Microeconomics Exam 2

impact on quantities

The competitive market equilibrium maximizes gains from trade. Taxes and subsidies, by altering the market outcome, reduce the gains from trade. Does this happen primarily because of the impact of taxes and subsidies on prices, or the impact of taxes and subsidies on quantities?

5 problems with price ceilings

1. Shortages 2. Reduce quality 3. Wasted Resources 4. Deadweight loss 5. Miss allocation of resources

problems caused by price floors

1. Surpluses 2. Lost gains from trade 3. Wasteful increases in quality 4. Mis-allocations of resources

two problems with central planning

1. Too much information to process 2. Too few incentives

determinants of elasticity of supply

1. change in per-unit costs with an increase in production 2. time horizon 3. share of market for inputs 4. geographic scope

economic truths about subsidies

1. who gets subsidy does not depend on who receives the check from government 2. who benefits from the subsidy does depend on the relative elasticities of demand and supply 3. subsidies must be paid for by taxpayers and they create inefficient increases in the trade (deadweight loss)

no coase

A coal-fired electricity plant dumps its leftover hot water into the nearby lake, killing the naturally occurring fish. Thousands of homes line the banks of the lake.

yes coase

A coal-fired electricity plant dumps its leftover hot water into the nearby river, killing the naturally occurring fish downstream. There is one large fishery one-mile downstream affected by this. After that, the water cools enough so it's not a problem.

made 250,000

Andy enters in a futures contract allowing him to sell 5,000 troy ounces of gold at $1,000 per ounce in 36 months. After that time passes, the market price of gold is $950 per troy ounce. How much did Andy make or lose?

family and factory

Suppose that a family moves in next door to this smelly factory. Who is causing the externalities problem?

nirvana fallacy

Comparing a realistic solution with an idealized one, and dismissing or even discounting the realistic solution as a result of comparing to a "perfect world" or impossible standard. Ignoring the fact that improvements are often good enough reason.

no externalities produced

Consider a factory, located in the middle of nowhere, producing a nasty smell. As long as no one is around to experience the unpleasant odor, what type of externality is produced?

sellers

Consider jewelry. Is a luxury tax more likely to hurt the buyers of jewelry, or the sellers of jewelry?

elastic-sales would fall a lot

Decades ago, Washington, DC, a fairly small city, wanted to raise more revenue by increasing the gas tax. Washington, DC, shares borders with Maryland and Virginia, and it's very easy to cross the borders between these states. How elastic is the demand for gasoline sold at stations within Washington, DC? In other words, if the price of gas in DC rises, but the price in Maryland and Virginia stays the same, will gasoline sales at DC stations fall a little, or will they fall a lot?

supply decreases

How does the change in desktop demand affect the quantity supplied of desktop computers?

elastic supply and elastic demand

If a government is hoping that a small tax can actually discourage a lot of junk food purchases, it should hope for:

poorer

If a nation's government made it impossible for inefficient firms to fail by giving them loans, cash grants, and other bailouts to stay in business, is that nation likely to be poorer or richer as a result of this strategy?

Elastic

If the government wants to strongly discourage people from eating junk food, when will it need to set a higher tax rate: When junk food demand is elastic or when it is inelastic?

inelastic party

In our discussion of taxation, we've acted as if it were effortless to pass and enforce tax laws. But, of course, law enforcement officials including the Internal Revenue Service put a lot of effort into enforcing tax laws. Let's think for a moment about what kind of taxes are easiest to collect, just based on the basic ideas we've covered. Who will make the most effort to escape a tax?

From the low-cost South to the high-tax North

In the opening scene of the classic Eddie Murphy comedy Beverly Hills Cop, Axel Foley, a Detroit police officer, is stopping a cigarette smuggling ring. Of course, smugglers don't pay the tax when the cigarettes cross state lines. Which way do you suspect the smugglers were moving the cigarettes, based on economic theory?

elastic

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state imposes a tax on junk food. For the tax to actually deter people from eating junk food, should junk food demand be elastic or inelastic?

demand decreases

Laptop and desktop computers are substitutes. Now that the price of laptops has changed, what does this do to the demand for desktop computers?

