CHAPTER TEN –THE GOVERNMENT IN THE ECONOMY: TAXATION AND REGULATION Flashcards
Name the two types of regulation
- Direct regulation
2. Price controls
What is referred to as direct regulation?
Attempts by the government to control the
amount of an activity—also called
command-and-control regulation
What is referred to as price controls?
Attempts by the government to control the
price of an activity
Whats the price ceiling?
A cap (or maximum) on the price
Whats the concept of production possibility curves?
Shows the relationship between the
maximum production of one good for a given level of production of another good
Whats a comparative advantage?
The ability of one economic agent
to produce at lower opportunity
cost than another
Whats an absolute advantage?
When an economic agent can produce
more output than another agent with
the same resources
What are the terms of trade?
The “price” of one good in terms of the
other; the exchange rate between goods
Whats the formula of the per unit tax?
Price Paid by Buyer (PPAID) – Price Received by Seller (PRECD)
What are the price conditions hold in equilibrium?
– PPAID is on the demand curve: PPAID = 180 – Qd.
– PRECD is on the supply curve: PRECD = 60 + Qs.
– There is a unique quantity: Qd = Qs = QTAX.
– The two prices differ by the tax: PPAID = PRECD + T.
What are the steps to calculate QTax? (E.g.: T = 20)
a. PPAID = PRECD + 20
b. PPAID = 180 – Qd
c. Substituting a in b yields: PRECD = 160 - Q
d. From supply curve we know: PRECD = 60 + Q
➢QTAX = 50
What are the steps to calculate a desired target output to find T
For a desired target output find necessary tax T (E.g.: QTAX = 40)
– PPAID = 180 – 40 = 140.
– PRECD = 60 + 40 = 100.
➢T = PPAID – PRECD = 40
What are price floors?
Price floors refer to a minimum price of a market good or service. An example is the minimum wages requirement given by different countries. A price floor has similar implications to those of a price ceiling, except that instead of a shortage, a price floor causes a surplus
