Chapter 5 Flashcards
market equilibrium,
the market price moves to the level at which the quantity supplied equals the quantity demanded and maximizes total surplus
A price ceiling
is a cap or a legal maximum on the price at which a good can
be sold.
When the maximum price is below the equilibrium price,
the price ceiling is a
binding constraint.
A price floor
is a legal minimum on the price at which a good can be sold
(Binding price ceilings create) a deadweight loss:
The loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity
When a shortage of rental accommodation develops,
some mechanism for
rationing accommodation will develop.
The EU’s Common Agricultural Policy (CAP)
was introduced in 1962. It was
designed to offer minimum guaranteed prices to European farmers to ensure a consistent and reliable supply of food throughout the European community.
Quantity controls
or quotas are government imposed limits on how much of a good may be bought or sold
the quota limit
The quantity allowed for sale
The government issues licenses:
the right to sell a given quantity of a
good under the quota
the quota rent.
The wedge between the demand and supply price is
A direct tax
is a tax levied on income or wealth.
• Example: income tax or tax on profit
An indirect tax
is a tax levied on the sale of goods and services.
• Example: A value-added tax (VAT) on consumption
Tax incidence
the way in which the burden of a tax is shared among participants in the market.
A specific tax
A tax levied on goods or services expressed as a sum per unit (excise duties).
An ad valorem tax
A tax levied as a percentage of the price of a good (VAT).
A subsidy
is a payment to buyers or sellers to supplement income or reduce costs of production to provide an advantage to the recipient of the subsidy.
The administrative burden of any tax system is part of the inefficiency it creates. (What are its negativities of the system)
• Costs of filling in the tax form
• Cost of tax avoidance: optimizing your affairs so that you pay as little
tax as possible without breaking the law (6= tax evasion)
The deadweight loss
is the fall in total surplus that results from a market distortion, such as a tax.
The average tax rate
is total taxes paid divided by total income. measures the fraction of income paid in taxes
The marginal tax rate
is the extra taxes paid on an additional unit of income. measures how much the tax system discourages people from working.
lump-sum tax
is a tax that is the same amount for every person. The marginal tax rate is zero
benefit principle
states that people should pay taxes based on the benefits they receive from government services.
ability to pay principle
states that taxes should be levied on a person according to how well that person can shoulder the burden.
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 should pay the same amount.
proportional tax (flat tax)
a tax for which high-income and
low-income taxpayers pay the same fraction of income.
regressive tax
a tax for which high-income taxpayers pay a smaller
fraction of their income than do low-income taxpayers.
A progressive tax
a tax for which high-income taxpayers pay a larger
fraction of their income than do low-income taxpayers.
Tax incidence
the study of who bears the burden of taxes - is central toe evaluating tax equity.
Non-binding price ceiling
A price ceiling that doesn’t have an effect on the market price.
What is binding vs non binding?
Binding means you’re legally bound to something, while non-binding means you aren’t.
