Econ test 2

Lump-sum taxes

Same amount of tax for every person No equity Most efficient tax possible: •A person's decisions do not alter the amount owed •Doesn't distort incentives •Doesn't cause deadweight losses •Imposes a minimal administrative burden

Costs of taxes to taxpayers

Administrative burden: •Administrative burden •Time spent to fill out forms •Time spent throughout the year keeping records for tax purposes •Resources the government has to use to enforce the tax laws •Tax lawyers and accountants •Legal tax avoidance •Resources devoted to complying with tax laws •Deadweight loss •Can be reduced - simplify the tax laws •Politically difficult

Market-based policies

•Provide incentives so that private decision makers will choose to solve the problem on their own •Corrective taxes and subsidies •Tradable pollution permits

The free-rider problem

•Public goods are not excludable •Prevents the private market from supplying the goods •Market failure

The Coase theorem

•If private parties can bargain without cost over the allocation of resources •They can solve the problem of externalities on their own

Public goods

•Not excludable & Not rival in consumption

Negative externality

•One person uses a common resource diminishes other people's enjoyment of it •Common resources tend to be used excessively

The market equilibrium quantity of output is a. 4 units. b. 6 units. c. 5 units. d. 3 units.

b. 6 units.

Positive externality

Impact on the bystander is beneficial

Corporate income tax: tax on profits

Corporate profits are taxed twice •Corporate income tax when the corporation earns the profits •Individual income tax when the corporation uses its profits to pay dividends to its shareholders

Taxes collected by state and local governments

Funds from the federal government- Redistributes funds from high-income states (which pay more taxes) to low-income states (which receive more benefits)

As a nation gets richer

Government takes a larger share of income in taxes

Taxes collected by federal government

Two-thirds of taxes in the economy

Taxes collected by state and local governments

•About 1/3 of all taxes paid •Sales tax- Percentage of total amount spent at retail stores

Distribution of income

•Align families by income •Divide all families into five equal groups (quintiles): Same number of families in each group

•Costs of taxes to taxpayers •Tax payment itself •Deadweight losses

•Taxes distort the decisions that people make •Reduction in economic well-being of taxpayer •In excess of the amount of revenue raised by the government •Inefficiency •People allocate resources according to the tax incentive

The ability-to-pay principle

•Taxes should be levied on a person according to how well that person can shoulder the burden

The difficult job of cost-benefit analysis

Government- •Decide what public goods to provide •In what quantities

Proportional tax

High-income and low-income taxpayers pay the same fraction of income

regressive tax

High-income taxpayers pay a smaller fraction of their income than do low-income taxpayers

Taxes collected by state and local governments

Individual and corporate income taxes

Taxes collected by federal government

Payroll taxes: a tax on the wages that a firm pays its workers •"Social insurance taxes" - pay for Social Security and Medicare •Social Security: income-support program for the elderly •Medicare: government health program for the elderly

Property taxes

Percentage of estimated value of land and structures - paid by property owners

Taxes collected by federal government

Personal income taxes •Largest source of revenue •Based on total income (wages, interest, dividends, profits) •Marginal tax rate •Tax rate applied to each additional dollar of income •Rises as income rises, higher-income families pay a larger percentage of their income in taxes

Costs of taxes to taxpayers

Tax payment itself Deadweight losses- •Taxes distort the decisions that people make •Reduction in economic well-being of taxpayer •In excess of the amount of revenue raised by the government •Inefficiency •People allocate resources according to the tax incentive

degree of inequality

Varies substantially around the world

What amount of subsidy per unit of output would move the market from the equilibrium level of output to the socially optimal level of output? a. $10 b. $5 c. $2 d. $3

a. $10

Who among the following is a free rider? a. Ernie listens to National Public Radio, but does not contribute to any fundraising efforts. b. Bert takes the commuter rail to work, but he purchases the discounted monthly passes rather than buying tickets each day. c. Grover sends his five children to a private school rather than to the public school in his neighborhood. d. Oscar goes to Elmo's house to watch a football game on the local commercial television channel.

a. Ernie listens to National Public Radio, but does not contribute to any fundraising efforts.

A regional lobster management board recently proposed a five-year moratorium on lobster fishing in the Atlantic waters south of Cape Cod based on a study of the lobster population. Which of the following statements is not correct? a. If left unregulated, the lobster population will likely increase. b. The lobster population is an example of the tragedy of the commons. c. Lobsters are rival but not excludable. d. Reducing the quota on the number of lobsters any fisher can catch would have a protective effect on the lobster populati

a. If left unregulated, the lobster population will likely increase.

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The after-tax equilibrium quantity is greater than the socially optimal quantity. c. The after-tax equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

a. They are equal.

