Econ chapters 10-12

external cost

(neg externalities) The ideal corrective tax =

external benefit

(pos externalities) the ideal corrective subsidy =

Examples of Negative Externalities

-Air pollution from a factory -The neighbor's barking dog -Late-night stereo blasting from the dorm room next to yours -Noise pollution from construction projects -Health risk to others from secondhand smoke -Talking on cell phone while driving

Examples of positive externalities

-Being vaccinated -R&D creates knowledge others can use -People going to college to raise population's education level, which reduces crime and improves government

administrative burden

-Includes the time and money people spend to comply with tax laws -Encourages the expenditure of resources on legal tax avoidance -Could be reduced if the tax code were simplified but would require removing loopholes, politically difficult -filing ones own taxes is really hard

types of private solutions to externalities

-Moral codes and social sanctions -Charities -Contracts between market participants and the affected bystanders

Policy options to prevent overconsumption of common resources

-Regulate use of the resources -Impose a corrective tax to internalize the externality (Ex. hunting and fishing licenses, entrance fees for congested national parks) -Auction off permits allowing use of the resources (Ex. spectrum auctions by the US federal communications commission) -If the resource is land, convert to a private good by dividing and selling parcels to individuals

ideal marriage tax/subsidy system

-Two married couples with the same total income pay the same tax -Marital status does not affect a couple's tax bill -A person/ family with no income pays no taxes -High-income taxpayers pay a higher fraction of their incomes than low-income taxpayers

Corrective taxes & subsidies

-align private incentives with society's interests -make private decision-makers take into account the external costs and benefits of their actions -move economy toward a more efficient allocation of resources

Why private solutions do not always work

1. transaction costs 2. stubbornness 3. Coordination problems

Equity

= everybody pays their fair share Fairly distributed equality

Proportional tax

= flat tax

Efficiency

= no DWL What happens to economy when DWL and administrative burdens stack up

Social cost

= private + external cost

Supply

= private cost

Abatement Cost

A cost borne by many businesses for the removal and/or reduction of an undesirable item that they have created. They generally incurred when corporations are required to reduce possible nuisances or negative byproducts created during production.

excludable

A good is ______ if a person can be prevented from using it.

no deadweight loss, Minimal administrative burden

A lump-sum tax is the most efficient because it ______ (Causes no does not distort incentives) and _____(No need to hire accountants, keep track of receipts etc.)

deadweight loss

A tax causes a

market quantity

A tax on a good reduces the ________ of that good.

Ex. Gasoline taxes

Amount of tax paid is related to how much a person uses public roads

problems with common resources

Are not excludable so the free rider problem cannot be prevented They rival in competition so each person's use reduces others' ability to use

social value

At any Q higher than the socially optimal Q, the cost of the last unit exceeds its ______

exceeds

At any Q lower than the socially optimal Q, the social value of the additional units _____ the costs of these additional units

Pollution

Burning fossil fuels produces greenhouse gases.

Important Common resources

Clean air and water Congested roads

Public Policies toward externalities (the two approaches)

Command-and-control policies Market-based policies

three negative externalities the gas tax targets

Congestion-- The more you drive, the more you contribute to congestion. Accidents-- Larger vehicles cause more damage in an accident. Pollution Burning fossil fuels produces greenhouse gases.

marriage taxes

Couple with similar incomes are likely to pay a ____

marriage subsidy

Couples with very different incomes are likely to receive a _____

lower quantity

DWL when there is a pos externality bc _______ is being produced Society is lost here bc valuable goods are not being produced at this point

socially optimal quantity

Eq pt of D and S+social cost

consumption tax

Europe's Value-Added TAx (VAT) is like a ______

Stubbornness

Even if a beneficial agreement is possible, each party may hold out for a better deal.

the gas tax

Example of correcive tax

negative positive

Externalities either _______ or _______ depending on whether impact on bystander is adverse of beneficial

Not excludable

FM radio signals, national defense (excludable or not excludable)

A pollution tax is efficient

Firms with low abatement costs will reduce pollution to reduce their tax burden. Firms with high abatement costs have greater willingness to pay tax.

Efficient outcome

Firms with the lowest abatement costs reduce pollution the most. (corrective races v. regulations)

free ride ; provide

For public goods, because people do not have to pay to use them, they have an incentive to ________ , and firms have no incentive to ______ them.

