Government actions in Markets Flashcards
Q: What is the Benefits Principle in taxation?
A: The idea that people should pay taxes equal to the benefits they receive from government services, leading those who benefit most to pay the most.
Q: What does the Ability-to-Pay Principle suggest?
A: People should pay taxes based on their ability to bear the burden, with wealthier individuals contributing more.
Q: What is the Big Tradeoff in taxation?
A: The conflict between fairness and efficiency, particularly how taxes on capital income generate deadweight loss while being justified by the ability to pay.
Q: What effect does a production quota have on supply?
A: It decreases supply by setting an upper limit on the quantity of a good that can be produced.
Q: How does a subsidy affect market supply?
A: It increases supply by effectively lowering production costs, which can also decrease market prices.
Q: What happens to the equilibrium price and quantity when illegal goods are regulated?
A: The price often increases, and the quantity traded decreases due to the added costs of illegal transactions.
Q: What is a deadweight loss?
A: An economic inefficiency that occurs when the equilibrium quantity is not achieved, often due to taxes or quotas.
Q: What are the potential benefits of legalizing and taxing drugs?
A: It could reduce the quantity bought and sold, generate tax revenue, and fund law enforcement and education against drug use.
Q: Why might a luxury tax be inefficient?
A: Because luxury goods often have elastic demand, leading to a significant reduction in quantity sold and a large deadweight loss.
Q: How do penalties on sellers and buyers affect the market for illegal goods?
A: Penalties on sellers decrease supply, while penalties on buyers decrease demand, both leading to reduced quantity traded.
What does the Benefits Principle advocate for in a tax system?
A) Equal taxes for everyone
B) Taxes based on income level
C) Taxes corresponding to the benefits received from government services
D) Lower taxes for the wealthy
Correct Answer: C
Which principle states that those who can bear the tax burden more easily should pay more?
A) Marginal Cost Principle
B) Benefits Principle
C) Ability-to-Pay Principle
D) Supply Principle
Correct Answer: C
What is the likely outcome of a production quota set below the equilibrium quantity?
A) Increased supply
B) Decreased price
C) Increased price and decreased supply
D) No effect on the market
Correct Answer: C
What is the main effect of a subsidy on a market?
A) Decrease in demand
B) Increase in supply and decrease in price
C) Decrease in supply and increase in price
D) Increase in price and marginal cost
Correct Answer: B
Which of the following statements about illegal markets is true?
A) Prices and quantities are unaffected by legal penalties.
B) Penalties on sellers can lead to decreased supply.
C) Illegal markets always have lower prices than legal markets.
D) Buyers are never penalized for illegal purchases.
Correct Answer: B
What happens when a government imposes a luxury tax on imported goods?
A) Quantity sold increases significantly
B) The entire tax burden is shared between buyers and sellers
C) Buyers pay the entire tax
D) Deadweight loss is eliminated
Correct Answer: B
Which of the following is a potential drawback of taxing luxury items?
A) Increased consumer surplus
B) Large deadweight loss
C) Increased producer surplus
D) Higher market efficiency
Correct Answer: B
If a government legalizes and taxes drugs, what is a possible outcome?
A) Quantity sold remains unchanged
B) Tax revenues may be very high
C) Illegal trading may still occur
D) The market price will not be affected
Correct Answer: C