As the economy's income has grown, the government has a. grown at a faster pace. b. shrunk. c. grown at a slower pace. d. grown at about the same pace.

a. grown at a faster pace.

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

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

People cannot be prevented from using a good if the good is a a. public good or a common resource. b. private good or a public good. c. private good or a common resource. d. public good or a club good.

a. public good or a common resource.

In some cases, tradable pollution permits may be better than a corrective tax because a. the government can set a maximum level of pollution using permits. b. pollution permits are never preferred over a corrective tax. c. pollution permits generate more revenue for the government than a corrective tax. d. pollution permits allow for a market solution while a corrective tax does not.

a. the government can set a maximum level of pollution using permits.

The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following: • a private cost of $3.10;• a social cost of $3.55; • a value to consumers of $3.70. Let Q MARKET represent the equilibrium quantity of gasoline, and let Q OPTIMUM represent the socially optimal quantity of gasoline. Which of the following inequalities is correct? a. QOPTIMUM < 1,000 < QMARKET b. 1,000 < QOPTIMUM < QMARKET c. QMARKET < 1,000 < QOPTIMUM d. QOPTIMUM < QMARKET < 1,000

b. 1,000 < QOPTIMUM < QMARKET

The U.S. tax burden is a. higher than all European countries. b. lower than most European countries. c. higher than most European countries. d. about the same as most European countries.

b. lower than most European countries.

When a good is rival in consumption, a. people can be prevented from using the good. b. one person's use of the good diminishes another person's ability to use it. c. everyone will be excluded from obtaining the good. d. an unlimited number of people can use the good at the same time.

b. one person's use of the good diminishes another person's ability to use it.

Cost-benefit analysts often encounter the problem that those who would benefit from government provision of a public good tend to a. understate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to understate the costs they would incur from the public good. b. overstate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good. c. understate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good. d. overstate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to understate the costs they would incur from the public good.

b. overstate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good.

A textbook is a a. common resource and the knowledge that one gains from reading the book is a private good. b. private good and the knowledge that one gains from reading the book is a public good. c. private good and the knowledge that one gains from reading the book is a common resource. d. common resource and the knowledge that one gains from reading the book is a public good.

b. private good and the knowledge that one gains from reading the book is a public good.

A benevolent social planner would prefer that the output of good x be increased from its current level if, at the current level of output of good x, a. social value = private value = private cost < social cost. b. social cost = private cost = private value < social value. c. social cost > private value = social value > private cost. d. social value = private cost = social cost > private value.

b. social cost = private cost = private value < social value.

According to the Coase theorem, private parties can solve the problem of externalities if a. the number of parties involved is sufficiently large. b. the cost of bargaining is small. c. property rights aren't clearly defined. d. the initial distribution of legal rights favors the person being adversely affected by the externality.

b. the cost of bargaining is small.

The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following: • a private cost of $3.10; • a social cost of $3.55; • a value to consumers of $3.70. From the given information, it is apparent that a. the production of gasoline involves a positive externality, so the market will produce a larger quantity of gasoline than is socially desirable. b. the production of gasoline involves a negative externality, so the market will produce a larger quantity of gasoline than is socially desirable. c. the production of gasoline involves a positive externality, so the market will produce a smaller quantity of gasoline than is socially desirable. d. the production of gasoline involves a negative externality, so the market will produce a smaller quantity of gasoline than is socially desirable.

b. the production of gasoline involves a negative externality, so the market will produce a larger quantity of gasoline than is socially desirable.

The table represents a market in which a. there is a negative externality b. there is a positive externality. c. there is no externality. d. The answer cannot be determined from inspection of the table.

b. there is a positive externality.

This graph represents the tobacco industry. Without any government intervention, the equilibrium price and quantity are a. $3.00 and 30 units, respectively. b. $2.80 and 24 units, respectively. c. $2.07 and 38 units, respectively. d. $1.50 and 50 units, respectively.

c. $2.07 and 38 units, respectively.

Take into account private and external costs and assume the quantity of output is always a whole number (that is, fractional units of output are not possible). The maximum total surplus that can be achieved in this market is a. $35. b. $40. c. $46. d. $29.

c. $46.

What is the equilibrium price in this market? a. More than $10 b. $10 c. $8 d. Between $8 and $10

c. $8

A taxpayer faces the following tax rates on her income: 20 percent of the first $40,000 of her income; 30 percent of all her income above $40,000. The taxpayer faces a marginal tax rate of a. 0 percent when her income rises from $30,000 to $30,001. b. 10 percent when her income rises from $40,000 to $40,001. c. 20 percent when her income rises from $30,000 to $30,001. d. 20 percent when her income rises from $40,000 to $40,001.

c. 20 percent when her income rises from $30,000 to $30,001.