The person with more inelastic demand

Let's apply the economics of taxation to romantic relationships. Sometimes relationships have taxes. Suppose that you and your boyfriend or girlfriend live one hour apart. Using the tools developed in the chapter, how can you predict which one of you will do most of the driving? That is, which one of you will bear the majority of the relationship tax?

elastic

Let's take a look at the supply side of junk food. If junk food supply is highly elastic, will a junk food tax have a bigger effect if supply were inelastic or elastic?

yes coase

My neighbor wants me to cut down an ugly shrub in my front yard. The ugly shrub, of course, imposes an external cost on him and on his property value.

no coase

My neighbors all would love for me to get that broken-down Willies Jeep off my front lawn. It's been years now, after all. And would it be too much for me to paint the house and fill up that 6-foot deep ditch in the front yard? The whole neighborhood is just annoyed.

yes

Once it became easier to build good laptops, did "invisible hand" forces push more of society's resources into making laptop and push resources away from making desktops?

elastic

One way governments have tried to collect taxes from the wealthy is through the use of luxury taxes, which are exactly what they sound like: taxes on goods that are considered luxuries, like jewelry or expensive cars and real estate. What is true about the demand for luxuries?

Price Controls

Price Ceilings and Price Floors

price decreases

Since it's become much easier to build better laptop computers in recent years, laptop supply has increased. What does this do to the price of laptops?

people with diabetes

Some people with diabetes absolutely need to take insulin on a regular basis to survive. Pharmaceutical companies that make insulin could find a lot of other ways to make some money. If the U.S. government imposes a tax on insulin producers of $10 per cubic centimeter of insulin, payable every month to the U.S. Treasury, who will bear most of the burden of the tax?

supply curve will decrease

Suppose you learned that growing political instability in Chile (the largest producer of copper) will greatly reduce the productivity of its mines in two years. Ignoring all other factors, which curve (demand or supply) will shift which way in the market for copper two years from now?

demand shifts left

Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing. If you think of the "market for clothing" as the "market for new clothing," does this shift the demand or the supply of clothing, and in which direction?

people with diabetes

Suppose instead that because of government corruption, the insulin manufacturers convince the U.S. government to pay the insulin makers $10 per cubic centimeter of insulin, payable every month from the U.S. Treasury. Who will get most of the benefit of this subsidy?

language

The process of market creation is most similar to the creation of a country's

increase, decrease

Wage subsidies ____ the demand for labor and the number of low skilled jobs. The minimum wage laws ____ the demand for labor and the number of low skilled jobs.

It is easy for market participants to escape to another market if they have elastic demand or supply

What does it mean that elasticity equals escape?

increases employment

What effect do wage subsidies have on employment?

decreases demand

What effect do wage subsidies have on the demand for welfare payments?

toward, away from

When the government subsidizes an activity, resources such as labor, machines, and bank lending will tend to gravitate __________ the activity that is subsidized and will tend to gravitate ___________ activity that is not subsidized.

away from, toward

When the government taxes an activity, resources such as labor, machines, and bank lending will tend to gravitate _________the activity that is taxed and will tend to gravitate ________ activity that is not taxed.

bermuda shorts

You manage a department store in Florida, and one winter you read in the newspaper that orange juice futures have fallen dramatically in price. Should your store stock up on more sweaters than usual, or should your store stock up on more Bermuda shorts?

public good

a good that is non-excludable and non-rivalis, very specific ex. fireworks, because don't have to pay you can still look at them

externalities

a spill over costs and benefits in an exchange, needs to fall on the people not within the exchange (consumer nor supplier)

price system

allows us to connect with people all over the world, requires social cooperation

supply more elastic than demand

buyers pay more of the tax when

wasted resources

changes nature of competition, illegal means to allocate resources (bribes). Wasted time, excess demand, wait in line for goods (waste of time)

relative prices

connecting markets together ex. shift in demand and supply market has ripple effect for other markets: oil and candy bars (decrease of oil supply, hurts candy bars market)

consumer surplus

consumer gain from exchange, area underneath demand curve and above price up to quantity exchange

futures

contracts to buy or sell specified quantities of a commodity or financial instrument at a specified time in the future at a price agreed upon today

negative externalities

costs are being internalized, causes overproduction and inefficiency (deadweight loss) ex. steel factory- transaction between steel factory and steel consumers does not take into account the people affected by steel factory's pollution

transaction costs

costs of doing the exchange, cost of business

wage subsidies

costs the government money but increases employment

reduce quality

lower quality of the goods because of the high demand at a low price, suppliers reduce services in order to reduce the costs, zero incentive because they can't raise price. Cutting quality is a way to cut cost, little competition at the price

market price

market collapses all relevant information into single number

demand more elastic than supply

demanders pay smaller share of tax and sellers pay larger share of tax when

escape

elasticity equals

shortages

excess demand, quantity demanded exceeds quantity supplied

coase theorem

general idea that private individuals negotiate a solution to a situation. States that if transaction costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities. ex. Pond someone owns, overfishing occurs, resolves this issue by someone getting ownership and negotiate with people, establishing ownership of something that would affect the public and resolving it on own merit.

