Externalities and the Role of the Government Flashcards
Spillover benefits
Additional benefits to society, not captured by the market demand curve from the production of a good, result in a price that is t_oo high_ and a market quantity that is too low. Resources are underallocated to the production of the good.
Positive externality
Exists when the production of a good creates utility (spillover benefits) for the third parties not directly involved in the consumption or production of the good.
Spillover costs
Additional costs to society, not captured by the market supply curve from the production of a good, result in a price that is too low and market quantity that is too high. Resources are overallocated to the production of this good.
Negative externality
Exists when the production of a good imposes disutility (the spillover costs) upon third parties not diretly involved in the consumption or production of the good.
Marginal Production Theory
The philosohpy that a citizen should recieve a share of economic resources proportional to the marginal revenue product of his or her productivity.
Marginal tax rate
The rate paid on the last dollar earned. This is found by taking the ratio of the change in taxes divided by the change in income.
Average tax rate
The proportion of total income paid to taxes. It is calculated by dividing the total taxes owed by the total taxable income.
Progressive tax
The proportion of total income paid in taxes rises as income rises. An example is the peronal income tax.
Regressive tax
The proportion of income paid in taxes decreases as income rises. An example is a sales tax.
Proportional tax
A constant proportion of income is paid in taxes no matter the level of income. An example is a “flat taxt” or the corporate income tax.
Gini ratio
A measure of a nation’s income inequality. This measure uses a scale between zero and one. the closer it lies to zero, the more equal the distution of income.