The following table shows the marginal tax rates for unmarried individuals for two years. For an individual who earned $35,000 in taxable income in both years, which of the following describes the change in the individual's marginal tax rate between the two years? a. The marginal tax rate decreased from 2019 to 2020. b. The change in the marginal tax rate cannot be determined for the two tax schedules shown. c. The marginal tax rate increased from 2019 to 2020. d. The marginal tax rate remained constant from 2019 to 2020.

c. The marginal tax rate increased from 2019 to 2020.

Suppose that candy producers create a positive externality equal to $1 per pound of candy. Further suppose that the government offers a $1-per-pound subsidy to the producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of candy? a. The equilibrium quantity is greater than the socially optimal quantity. b. The equilibrium quantity is less than the socially optimal quantity. c. They are equal. d. There is not enough information to answer the question.

c. They are equal.

A toll on a congested road is in essence a. an interstate highway subsidy. b. a gasoline tax. c. a corrective tax. d. a hidden tax.

c. a corrective tax.

Two types of private solutions to the problem of externalities are a. charities and subsidies. b. the Golden Rule and taxes. c. charities and the Golden Rule. d. taxes and subsidies.

c. charities and the Golden Rule.

Before considering any public project, the government should a. only measure the total benefits of the project. b. infer that citizens who vote for a project are willing to pay equally for it. c. conduct a cost-benefit analysis and compare the total cost and total benefits of the project. d. only measure the cost of the project.

c. conduct a cost-benefit analysis and compare the total cost and total benefits of the project.

If this market is currently producing at Q 4 , then total economic well-being would be maximized if output a. stayed at Q4. b. decreased to Q3. c. decreased to Q2. d. decreased to Q1.

c. decreased to Q2.

If the government wanted to tax or subsidize this good to achieve the socially optimal level of output, it would a. introduce a subsidy of $2 per unit. b. impose a tax of $2 per unit. c. introduce a subsidy of $4 per unit. d. impose a tax of $4 per unit.

c. introduce a subsidy of $4 per unit.

Both public goods and common resources are a. nonrival in consumption. b. rival in consumption. c. nonexcludable. d. excludable.

c. nonexcludable.

A good is excludable if a. one person's use of the good diminishes another person's enjoyment of it. b. it is not a normal good. c. people can be prevented from using it. d. the government can regulate its availability.

c. people can be prevented from using it.

The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following: • a private cost of $3.10; • a social cost of $3.55; • a value to consumers of $3.70. Suppose the equilibrium quantity of gasoline is 1,150 gallons; that is, Q MARKET = 1,150. Then the equilibrium price of a gallon could be a. $3.80. b. $2.80. c. $3.00. d. $3.30.

d. $3.30.

The social cost of the 2 nd unit of output that is produced is a. $38. b. $7. c. $23. d. $30.

d. $30.

A membership at a gym that always has space in classes and on machines is an example of the type of good represented by Box a. A. b. C. c. D. d. B.

d. B.

Emma's use of good x does not affect anyone else's use of good x. Neither Emma nor anyone else can be prevented from using the good. Good x is an example of the type of good that belongs in a. Box B, which represents common resources. b. Box A, which represents private goods. c. Box C, which represents common resources. d. Box D, which represents public goods.

d. Box D, which represents public goods.

Which of the following would not be considered a private good? a. An SUV b. A pair of scissors c. A pair of shoes d. Cable TV service

d. Cable TV service

When Monique drives to work every morning, she drives on a congested highway. What Monique does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Monique's highway trip a. lowers the social cost below the private cost. b. increases the social value above the private benefit. c. decreases the social value below the private benefit. d. increases the social cost above the private cost.

d. Increases the social cost above the private cost.

A city street is a. always a public good, whether or not it is congested. b. a public good when it is congested, but it is a common resource when it is not congested. c. always a common resource, whether or not it is congested. d. a common resource when it is congested, but it is a public good when it is not congeste

d. a common resource when it is congested, but it is a public good when it is not congeste

A city street is a. always a common resource, whether or not it is congested. b. a public good when it is congested, but it is a common resource when it is not congested. c. always a public good, whether or not it is congested. d. a common resource when it is congested, but it is a public good when it is not congested.

d. a common resource when it is congested, but it is a public good when it is not congested.

A tax levied on the total amount spent in retail stores is called a. an income tax. b. an excise tax. c. a retail tax. d. a sales tax.

d. a sales tax.