socialism

government dictates how the means of production are distributed and consumed

tax revenue

government gets this, height times width

subsidy

government gives money to consumer or producers, receive benefit rather than burden, which changes consumption.

short-term affects of rent control

housing doesn't deplete much

shifts demand curve down

how does a tax on buyers shift the demand curve? When buyers pay more and sellers receive less than before there was a tax

shifts supply curve up

how does supply curve shift when there is a tax on sellers? When buyers pay more and sellers receive less than before there was a tax

great economic problem

how to arrange limited resources to satisfy as many of our wants as possible. Resources not equally valuable in all uses

law of one price

identical goods in similar areas cost the same price, prices are going to equalize. Concept of stock going to be equalized stock's value and worth. How much someone will be willing to pay in the future

miss allocations of resources

if no price gauge, limited supply, missed allocations of resources. Stays where it is least valued and doesn't get transported to where it is most valued. ex. bottled water when hurricane expected, if no incentive for Dasani to send more water to Florida, it would just stay in Georgia

fall, rise

if there is a tax, the equilibrium quantity must _________ and the price buyers pay must __________

fall, fall

if there is a tax, the equilibrium quantity must _________ and the price sellers receive must _________

market failures

inefficient, does not achieve equilibrium in a market

Rent Control

keep price ceiling on housing, so price doesn't come up. Law meant to help poor people, but ultimately hurts them the most because low price alters opportunity cost, makes owning not worth it

taxes

lead to inefficiency, quantity leads to deadweight loss, wasted trade

coase theorem

market solution to externalities (capable but doesn't always solve problems of externalities) says externalities are not one-sided, both sides affect each other. Needs three things: 1. Property rights are clear and well defined 2. Property rights are exchangable 3. transaction costs are zero Doesn't hold in real world because property rights not well defined (who owns air) and transaction costs everywhere, too many

Price Ceiling

maximum price allowed by law

elastic demand

means that demanders have good substitutes for the taxed good and so can escape the tax

elastic supply

means that resources used to produce the taxed good can easily be moved to other industries so they can escape the tax

elasticity of supply

measures how responsive the quantity supplied to a change in price

Price Floors

minimum price allowed by law

producer surplus

producer gain from exchange, area above supply curve up to quantity exchange and below the price

central planning

single official or bureaucracy is responsible for allocating limited resources

prediction market

speculative market designed so prices can be interpreted as probabilities and used to make predictions

negative externalities

spill over costs, over production of a good, difference between private action and social optimal, don't internalize costs or benefits

positive externalities

spill-over benefit, benefits not being internalized, quantity supply goes up, price goes up. underproduce the good, we pay at one point, but willing to pay at a higher point ex. flu-shots: other people get flu shots, you have less chance of getting sick

demand more elastic than supply

suppliers bear more of the burden of a tax and receive more benefit of subsidy when

long-term affects of rent control

supply gets more elastic, opportunity cost of a new apartment is too high, supply curve decreases, breeds more intervention from the government (new laws passed to make it difficult for landlords to kick tenants out)

fall

suppose new farming techniques drastically increased the productivity of growing wheat. Given this change, how would the price of wheat change?

pigouvian tax

tax set per unit tax to the external cost to balance social marginal cost and private marginal cost. Meant to eliminate deadweight loss by internalizing the cost and setting the tax to the price of external cost. Good because no inefficiency, but wrong because how are you suppose to know price of external cost

Speculation

the attempt to profit from future price changes ex. If oil was expected to be reduced in one year, people buy more oil today to store and sell when supply is low, this would be a good result

total surplus

the sum of consumer and producer surplus

elastic

the supply curve is said to be ________ when an increase in price increases the quantity supplied a lot

Deadweight loss

total loss gains from trade, total of loss consumer and producer surplus when not all gains from trade are exploited. Calculate by base x height/2, difference of where the price is sold and where it could be sold are larger the more elastic the demand curve. If demand is inelastic, a tax will not deter many trades

cost of subsidy

what costs the government for the subsidy

eliminates a shortage

when a free market raises the prices of goods to sell for the higher demand it _____________

too low

when external benefits are significant, market output is _________.

too high

when external costs are significant, output is ________.

Price ceiling keeps price below market price

when quantity demanded is larger than the quantity supplied. Large amount of people want the good but limited supply results in long lines and wasteful searches when producers try to find cheaper ways to produce the goods

relative elasticity

who bears the burden of taxes depends on ___________