price ceiling?

consumer surplus

difference between willingness to pay and price, CS =WTP-P

private costs

direct cost to buyers

positive externalities

good impact on bystander (benefits)

the sellers bear more of the tax because it's easier for buyers to leave the market

if the demand is more elastic than supply

supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20

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

corrective taxes

taxing pollution is an effective example; with this tax, company's with lower cost of reducing pollution will reduce pollution at it's max

inelastic supply and inelastic demand

the deadweight loss from a tax per unit of good will be smallest in a market with ____

deadweight loss

the decrease in total surplus that results from a market distortion, such as a tax, is called a

producer surplus

the difference between price and cost P=P-C

efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society

the distinction between efficiency and equality can be described as follows

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

economic incidence

the ultimate burden of the tax (determined by supply and demand)

opportunity cost

the value of everything you give up to produce something

total surplus is maximized

we can say that allocation of resources is efficient if

both buyers and sellers are made worse off

when the government places a new tax on a good

anywhere below equilibrium

where is ceiling binding?

anywhere above equilibrium

where is ceiling not binding?

anywhere above equilibrium

where is floor binding ?

anywhere below equilibrium

where is floor not binding?

c. government should tax goods with negative externalities and subsidize goods with positive externalities

which of the following statement is true a. government should tax goods with either positive or negative externalities b. government should tax goods with positive externalities and subsidize goods with negative externalities c. government should tax goods with negative externalities and subsidize goods with positive externalities d. government should subsidize goods with either positive or negative externalities

binding price ceiling is imposed on a market

which of the following would cause a shortage?

legal incidence

who directly pays the tax (determined by politics)