Exam 4 Flashcards
Unit 8, 9, 10
Tax
compulsory charge paid to a government without immediate, direct quid pro quo
Tax base
the economic activity being taxed
Tax rate
the amount of the tax
Tax revenue
the money that is raised by the government from the tax
(TB * TR)
Ad valorem tax
a tax based on value
EX: sales tax, income tax
Excise tax
a tax based on quantity
EX: gas tax, alcohol tax
Statutory incidence
who is required by law to pay a tax
Actual incidence
who has the economic burden of a tax
Regressive tax
as income increases, the average tax rate decreases
Average tax rate
taxes paid divided by income
Progressive tax
as income increases, tax rate stays equal
Detrimental costs of taxes
-buyers pay more money
-sellers receive less money
-less units are bought and sold
Subsidy
a payment by a government to reduce the cost of production or acquisition
Excise subsidy
per-unit subsidy
Ad valorem subsidy
subsidy according to value
Government expenditures
money paid by the government for the subsidies
External costs
costs accrued by non-consenting third parties
Negative externality in production
Chili pepper house
Negative externality in consumption
EX: Smoking
5 Solutions to overproduction from a negative externality
-manners
-command and control
-private property
-pigouvian tax
-let it be
Pigouvian tax
a corrective tax where the goal is for Qt to be equal to Qe
Positive externality
when a good generates benefits for third parties
Positive externality in consumption
Other people getting the flu shot
Positive externality in production
Factory producing laundry detergent
5 Solutions to the underproduction of a positive externality
- Manners
- Command and control
- Private property
- Pigouvian subsidy
- Let it be
Pigouvian subsidy
a corrective subsidy where we want Q sub to be equal to Qe
Inefficient markets
-negative externalities
-positive externalities
-public goods
-common resources
Rivalrous good
a good that only one person can consume
Excludable good
a good you can be prevented from using
Private good
rivalrous and excludable
EX: haircut
Club good
non-rivalrous and excludable
EX: streaming service
Common resources
rivalrous and non-excludable
EX: elephant tusks
Public good
non-rivalrous and non-excludable
EX: sidewalk
Free rider problem
one who receives benefits without incurring costs
Solutions to free rider problem
-coerce payment through taxation
-make the resource excludable
Tragedy of the commons
a short run incentive to over-consume
3 Solutions to the tragedy of the commons
-command and control
-cultural norms
-private property
The budget constraint
a model that represents consumption possibilities
Income
how much money you have to spend (budget)
A relative price
the price of one good in terms of another
Utility
satisfaction from the consumption of a good or service
Accounting profit
revenue - explicit costs
Economic profit
revenue - explicit costs - implicit costs
Revenue
money earned from selling goods and services
Explicit costs
money paid for factors of production and raw materials
Implicit costs
the opportunity costs of using the factors of production
Barriers to entry
-high fix costs
-natural barriers
-legal barriers
Competitive market
a market in which many firms compete for consumer business
Firms that earn a positive economic profit…
create value
Firms that earn a negative economic profit…
destroy value
The long term economic profit for a firm in a competitive market…
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