Regressive tax

High-income taxpayers pay a smaller fraction of their income than low-income taxpayers (Is the opposite of a progressive tax)

Coordination problems

If # of parties is very large, coordinating them may be costly, difficult, or impossible.

not excludable

If good is _______, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good

The Coase theorem

If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own. -Essentially asking / answering the question of whether the private market will reach the efficient outcome on its own

exceeds

If the benefit of a public good _____ the cost of providing it, gov should provide the good and pay for it with a tax on people who benefit -but measuring the benefit is difficult

positive

If the externality is ________ (e.g., technology spillovers), the market quantity falls short of the social optimum.

negative externalities

If the transaction yields _________ (e.g., pollution), the market quantity exceeds the socially optimal quantity.

negative externality

In a _______ Tax that gives buyers and sellers an incentive to take into account the external effects of their actions -Shift supply curve upward

social value

In the presence of a positive externality, the ________ of a good includes private value and external benefit

public policy

In the presence of externalities, ________ can improve efficiency

Accidents

Larger vehicles cause more damage in an accident.

common resources

Like public goods, ________ are not excluding -Cannot prevent free riders from using -Little incentive for firms to provide -Role for gov: seeing that they are provided

Average tax rate

Looks at overall burden on person liability / income

private goods

Markets work best for ________, which are excludable and rival in consumption. Markets do not work well for other types of goods.

Some important Public Goods

National defense Knowledge created through basic research Fighting poverty

tax and efficiency

One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers

social optimum

Other taxes and subsidies distort incentives and move economy away from the _______

Efficiency Equity

Policymakers have to choose between _______ and _______

efficiency ; equity

Policymakers often face a tradeoff between the goals of ______ and _____in the tax system.

result of tradable pollution permits

Pollution reduction is concentrated among those firms with lowest costs.

free-rider problem

Public goods are difficult for private markets to provide because of the _______. Result: the good is not produced, even if buyers collectively value the good higher than the cost of providing it

under-provided ; over-consumed

Public goods tend to be ______, while common resources tend to be ________

not efficient

Self-interested buyers and sellers neglect the external costs or benefits of their actions, so market outcome is --Consequences that are not baked into intersection of supply and demand

Negative externality

Shift Supply curve to the left Bc of the social cost tax

GDP

Tax revenue is relative to_____ and varies across countries

progressive tax system

The U.S. has a __________, in which high income taxpayers face a higher average tax rate than low income taxpayers.

Transaction costs

The costs parties incur in the process of agreeing to and following through on a bargain. These costs may make it impossible to reach a mutually beneficial agreement.

Marginal tax rate

The extra taxes paid on an additional dollar of income Measures the incentive effects of taxes on work effort, saving, etc.

cost-benefit analysis

The government provides public goods, using ________ to determine how much to provide.

Congestion

The more you drive, the more you contribute to congestion.

socially efficient

The private market may fail to provide the ________ quantity of such goods.

welfare

The socially optimal Q maximizes ________ -at any lower Q, social value is too high -at any higher Q, costs are too high

The cost to taxpayers

The tax payment itself Deadweight losses Administrative burden

property rights

These problems arise because _____ are not well-established -nobody owns the air so no one can charge polluters -nobody can charge people who benefit from national defense

taxation

To improve its functions gov raises revenue through _____

Average tax rate

Total taxes paid divided by total income -Measures the sacrifice a taxpayer makes

tax incidence

When evaluating the equity of a tax system, it is important to consider ______, as the distribution of tax burdens is not the same as the distribution of tax bills.

prices

When goods have no ________, the market forces that normally allocate resources are absent. ______ represents a change in interest, so can't allocate resources efficient because this is not present

the permits system

When policymakers do not know the position of this demand curve, _________ achieves pollution reduction targets more precisely.

socially optimal position

When taxes are placed on a market then the market is no longer at

corporation ; people

When the gov levies a tax on a corporation, the______ is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on ______

Permit

_______ = fixed quantity

permits

________ would be preferable to a tax in a situation where the polluting firm's demand for pollution rights is unknown and thus the gov would have difficulty determining the appropriate size for a tax

Free-rider

a person who receives the benefit of a good but avoids paying for it

not efficient

a regulation requiring all firms to reduce pollution by a specific amount is ________

Cost- benefit analysis

a study that compares the costs and benefits of providing a public good However, this lack accuracy / detail, so the efficient provision of public goods are more difficult than that of private goods.

