Micro Exam 2
Market -based
Align private incentives with social efficiency
What is an item that falls more heavily with sellers
entertainment
A tax placed on a necessary good for consumers will
fall more heavily on buyers
the sellers cost production
is the minimum amount they are willing to accept
Tax collected from buyers in a market
is the same as tax collected from sellers
A buyers willingness to pay is
the max amount for the good
Excludable
the property of a good whereby a person can be prevented from using it. food in a grocery store
Rivalry in Consumption
the property of a good whereby one persons use of a good diminishes other peoples use. Food, not rival - streetlight
Positive Externality
Education:generates benefits to people beyond just buyers of education. Social value exceeds private value. The optimal quantity that maximizes total surplus is greater than equilibrium quantity
If equilibrium price of gas is $1/gal and the govt places a price ceiling on gas of $1.5/gal the result will be a shortage of gas
False, a price ceiling that is set above isnt binding
A 10% increase in minimum wage causes 10% in teenage employment
False, it causes a 1-3% reduction
A price floor in the market always creates a surplus
False, only if it is set above the equilibrium price
A price ceiling set below cause a surplus
False, shortage
the minimum wage helps all teenagers because they receive higher then they would have
False, some may become unemployed and others quit school to earn what they think is good money
Public
Goods that are neither excludalbe or rival. national defense and streetlights
What is an example of a price floor
Minimum wage
An apple orchard uses pesticides the fumes drift across to a nearby neighborhood
Negative, the social cost exceeds the private cost
If the externality is not internalized does the market overproduce or underproduce
Overproduced. To overproduce means the true cost exceeds the true value. To underproduce means the true value exceeds the true cost
Negative Externality
Pollution: costs to society are beyond those to the firm ( social cost exceeds private)
If the government places a price ceiling on gas at $1.50 and the equilibrium is $1.00
Price ceiling becomes a binding constraint because of increase in demand
What is not a function of prices in a market system?
Prices ensure an equal distribution of goods and services among consumers.
To internalize a negative externality a policy would be
Tax the good
What is not a short run effect of rent control on the housing market
a large shortage
corrective tax
a tax enacted to correct the effects of a negative externality
Why is a tax collected from buyers equivelant to a tax collected from sellers
a tax places a wedge between what the buyers and sellers receieve . Whether the buyer or seller hands the tax to the government makes no difference
Trade pollution permits
allow the holder of the permit to pollute only a certain amount
Total surplus area is
below demand curve and above supply
Private Goods
both excludable and rival. bread and jeans
Under rent control bribery is a mechanism used to
bring the total price of an apartment (including the bribe) closer to the equilibrium price
A tax collected from the buyers of a good shifts the
demand curve downward by the size of the tax
the burden of the tax falls more heavily on the sellers in the market when
demand is elastic and supply is inelastic
the burden of tax falls more heavily on buyers when
demand is inelastic and supply is elastic
When collected from the buyers which way does the demand curve shift
downward by the size of the tax
Common resource
good that are rival but not excludable - fish in the ocean
Club goods
goods that are excludable but not rival - fire protection or cable tv
Is the impact of a binding price ceiling greater in the short run or long run?
greater in the long run because both supply and demand tend to be more elastic in the long run. As a result, the shortage becomes more severe.
technology spillover
high technology production generates a positive externality for other producers
What takes places when a tax is placed on a good
increase in price buyers pay, decrease sellers receive, and decrease in quantity sold
Rent Control
is a price ceiling, leads to larger shortage of apartments in the long run than short, and leads to
When we use the model of supply and demand to analyze a tax that is collected from the sellers, which way do we shift the supply curve
its shifted upward by the size of the tax because the amount the seller requires from the buyer has been increased by the tax
Under rent control tenants can expect
lower rent and lower quality housing
Adam Smiths "invisible hand" suggests that a competitve market outcome
maximizes total surplus
If a tax is levied on the sellers of a product then there will be a
movement up and to the left along the demand curve
When a binding price ceiling is imposed on the market
price no longer serves as a rationing device
Coase Theorm
proposition that if private parties can bargain without cost over allocation of resources they can solve the problem of externalities on their own
Command and control
regulations that requires or limit certain behaviors. The regulator must know all of the details of an industry and alternative technologies to create the efficient rules
What are problems caused by a binding price ceiling
shortages, long lines, bribes, poor quality
What is the impact on the price and quantity if a price is set below equilibrium?
the Qs falls and the Qd rises causing a shortage
What if the price and quantity of the price floor are set above
the Qs rises and the Qd falls causing a surplus
Interalizing of externality
the altering of incentives so that people take into account the external effects of their actions
Why are tradable pollution permits considered superior to corrective tax at reducing pollution
the regulator doesnt need to know anything about the dmenad to pollute in order to arrive at the targeted amount of pollution
Non- excludable
the seller cant exclude non-payers from using it - broadcast television or radio
Suppose a gas- guzzler tax is placed on luxury cars. Who will likely bear the burden of tax
the sellers, because the demand for luxuries tend to be highly elastic. Buyers can easily shift their purchases toward alternatives while sellers cant quickly reduce production when the price they receive falls. The burden falls on the side of the market that is less elastic.
If a social planner chooses to produce less than equilibrium of a good
the value placed on the last unit produced by buyers exceeds the value of the cost of production
What is the impact on the price and quantity if a price is set above the equilibrium
there is no binding constraint and the price can move to equilibrium without restriction
What is the impact on the price and quantity if the price floor is set below equilibrium price?
there is no binding constraint, so no impact
In the short run, rent control causes quantity supplied
to fall and quantitiy demanded to rise
A price floor set above is a binding constraint
true
the shortage of housing caused by binding rent is more severe in the long run
true
