ECON 2

Corrective taxes

- Pigovian Taxes - negative externality - Taxes raise the (effective) private costs for the producers

corrective subsidy

- Positive externality - Subsidies raise the (effective) private benefits for consumers

Public goods

Non-excludable, Non-rival - Example: Streetlights, Lightning sirens/warnings

Common Resources

Non-excludable, Rival - Example: Forests, fish in the ocean

price floor

A legal minimum on the price at which a good can be sold ex: minimum wage

binding price ceiling Nonbinding price ceiling

Binding: - below equilibrium - shortage--> sellers must ration goods among buyers - Qs<Qd Nonbinding: - above equilibrium - surplus - no effect on Q or P

Binding price floor Nonbinding price floor

Binding: - below equilibrium - shortage in labor Nonbinding: - above equilibrium - surplus in labor = unemployment

Club goods

Excludable, Non-rival - Example: Cable TV, Netflix subscription

Private goods

Excludable, Rival - Example: Pizza, Fish in a private pond

Tradable pollution permits

Firms with low costs of cleaning up →sell permits Firms with high costs of cleaning up →buy permits →Pollution reduced at lower cost than regulation

price ceiling

Legal maximum on the price at which a good can be sold Example: rent control

Command-and-Control Policies

Regulations that require or forbid certain behaviors

Which of the following goods is not rival in consumption? a. National Defense. b. Busy non-toll roads. c. Ice cream. d. Busy toll roads.

a. National Defense.

Under which of the following scenarios would a park be considered a common resource? a. Visitors can enter the park free of charge, but frequently all the swings are in use. b. Visitors can enter the park free of charge and there are always plenty of empty swings. c. Visitors to the park must pay a fee and frequently all the swings are in use. d. Visitors to the park must pay a fee, but there are always plenty of empty swings.

a. Visitors can enter the park free of charge, but frequently all the swings are in use.

Public goods and common resources are a. both non-excludable, but only public goods are rival in consumption. b. both non-excludable, but only common resources are rival in consumption. c. both rival in consumption, but only common resources are non-excludable. d. both rival in consumption, but only public goods are non-excludable.

a. both non-excludable, but only public goods are rival in consumption.

Negative externalities a. lead to a market quantity that is more than the socially optimal quantity. b. lead to a market quantity that is less than the socially optimal quantity. c. result in an efficient market quantity. d. sometimes lead to a market quantity that is more than the socially optimal quantity, but sometimes lead to a market quantity that is less than the socially optimal quantity.

a. lead to a market quantity that is more than the socially optimal quantity.

According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long as a. private parties can bargain with sufficiently low transaction costs. b. government assigns property rights to the harmed party. c. the externalities that are present are positive, not negative. d. businesses determine an appropriate level of production.

a. private parties can bargain with sufficiently low transaction costs.

A binding price floor imposed in the labor market leads to a. unemployment. b. lower wages for workers who have jobs. c. a shortage of labor. d. increased total consumer surplus.

a. unemployment.

Marginal Tax Rate

additional taxes paid on one additional dollar of income →Measures the incentive effects of taxes →This tells us how much distortion is created

Proportional Tax

all taxpayers pay same fraction of income - not efficient - distorts incentives

Lum-Sum Tax

all taxpayers pay the same fixed amount - most efficient - no distortions

The deadweight loss from a $2 tax will be largest in a market with a. inelastic supply and elastic demand. b. elastic supply and elastic demand. c. inelastic supply and inelastic demand. d. elastic supply and inelastic demand.

b. elastic supply and elastic demand.

Corrective (or Pigouvian) taxes are unlike most other taxes because they can a. distort incentives. b. move the allocation of resources closer to the social optimum. c. raise revenue for the government. d. move the allocation of resources away from the social optimum.

b. move the allocation of resources closer to the social optimum.

When a tax is levied on buyers, the a. supply curve shifts upward by the amount of the tax. b. tax creates a wedge between the price buyers pay and the price sellers receive. c. tax has no effect on the well-being of sellers. d. buyers bear the entire burden of the tax.

b. tax creates a wedge between the price buyers pay and the price sellers receive.

The price received by sellers in a market will increase if the government decreases a a. binding price floor in that market. b. tax on the good sold in that market. c. binding price ceiling in that market. d. All of the above are correct.

b. tax on the good sold in that market.

If the size of a tax increases, a. DWL and tax revenue will increase. b. DWL will decrease, but tax revenue will increase. c. DWL will increase, but tax revenue may increase or decrease. d. DWL may increase or decrease, but tax revenue will decrease.

c. DWL will increase, but tax revenue may increase or decrease.