A lighthouse is typically considered to be a public good because a. the owner of the lighthouse is able to exclude beneficiaries from enjoying the lighthouse. b. there is rarely another lighthouse nearby to provide competition. c. a nearby port authority cannot avoid paying fees to the lighthouse owner. d. all passing ships are able to enjoy the benefits of the lighthouse without paying.

d. all passing ships are able to enjoy the benefits of the lighthouse without paying.

Private goods are both a. nonexcludable and rival in consumption. b. excludable and nonrival in consumption. c. nonexcludable and nonrival consumption. d. excludable and rival in consumption.

d. excludable and rival in consumption.

A good is excludable if a. it is not a normal good. b. one person's use of the good diminishes another person's enjoyment of it. c. the government can regulate its availability. d. people can be prevented from using it.

d. people can be prevented from using it.

Because of the free-rider problem, a. the federal government spends too many resources on national defense and not enough resources on medical research. b. poverty can easily be eliminated through private charity. c. firework displays provided by private markets have become increasingly popular. d. private markets tend to undersupply public goods.

d. private markets tend to undersupply public goods.

The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following: • a private cost of $3.10;• a social cost of $3.55; • a value to consumers of $3.70. Suppose the dollar amount of the externality, per gallon of gasoline, is constant, regardless of how much gasoline is produced. Then the externality could be internalized if producers of gasoline were a. provided a subsidy of $0.45 per gallon of gasoline sold. b. provided a subsidy of $0.30 per gallon of gasoline sold. c. required to pay a tax of $0.30 per gallon of gasoline sold. d. required to pay a tax of $0.45 per gallon of gasoline sold.

d. required to pay a tax of $0.45 per gallon of gasoline sold.

A person's marginal tax rate equals a. her tax obligation divided by her average tax rate. b. her tax obligation divided by her income. c. the increase in taxes if her average tax rate were to rise by 1percent. d. the increase in taxes she would pay as a percentage of the rise in her income.

d. the increase in taxes she would pay as a percentage of the rise in her income.

Club goods

excludable and not rival in consumption

A free rider is a person who

receives the benefit of a good but avoids paying for it

Government revenue - increased

•As percentage of total income •As economy's income has grown- Government's revenue from taxation has grown even more

Market fails to allocate resources efficiently

•Because property rights are not well established •Some item of value does not have an owner with the legal authority to control it

Some important common resources

•Clean air and water •Congested roads •Fish, whales, and other wildlife

Cost-benefit analysis

•Compare the costs and benefits to society of providing a public good •Doesn't have any price signals to observe •Government findings: rough approximations at best

Taxes collected by federal government

•Excise taxes: taxes on specific goods like gasoline, cigarettes, and alcoholic beverages •Estate taxes •Customs duties

Private goods

•Excludable & Rival in consumption

Other receipts

•Fees for fishing and hunting licenses; •Tolls from roads and bridges •Fares for public buses and subways

The government can potentially solve the problem

•Help define property rights and thereby unleash market forces •Regulate private behavior •Use tax revenue to supply a good that the market fails to supply

Progressive tax

•High-income taxpayers pay a larger fraction of their income than do low-income taxpayers

Government can remedy the free-rider problem

•If total benefits of a public good exceeds its costs •Provide the public good •Pay for it with tax revenue

Negative externality

•Impact on the bystander is adverse

Inequality measure: quintile ratio

•Income received by the richest quintile of the population •Divided by the income of the poorest quintile

Some important public goods

•National defense •Basic research •Antipoverty programs financed by taxes •Welfare system (Temporary Assistance for Needy Families program, TANF) •Food stamps (Supplemental Nutrition Assistance Program, SNAP) •Government housing programs

The tragedy of the commons

•Parable that shows why common resources are used more than desirable •From society's standpoint •Social and private incentives differ •Arises because of a negative externality

The benefits principle

•People should pay taxes based on the benefits they receive from government services •Tries to make public goods similar to private goods •A person who gets great benefit from a public good should pay more for it than a person who gets little benefit

Excludability

•Property of a good whereby a person can be prevented from using it

Rivalry in consumption

•Property of a good whereby one person's use diminishes other people's use

Command-and-control policies

•Regulate behavior directly •Regulation

Government can solve the problem

•Regulation or taxes to reduce consumption of the common resource •Turn the common resource into a private good

Common resources

•Rival in consumption & Not excludable

vertical equity

•Taxpayers with a greater ability to pay taxes should pay larger amounts •Richer taxpayers should pay more than poorer taxpayers

Marginal tax rate

•The extra taxes paid on an additional dollar of income •How much tax system distort incentives •Determines the deadweight loss

Externality

•The uncompensated impact of one person's actions on the well-being of a bystander •Market failure

Average tax rate

•Total taxes paid divided by total income •Sacrifice made by a taxpayer- Fraction of income paid in taxes