Corrective tax:

a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality The way we deal with neg externalities to most

Flat tax

a tax system under which the marginal tax rate is the same for all taxpayers -Typically, income above a certain threshold is taxed at a constant rate -The higher the threshold, the more progressive the tax -Sharply reduces administrative burden -Not popular with people who currently benefit from the current system (accountants, lobbyists)

Social insurance taxes

a tax where you pay half and your employer pays half

Example of uncompensated

affected by water pollution in the ocean even though you didn't buy any of the aluminum that polluted it

Internalizing the externality

altering incentives so that people take account of the external effects of their actions -Market participants must pay the social costs, market equilibrium = social optimum

Budget surplus

an excess of gov receipts over gov spending

Budget deficit

an excess of gov spending over gov receipts

Permits

are a direct means of controlling the total quantity of pollution emitted

Corrective taxes

are better for the environment -gives firms incentive to continue reducing pollution as long as the cost of doing so is less than the tax. -If a cleaner technology becomes available, the tax gives firms an incentive to adopt it. - firms have no incentive for further reduction beyond the level specified in a regulation.

most important revenue sources for state and local govs

are funds from the federal government and revenue from sales and property taxes. Income taxes are also important

Public goods

are neither excludable nor rival in consumption, That is people cannot be prevented from using a public good and one person's use of a public good does not reduce another person's ability to use it.

externalities

arise because something of value has no price attached to it.

Tragedy of the common

bc common resources are non-excludable and does rival in consumption there is no one controlling the good and people are over using the good, so don't enjoy doing something as much as you would -If I don't use it no one will use it -No incentive for someone to not use it because you can't be excluded from it -A parable that illustrates why common resources get used more than is socially desirable

Taxes distort incentive

cause people to allocate resources according to tax incentives rather than true costs and benefits

Pigouvian taxes

corrective taxes are also called _______ after Arthur Pigou (1877-1959).

equity

distributing the burden of taxes "fairly"

Equity

distribution of tax rev

"internalize the externality"

do this to combat the problem of neg and pos externalities -tax goods with negative externalities -subsidize goods with positive externalities

the Sierra Club

example of charities, a private solution to externalities

The Golden Rule

example of moral codes and social sanctions, a private solution to externalities

Club goods

excludable but not rival Example: cable TV

Private goods

excludable, rival in consumption Example: food

equity

fairness

Excludable

fish tacos, wireless Internet access (excludable or not excludable)

goods are not overused

for goods that rival in competition the government's role is to ensure that

corrective tax

gives firms incentive to continue reducing pollution as long as the cost of doing so is less than the tax. If a cleaner technology becomes available, the tax gives firms an incentive to adopt it.

internalizing the externality

government can attempt to help solve the problem of the externality by _______ using corrective taxes, issue permits to polluters, and establish where permits can be traded.

Progressive tax

high-income taxpayers pay a larger fraction of their income than low-income taxpayers -The more you make the higher your marginal tax rate -the US has this type of tax rate

rival in consumption

if one person's use reduces others' ability to use the same unit of the good.

negative externality

if there is this than the market quantity is larger than socially desirable quantity

positive externality

if there is this than the market quantity is smaller than the socially desirable quantity

Gini coefficient

is a measure of statistical dispersion intended to represent the income distribution of a nation's residents, and is the most commonly used measure of inequality. (Lorenz curve)

A free rider

is a person who receives the benefit of the good but does not pay for it Ex. a standford person coming in and watching the Greenwich fireworks -If you can enjoy something without paying for it why would you pay for it

lump-sum tax

is a tax that is the same for every person

An efficient tax system

is one that imposes small DWL and small administrative burdens

tax incidence

is the analysis of the effect of a tax on the distribution of economic welfare

Indiv income tax

is typically the largest source of revenue for the US federal gov -Social insurance taxes is second

Corrective taxes

less you use less you pay

Consumption tax

like provisions in the US tax code include Individual Retirement Accounts 401(k) plans -People can put a limited amount of saving into such accounts -The funds are not taxed until withdrawn at retirement -IRA = tax deduction

marginal tax rate

looks at to see what the distortion of the burden would be over time

unfair

lump-sum taxes are efficient yet may be perceived as ___ -In dollar terms, the poor pay as much as the rich -Relative to income, the poor pay much more than the rich

Negative externality

market is producing more that socially wanted amount, Put tax

Positive externality

market, left alone, is producing too little quantity for what we want as a society. Put Subsidy on it -- to attract a greater quantity in the market. Supply and demand curves are not being shifted so we have to force the market to procure this quantity

Public goods

not excludable, not rival Example: national defense

externality

occurs when a market transaction affects a third party.