Suppose that tree farmers create a positive externality equal to $6 per tree. Further suppose that the government provides an $8 per-tree subsidy to the farmers. What is the relationship between the after-subsidy equilibrium quantity and the socially optimal quantity of trees produced? a. There is not enough information to answer the question. b. The after-subsidy equilibrium quantity is less than the socially optimal quantity. c. The after-subsidy equilibrium quantity is greater than the socially optimal quantity. d. They are equal.

c. The after-subsidy equilibrium quantity is greater than the socially optimal quantity.

A tax imposed on sellers of a good will a. increase both the price paid by buyers and the effective price received by sellers and lower the equilibrium quantity. b. decrease both the price paid by buyers and the effective price received by sellers and raise the equilibrium quantity. c. increase the price paid by buyers, decrease the effective price received by sellers, and lower the equilibrium quantity. d. decrease the price paid by buyers, increase the effective price received by sellers, and raise the equilibrium quantity.

c. increase the price paid by buyers, decrease the effective price received by sellers, and lower the equilibrium quantity.

An externality is the uncompensated impact of a. society's decisions on the well-being of society. b. a person's actions on that person's well-being. c. one person's actions on the well-being of a bystander. d. society's decisions on the poorest person in the society.

c. one person's actions on the well-being of a bystander.

Taxes cause deadweight losses because taxes a. cause marginal buyers and marginal sellers to leave the market, causing the quantity sold to fall. b. prevent buyers and sellers from realizing some of the gains from trade. c. reduce the sum of producer and consumer surpluses by more than the amount of tax revenue. d. All of the above are correct.

d. All of the above are correct.

What is the difference between command-and-control policies and market-based policies toward externalities? a. Command-and-control policies provide incentives for private decision makers to solve the problems on their own, whereas market-based policies regulate behavior directly. b. Command-and-control policies rely on taxes, whereas market-based policies rely on quotas. c. Command-and-control policies are efficient, whereas market-based policies are inefficient. d. Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decision makers to change their behavior.

d. Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decision makers to change their behavior.

Which of the following statements is not correct? a. Government policies may improve the market's allocation of resources when negative externalities are present by taxing these goods. b. A negative externality is an example of a market failure. c. Markets allocate scarce resources with the forces of supply and demand. d. The government cannot improve upon the outcomes of private markets.

d. The government cannot improve upon the outcomes of private markets.

Which of the following would not be considered a positive externality? a. Tess plants flowers that all her neighbors enjoy. b. Janet bakes cookies and her roommates enjoy the smell. c. Your neighbor plays music that you like through stereo speakers set up on their deck. d. You are happy from eating a delicious pizza.

d. You are happy from eating a delicious pizza.

If we want to gauge how much the income tax system distorts incentives, we should use the a. average tax rate. b. ability to pay principle. c. total tax liability. d. marginal tax rate.

d. marginal tax rate.

Pollution from the production of paper is a good example of a negative externality because a. self-interested paper firms are generally unaware of environmental regulations. b. there are fines for producing too much pollution. c. pollution causes firms to produce less than the socially optimal amount of paper. d. self-interested paper producers will not consider the full cost of the pollution they create.

d. self-interested paper producers will not consider the full cost of the pollution they create.

Individuals have little incentive to provide a public good because a. the social benefit is less than the social cost. b. the social benefit is less than the private benefit. c. there is a Tragedy of the Commons. d. there is a free-rider problem.

d. there is a free-rider problem.

Coase Theorem

if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

When supply and demand are elastic, the DWL is

large

When supply and demand are inelastic, the DWL is

small

Benefits Principle

tax payments should be based on how much benefit people receive Example: gasoline taxes (more use of roads →more taxes)

Ability to Pay Principle

tax payments should be based on how well people can bear the burden Vertical equity: those with greater ability to pay should pay more Horizontal equity: those with similar ability to pay should pay the same

Negative externality

the impact on the bystander is adverse - Supply curve shows Private Costs (to sellers) - Demand curve shows Private Values (of buyers) - Supply curve moves up!!! - Doing too much - Qmarket>Qsocial

Positive externality

the impact on the bystander is beneficial - Supply curve shows Private Costs (to sellers) - Demand curve shows Private Values (of buyers) - Demand curve moves up!!! - Not doing enough Qmarket<Qsocial

Average Tax Rate

total taxes divided by total income →Measures how much a taxpayer sacrifices →This is the burden to taxpayers

Market-based Policies

→Government provides incentives →Private decision makers choose to solve the problem