Exam 2 All Terms

Question 1

Define: Commodity tax

Answer 1

a tax on goods

Question 2

Fill in the blanks: Tax = the price _______________ - the price _______________.

Answer 2

paid by buyers, received by sellers

Question 3

Fill in the blank: Who ultimately pays a tax depends on the _______________.

Answer 3

relative elasticities of supply and demand

Question 4

Fill in the blanks: Elasticity = _______________ from tax. The more elastic curve (supply or demand) has to pay _______________ of the tax.

Answer 4

escape, less

Question 5

Fill in the blanks: A commodity tax _______________ revenue and _______________ the gains from trade (creates a _______________).

Answer 5

raises, reduces, deadweight loss.

Question 6

Define: Deadweight loss

Answer 6

the reduction in total surplus caused by a market distortion or inefficiency

Question 7

Fill in the blank: The deadweight loss from taxation is _______________ the more elastic the demand curve.

Answer 7

larger

Question 8

Fill in the blank: The deadweight loss from taxation is _______________ the less elastic the supply curve.

Answer 8

smaller

Question 9

Define: Subsidy

Answer 9

a reverse tax; the government gives money to consumers or producers

Question 10

Fill in the blank: Whoever receives the burden of the tax receives the _______________ of the subsidy.

Answer 10

benefit

Question 11

Define: Price ceiling

Answer 11

a maximum price allowed by law

Question 12

Fill in the blanks: Price ceilings create
1. _______________
2. _______________
3. _______________
4. _______________
5. _______________

Answer 12

1. shortages
2. reductions in product quality
3. wasteful lines and other search costs
4. a loss of gains from trade (deadweight loss)
5. a misallocation of resources

Question 13

Fill in the blank: When prices are controlled, resources do not flow to their _______________
-valued uses.

Answer 13

highest

Question 14

Define: Price floor

Answer 14

a minimum price allowed by law

Question 15

Fill in the blanks: Price floors create
1. _______________
2. _______________
3. _______________
4. _______________
5. _______________

Answer 15

1. surpluses
2. a loss of gains from trade (deadweight loss)
3. wasteful increases in quality
4. a misallocation of resources

Question 16

Define: Private cost

Answer 16

a cost paid by the consumer or producer

Question 17

Define: External cost

Answer 17

a cost paid by people other than the consumer or producer trading in the market

Question 18

Define: Social cost

Answer 18

the cost to everyone: the private cost plus the external cost

Question 19

Define: Externalities

Answer 19

external costs or external benefits AKA cost or benefits that fall on bystanders.

Question 20

Define: Social surplus

Answer 20

consumer surplus plus producer surplus plus everyone else’s surplus

Question 21

Define: Efficient equilibrium

Answer 21

the price and quantity that maximize social surplus

Question 22

Define: Efficient quantity

Answer 22

the quantity that maximizes social surplus

Question 23

Define: Pigouvian tax

Answer 23

a tax on a good with external costs

Question 24

Define: External benefit

Answer 24

a benefit received by the people other than the consumers or producers trading in the market

Question 25

Define: Pigouvian subsidy

Answer 25

a subsidy on a good with external benefits

Question 26

Fill in the blanks: private goods are _______________ and _______________.

Answer 26

excludable, rival

Question 27

Fill in the blanks: public goods are _______________ and _______________.

Answer 27

nonexcludable, nonrival

Question 28

Fill in the blanks: club goods are _______________ and _______________.

Answer 28

excludable, nonrival

Question 29

Fill in the blanks: common resources are _______________ and _______________.

Answer 29

nonexcludable, rival

Question 30

Define: tragedy of the commons

Answer 30

the tendency of unowned/unexcludable good to be overused and undermaintained

Question 31

Fill in the blank: A dominant strategy is a strategy that has a _______________ payoff than any other strategy no matter what the other player does.

Answer 31

higher

Question 32

Define: Prisoner’s dilemma

Answer 32

describes situations where the pursuit of self-interest leads to a group or social outcome that is in the interest of no one.