Lecture 9: Consequences of taxation

Question 1

What is a pareto efficient allocation?D

Answer 1

Question 2

Draw a pareto efficient consumption in an edgeworth box

Answer 2

Question 3

Draw a pareto efficient production in an edgeworth box

Answer 3

Production Edgeworth box

Curves are now isoquants. Isoquants are all the combinations of capital and labour that can produce the same quantity of output

It is a two good economy

At point A, the production of good 1 can be increased without any reduction in production of good 2, by moving to point C

Question 4

What is an allocatively pareto efficiency?

Answer 4

Question 5

Draw a complete pareto efficient allowances (using a PPF)

Answer 5

Question 6

What does the first fundamental theorem of welfare economics state?

Answer 6

Question 7

What 4 points should you discuss wrt FFTWE?

Answer 7

1 Smith’s `Invisible Hand’
2 It derives a relationship between two different things: competitive equilibrium and Pareto effcient allocation of resources
3 FWT holds only under strong assumptions: perfect competition, perfect information, no taxes, all interactions through markets (no externalities, no public goods), no increasing returns to scale
4 FFTWE says nothing about distributional issues Digression: Efficiency of social equilibria (without prices)

Question 8

What does the second fundamental theory of welfare economics state?

Answer 8

If indifference cures are convex and production functions are concave, any Pareto efficient allocation can be attained as a competitive equilibrium with appropriate selected endowments

the SFTWE says that under certain conditions, it is possible to achieve allocation B by transferring endowment from E to anwhere on line AA

Question 9

What 5 assumptions are needed for a perfect market?

Answer 9

Question 10

Draw a supply curve for the market and an individual firm in the short run

Answer 10

Question 11

Can firms make profit in the short or long run? Why?

Answer 11

Question 12

Draw out how a quantity tax (excise tax) impacts the buyer and seller

Answer 12

Question 13

Draw out how a sales tax (consumer tax) impacts the buyer and seller

Answer 13

Question 14

What is the tax incidence and how is it calculated?s

Answer 14

Question 15

how is tax incidence and elasticity related?

Answer 15

Question 16

What happens to the incidence of tax as the demand elasticity becomes more inelastic?

Answer 16