Mid Term 2 Flashcards
consumer surplus
between the demand curve and the market price
producer surplus
willing to supply if price is greater than the opportunity cost. is the area above the supply line but below the market price
total surplus
CS+PS value to buyers minus cost to sellers. an allocation that maximizes TS is said to be efficient
benevolent Social planner
all powerful and seeks to maximize economic well being of everyone in society may also care about equity but efficiency first
Market Equilibrium
when supply is equal to demand. market allocates the supply of goods to those who value them the most and allocates demand of goods to sellers with lowest costs
BSP cannot…
increase well being by reallocation among buyers or sellers
Free market
produces quantity of goods that maximizes TS, prices are determined by unrestricted competition between private companies
Chapter 7 summary
Forces of supply and demand allocate resources efficiently, buyers and sellers only care about the outcome, market outcome maximizes TS, markets are competitive no market power, no externalities outcomes matter only to market participants, use welfare tools to look at effect of government policies
Tax revenue
T x Q which is the rectangle in between supply and demand curve
Welfare
the study of how the allocation of resources affects economic wellbeing
dead weight loss
area beside tax in between supply and demand curves, lost from total surplus
dead weight loss
area beside tax in between supply and demand curves, lost from total surplus. result of market distortion. market shrinks
Price elasticities
the more elastic the more buyers and sellers exit
Laffer curve
shows most effective way to explain where more TQ could be gained by raising or lowering the tax
world price
the price of a good that prevails in the world market for that good
tariff
a tax on goods produced abroad and sold domestically
benefits of international trade
variety of goods, lower cost through economies of scale
increased competition
enhanced flow of ideas
Arguments for restricting trade
jobs national security infant industry unfair competition protection as a bargaining chip
externalities
the uncompensated impact of one person’s actions on the well being of a bystander
Social optimum
In the presence of a negative externality, the social cost of the good exceeds the private cost. the optimal quantity therefore drops
internalizing the externality
alter incentives so that people take account of the external effects of their actions
corrective taxes
taxes enacted to correct the effects of negative externalities
corrective taxes vs permits
taxes set price, permits set quantity
subsidies
how the government balances positive externalities
caose theorem
if private parties can bargain without the cost over the allocation of resources, they can solve the problem of externalities on their own
transaction costs
the costs that parties incur in the process of agreeing to and following through on a bargain
excludability
the property of a good whereby a person can be prevented from using it
rival in consumption
where one person’s use of a good diminishes the other peoples use
private goods
goods that are excludable and rival (ice cream)
public goods
not rival and not excludable (fire alarm)
common resource
rival but not excludable (fish in the ocean)
club goods
excludable but not rival (Cable tv)
free rider
a person who receives benefit of a good but avoids paying for it
cost benefit analysis
compares the costs and benefits to society of providing a public good
tragedy of the commons
why common resources get used more than is desirable from the standpoint of society as a whole (over fishing)
budget deficit
an excess of government spending over government receipts
budget surplus
if revenue exceeds spending
average tax rate
total taxespaid over total income
marginal tax rate
the extra taxes on an additional dollar of income
lump sum tax
same for everyone
benefits principle
taxes should fall to the amount a person can burden
vertical equity
tax payers with greater ability to pay should pay larger amounts
horizontal equity
taxpayers with similar ability to pay should pay the same amount
proportional tax
everyone pays the same tax