Chapter 5 Flashcards
1
Q
What is…
equity?
efficiency?
A
- allocating resources fairly
- increasing social surplus
2
Q
What are Price controls?
1.
2.
A
- are usually enacted when policymakers believe the market price is unfair to buyers or sellers
- price controls result in government-created price ceiling and price floor
3
Q
What is….
- price ceiling?
- price floor?
A
- price ceiling is a legal maximum on the price at which a good can be sold; can be not binding (if set above the equilibrium price) and binding (set below the equilibirum price which leads to a shortage)
- a price floor is a legal minimum on the price ar which a good can be sold, e.g. minimum wage
4
Q
Price Ceilings: What are some unintended consequences of rent controls?
1.
2.
3.
4.
5.
6.
7.
A
- a lower price attract more potential tenants (Mieter)
- a lower price scares off some potential landlords
- some appartements are converted to condos (=EIgentumswohnung), office space or storage space - in order to earn a higher return
- fewer app. buildings are contructed - which prolongs the shortage
- With less incentive to respond to customers, landlords cut maintenance costs; we would expect them to be less attentive when things break down
- Landlords try to collect shortfall in clever ways, such as furniture rental fees (“The apartment is rent controlled, but you are required to rent this folding chair for a mere
€200 a month!”) - Turnover and vacancies are lower because the opportunity costs of moving are so high! Once a family moves into a rent controlled apartment, it rarely leaves
5
Q
What is the deadweight loss?
A
- It is the loss of economic efficiency in terms of utility for consumers/producers such that the optimal or allocative efficiency is not achieved
- the loss of total welfare or the social surplus due to reasons like taxes or subsidies, price ceilings or floors, externalities
6
Q
What are Taxes?
1.
2.
3.
4.
5.
A
- governments levy (=erheben) taxes to raise revenue for public projects
- BUT they discourage market activity
- when a good is taxed, the quantity sold is smaller
- buyers and sellers share the tax burden
- direct and indirect tax
7
Q
What are….
direct taxes?
indirect taxes? (specific and ad valorem tax)
A
- direct tax is livied on income and wealth
- indirect tax is levied on the sale of goods and services (specific is set amount per unit of expenditure, e.g. 0.75 per litre of petrol - ad valorem tax is expressed as a percentage)
8
Q
What is Tax incidence?
A
- the manner in which the burden of a tax is shared among participants in a market
9
Q
What is a subsidy?
A
- opposite to a tax
- a payment to buyers and sellers to supplement income or lower costs and which thus encourages consumption or provides an advantage to the recipient
- subsidies alter the incentives for people to trvael on the train rather than on the roads (reduces congestion and pollution)
- promotes consumption of a very specific good of which there is currently too little production
10
Q
Example of a subsidy - Railway companies
A
- a subsidy given to railway companies shifts the supply curve outwards and lowers the price to buyers and so increases the amount purchased
- both buyers and suppliers ahre the benefit of the subsidy
- there are costs associated with subsidies
11
Q
What does a low price elasticity of demand imply?
A
- it shows that buyers do not have good alternatives to consuming the product
11
Q
What does a low price elasticity of demand imply?
A
- it shows that buyers do not have good alternatives to consuming the product
12
Q
A tax on a product means…
1.
2.
3.
A
- the price that a buyer pays will be greater than the price the seller receives
- therefore, there is a tax wedge between the two prices
- the quantity sold will be smaller if there was no tax
13
Q
low price elasticity means…
A
…that the sellers/ buyers do not have good alternatives of producing/ consuming - kurve ist STEIL wenn wenig elastisch
14
Q
How to calculate the Tax Revenue?
A
T (Tax) x Q (Quantity)
