Chapter 5

Question 1

market equilibrium,

Answer 1

the market price moves to the level at which the quantity supplied equals the quantity demanded and maximizes total surplus

Question 2

A price ceiling

Answer 2

is a cap or a legal maximum on the price at which a good can

be sold.

Question 3

When the maximum price is below the equilibrium price,

Answer 3

the price ceiling is a

binding constraint.

Question 4

A price floor

Answer 4

is a legal minimum on the price at which a good can be sold

Question 5

(Binding price ceilings create) a deadweight loss:

Answer 5

The loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity

Question 6

When a shortage of rental accommodation develops,

Answer 6

some mechanism for

rationing accommodation will develop.

Question 7

The EU’s Common Agricultural Policy (CAP)

Answer 7

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.

Question 8

Quantity controls

Answer 8

or quotas are government imposed limits on how much of a good may be bought or sold

Question 9

the quota limit

Answer 9

The quantity allowed for sale

Question 10

The government issues licenses:

Answer 10

the right to sell a given quantity of a

good under the quota

Question 11

the quota rent.

Answer 11

The wedge between the demand and supply price is

Question 12

A direct tax

Answer 12

is a tax levied on income or wealth.

• Example: income tax or tax on profit

Question 13

An indirect tax

Answer 13

is a tax levied on the sale of goods and services.

• Example: A value-added tax (VAT) on consumption

Question 14

Tax incidence

Answer 14

the way in which the burden of a tax is shared among participants in the market.

Question 15

A specific tax

Answer 15

A tax levied on goods or services expressed as a sum per unit (excise duties).

Question 16

An ad valorem tax

Answer 16

A tax levied as a percentage of the price of a good (VAT).

Question 17

A subsidy

Answer 17

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.

Question 18

The administrative burden of any tax system is part of the inefficiency it creates. (What are its negativities of the system)

Answer 18

• 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)

Question 19

The deadweight loss

Answer 19

is the fall in total surplus that results from a market distortion, such as a tax.

Question 20

The average tax rate

Answer 20

is total taxes paid divided by total income. measures the fraction of income paid in taxes

Question 21

The marginal tax rate

Answer 21

is the extra taxes paid on an additional unit of income. measures how much the tax system discourages people from working.

Question 22

lump-sum tax

Answer 22

is a tax that is the same amount for every person. The marginal tax rate is zero

Question 23

benefit principle

Answer 23

states that people should pay taxes based on the benefits they receive from government services.

Question 24

ability to pay principle

Answer 24

states that taxes should be levied on a person according to how well that person can shoulder the burden.

Question 25

Vertical equity

Answer 25

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

Question 26

Horizontal equity

Answer 26

the idea that taxpayers with similar abilities to pay should pay the same amount.

Question 27

proportional tax (flat tax)

Answer 27

a tax for which high-income and

low-income taxpayers pay the same fraction of income.

Question 28

regressive tax

Answer 28

a tax for which high-income taxpayers pay a smaller

fraction of their income than do low-income taxpayers.

Question 29

A progressive tax

Answer 29

a tax for which high-income taxpayers pay a larger

fraction of their income than do low-income taxpayers.

Question 30

Tax incidence

Answer 30

the study of who bears the burden of taxes - is central toe evaluating tax equity.

Question 31

Non-binding price ceiling

Answer 31

A price ceiling that doesn’t have an effect on the market price.

Question 32

What is binding vs non binding?

Answer 32

Binding means you’re legally bound to something, while non-binding means you aren’t.