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63 Cards in this Set
- Front
- Back
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What does the free market do?
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Maximizes economic surplus (ps+cs)
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What is a price floor?
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Legan minimum selling price
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What is a price ceiling?
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Legal maximum price
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To be effective, what must a price ceiling be?
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Price ceiling<P*
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What is deadweight loss (DWL)?
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Loss in economic surplus due to intervention in the market
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Who gains from a price ceiling?
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Some consumers gain, (ex. those who can rent an apartment during shortage)
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Who loses from a price ceiling?
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-Detrimental to economy as whole
-Some consumers lose, (ex. those who can't find an apartment) -Producers lose, (ex. if not making profit, upkeep stops--less apartments) |
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To be effective, what must a price floor be?
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Price floor>p*
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What is created from a price floor, price ceiling?
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-Price ceiling=shortage
-Price floor=surplus |
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Who gains from price floors?
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Some producers gain, (ex. people who can get a job)
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Who loses from price floors?
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-Economy as a whole
-Some producers, (ex. those who can't give a job) -Consumers lose |
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Define: tax incidence
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How the burden of a tax is distributed among members of the economy
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Define: free market
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Will self regulate in case of shortage/surplus to return to equilibrium
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Define: price controls
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Price won't change based on market, so binding rules on how prices are set
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What does minimum wage lead to?
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-Surplus of labor--unemployment
-Leads to discrimination (by employers) |
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What are the two importance issues with taxes?
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1.Statuatory incidence of a tax=who is legally responsible for the tax (buyers or sellers)
2.Economic incidence of a tax=who is actually paying for the tax |
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Define: unit tax
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Fixed amount per unit sold
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How does the demand curve shift when a tax is placed on the buyers?
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To the left (downward)
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How does the supply curve shift when tax is placed on the sellers?
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To the left (upwards)
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When tax is on the buyers who bears the burden? And on the sellers?
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Buyers bear the burden in both cases
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Define: luxury good
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Supply inelastic, demand is elastic
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What effect did a luxury tax have?
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Tax on buyers, producers were hurt not consumers, so no more luxury tax
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What is the equation for tax revenue?
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(amount of tax per unit) X (# of unites purchased)
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What is the problem with luxury taxes and predicting revenue?
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Estimated revenue could be a lot, but reality is the tax makes almost nothing because demand is elastic
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In what circumstances is tax revenue small?
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When supply and demand are very elastic
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In what circumstances is tax revenue large?
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When supply and demand are inelastic
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Define: tariff
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Tax on imports
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Define: world price
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The price of a good that prevails in the world market for that good
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Define: outarky
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Self-sufficient, independent economy (no international trade)
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If P*<world price for a particular country who has the comparative advantage?
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The country
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If P*>world price for a particular country who has the comparative advantage?
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The "rest of the world", country should import good
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Define: tax wedge
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Difference between before-tax and after-tax wages, how much government receives
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What are the results of taxes?
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1.Total price paid by consumers increases, but increase is less than the tax
2.Totaly price received by suppliers decreases, but decrease is less than tax |
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What's the equation for the burden of a tax on consumers?
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(New total price-old price)/total tax
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What's the equation for the burden of a tax on producers?
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The rest, or (old-price-new price received)/total tax
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When would a certain country open to international trade?
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When P*<Pw, then domestic prices will rise to Pw, suppliers will produce QSd and demanders will want QDd
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What determines the share of tax burdens?
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Relative elasticites
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For elasticities of substitutes, when elasticity of demand is high, what happens?
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Demanders have good alternatives
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For elasticities of substitutes, when elasticity of supply is high, what happens?
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Suppliers have good alternatives
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The group with greater elasticity...
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Bears smaller burden of tax
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When do we import a good?
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When P*>Pw, so domestic price will fall to Pw
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QDd-QSd=?
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# of imports
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What are other benefits from international trade?
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1.Increased variety of goods
2.Enchanced flow of ideas 3.Increased competition |
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What does a tariff do?
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-Acts as a "barrier to trade"
-Effectively raises price of imports (if P increases, then QD domestic decreases) -Society is made WORSE off |
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Why are tariffs bad for the economy?
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-Consumption effect=total consumption reduced due to tariff
-Production effect=supply of goods is no longer produced by the low cost supplier |
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Why are tariffs created if the loss>benefit?
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-Concentrated benefits, dispersed losses
-Ex. steel, total increase in prices/# of jobs saved=$750,000 (when each worker paid $75,000) |
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What are the arguments for tariffs/protectionism?
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1.International trade reduces # of domestic jobs (but preserves jobs in one industry at the expense of jobs in others) NOT valid
2.International trade poses national security risks (military internal should be protected) Valid 3.Infant industries should be protected until they're competitive (not needed, private investors must accept short term losses for future profits) NOT valid 4.Tariffs are a good source of government revenue (for developed countries small portion, but good for less developed) Valid 5.Trade restrictions are powerful political tools (ineffective, Cuba) NOT valid |
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Define: infant industry
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Early stages, just starting to develop
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What is necessary for a competitive market to exist?
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-Gains from trade are maximized (efficient outcome)
-Individuals must know and bare true opportunity cost of their actions |
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Define: externality
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Cost or benefit felt "external to" (beyond) those causing the effects, spill-over effect
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What do externalities result in?
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Inefficiency
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What are the two kinds of externalities?
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-Negative=cost, ex.pollution
-Positive=benefit, ex.education, landscaping, vaccines |
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What does the graph for negative externalities look like?
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-Shift to the left supply curve, decrease in supply
-Social costs=private costs+externality -Went too far, produced too much |
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What is the efficiency loss in negative externalities?
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Cost of Qmkt-Qopt > benefit of additional units (to society)
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Define: efficiency loss
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Loss in net benefits to society if Qmkt is produced instead of Qopt
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What does the graph look like for positive externalities?
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-Social value=private value + externality
-Stopped too soon -Benefit of Qopt-Qmkt > cost to society |
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What are the main points of externalities?
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-Potential wealth is decreased
-If full social costs/benefits are not used in the decision making process |
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What are public policy solutions for negative externalities?
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1.Corrective taxes=tax intended to make decision-maker internalize externality (tax size of externality)
2.Regulation |
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What are the public policy solutions for positive externalities?
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1.Subsidies=opposite of tax, negative tax, payment made to consumer when product is consumed (or produced)
2.Regulation 3.Government production (public schools) |
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Define: property rights
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Rights to use and transfer property, can lead to optimal outcome
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Define: Coase theorem
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-If property rights are complete and private parties can margin w/o costs, they can solve externality problems
-The efficient outcome is achieved regardless of initial allocation of property rights |
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What is an example of Coase theorem?
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-Factory that dumps pollution into river
-If factory has property rights=neighbors could pay factory not to pollute -If people have rights=factory could pay neighbors to pollute |
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What are the problems with Coase theorem?
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Bargining costs exists
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