Chapter 5 Flashcards
What is “Welfare Economics”?
Welfare Economics is the branch of economics that studies how the allocation of resources affects economic well-being
What is “willingness to pay” (reservation price)?
Willingness to pay is the maximum price a consumer will pay for a good or service.
What is “willingness to sell”?
Willingness to sell is the minimum price a seller will accept to sell a good or service.
What is “consumer surplus”?
Consumer surplus is the difference between the willingness to pay for a good (or service) and the price that is paid to get it.
What is “producer surplus”?
Producer surplus is the difference between the willingness to sell a good or service and the price that the seller receives.
What is “Total Surplus” (social welfare)? When is it considered efficient?
Total surplus, also known as social welfare, is the sum of consumer surplus and producer surplus. It measures the well-being of all participants in a market, absent any government intervention.
- When an allocation of resource maximises total surplus, the result is said to be efficient.
Distinguish between “efficiency” and “equity”.
Equity refers to the fairness of the distribution of benefits among the members of a society.
Efficiency means we eliminate waste.
What are “excise taxes”?
Excise taxes are taxes levied on a particular good or service.
What is “tax incidence”?
Incidence refers to the burden of taxation on the party who pays the tax through higher prices, regardless of whom the tax is actually levied on.
What is “deadweight loss” and how does a tax create it?
- Consumers who would’ve paid the lower price no longer purchase the good
- Producers who were willing to sell at a lower price with more of the profits no longer sell the good
Deadweight loss is the total decrease in economic activity caused by market distortions.
What is the incidence of tax determined by?
- The relative steepness of the demand curve compared to the supply curve (elasticity)
- When the demand curve is steeper (more inelastic) than the supply curve, consumers bear more of the incidence of the tax.
- When the supply curve is steeper (more inelastic) than the demand curve, suppliers bear more of the incidence of tax.
When is “deadweight loss” minimised?
Whenever the supply and/or demand curves are relatively steep, deadweight loss is minimised.
What happens when tax is levied on products with more elastic demand?
What happens when tax is levied on products with highly elastic demand?