Consumption

paying for goods and services

common resources

people can use _________ without paying, so they tend to overuse them. Therefore, governments try to limit the use of them

Free-rider good

people can use the good but don't have to pay for it

US most important federal revenue sources

personal income tax, social insurance payroll taxes, and the corporate income tax.

Equilibrium pt

private cost / value Doesn't factor in externalities -only at this point is society's welfare maximized

inefficient ; Public policy

private decisions about consumption and production can lead to an ____ outcome, and ______ can potentially raise economic well-being.

Neg externality

produced goods when market is left unregulated where cost of producing good exceeds price being received / Qd for this good

positive externality

produces a quantity higher than market equilibrium. Shift the demand curve upward

Market-based policies

provide incentives so that private decision-makers will choose to solve the problem on their own. Examples: corrective taxes and subsidies tradable pollution permits Externality credits - here are 500 credits for 1 million tons of CO2 so you can trade Ones who value polluting the most pay the most

Different kinds of goods

public goods private goods common goods club goods

corrective tax

raises this price and thus reduces the quantity of pollution firms demand.

Tradable pollution permits system

reduces pollution at lower cost than regulation. -Firms with low cost of reducing pollution do so and sell their unused permits. -Firms with high cost of reducing pollution buy permits.

The income tax

reduces the incentive to save. The lost income compounds over time

The efficiency of a tax system

refers to the costs it imposes on taxpayers beyond their tax payments.

Command-and-control policies

regulate behavior directly. Examples: limits on quantity of pollution emitted requirements that firms adopt a particular technology to reduce emissions Tax things -- can be positive

tradable permits system

restricts the supply of pollution rights, has the same effect as the tax.

Common resources

rival but not excludable Example: fish in the ocean

Supply curve

shows private cost, the costs directly incurred by sellers

Supply curve

shows private cost, the costs directly incurred by sellers. Marginal private cost

Demand curve

shows private value, the value to buyers (prices they are willing to pay)

Demand curve

shows private value, the value to buyers (the prices they are willing to pay). Marginal private benefit

Positive externality

socially optimal quantity is higher than equilibrium. Produces a quantity higher than market equilibrium

Negative externality

socially optimal quantity is lower than equilibrium

excludible

someone can be prevented from using it.

The Coase theorem

states that the private market can reach the socially optimal allocation of resources as long as people can bargain without cost. In practice, bargaining is often costly or difficult, and _______ does not apply.

Public goods

such as national defense and fundamental knowledge, are neither excludable nor rival in consumption.

The benefits principle

suggests that it is fair for people to be taxed based on the amount of government benefits they receive.

The ability-to-pay principle

suggests that it is fair for people to pay taxes based on their ability to handle the burden.

Government receipts

tax revenue, contributions to social insurance programs, and income from government-owned assets.

Proportional tax

taxpayers pay the same fraction of income, regardless of income -A flat tax -You make twice as much, you pay twice as much

Costs of the tax system

the deadweight loss caused by the distortion of incentives from taxes. the administrative burden of complying with tax laws.

private value

the direct value to buyers

conflict

the goals of efficiency and equity often _____ Eg. lump-sum tax is the least equitable but most efficient tax

Benefits principle

the idea that people should pay taxes based on the benefits they receive from government services. Another goal of this tax policy is equity -Tries to make public goods similar to private goods, the more you use the more you pay ex) gas tax --> especially if the revenue from this tax is used to build or maintain roads

Ability-to-pay principle

the idea that taxes should be levied on a person according to how well that person can shoulder the burden -Suggests that all taxpayers should make an "equal sacrifice" -Recognize that the magnitude of the sacrifice depends not just on the tax payment, but on the person's income and other circumstances

Vertical equity

the idea that taxpayers with a greater ability to pay taxes should pay larger amounts

Horizontal equity

the idea that taxpayers with similar abilities to pay taxes should pay the same amount -Problem = difficult to agree on what factors, besides income, determine ability to pay.

deadweight loss

the result of the fact that taxes distort incentives is _______, The fall in taxpayers' wellbeing exceeds the revenue the gov collects

most important state and local taxes

the sales tax and property tax.

Externality

the uncompensated impact of one person's actions on the well-being of a bystander -Action of two people on a third party

external benefit

the value of the positive impact on bystanders

Efficiency

trying to distribute the tax revenue with the smallest DWL

Externality

uncompensated impact of one person's actions on the well-being of a bystander. Can be positive or negative

External cost

value of the negative impact on bystanders -Value of harm from damaging aspects of life ex) $1 per gallon (value of harm from smog, greenhouse gases)

Consumption tax

would hurt the lower income people more -- pay a tax on everything you buy