Midterm 2 Material Flashcards
price floor
a legal minimum on the price of something
- as a market becomes more elastic, price floor gets larger
- binding = above equilibrium
- not binding = below equilibrium
- ex.) minimum wage
price ceiling
a legal maximum on the price of something
- not binding = above equilibrium
- binding = below equilibrium
- ex.) gas, rent, energy bills
effeciency
a resource allocation that maximizes the total surplus received by all members of society
tax revenue
the size of a tax multiplied by the new equilibrium quantity
dead weight loss (DWL)
the fall in total surplus that results from a tax
=(1/2)bh
laffer curve
relates the tax rate to tax revenue raised by the tax
-government starts loosing money when the tax is too high
externality
the uncompensated impact of one person’s actions on the well-being of a bystander
- negative: when the uncompensated impact is bad
- -> ex.) pollution, noise, traffic
- positive: when the uncompensated impact is beneficial
- -> ex.) vaccines, fireworks, education
internalizing an externality
altering incentives so that people take account of their external effects of their actions
-by implementing a tax
direct regulation
ex. ) education
- regulate amounts that can be used
corrective tax
a tax designed to induce private decision marks to take account of the sisal costs that arise from a negative externality
-ex.) bridge tolls, factory waste
create new markets
ex.) cap and trade
private solutions
no government intervention
- coase theorem: if private parties can bargain over the allocation of resources, they can solve externalities on their own
- transaction costs: when the bargaining is more expensive than the gains
excludable good
a good that people can be prevented from using
rival in consumption
a good where one person’s use diminishes another’s use
private good
excludable and rival
-ex.) ice cream, houses, gas, taxis
public good
non-excluable and non-rival
- ex.) free concert, fireworks show, roads
- free-rider: a person who receives the benefit of a good without paying the costs
- cost-benefit analysis: a study that compares the costs to the benefits of paying for a public good
- government provides them via taxes
club good
excludable and non-rival
-ex.) club that isn’t full, movie, show, golf course
common resource
non-excludable and rival
- ex.) fish in a lake, clean air and water
- tragedy of commons: an illustration of why common resources are used more than is desirable from the standpoint of society as a whole - arises b/c of an externality
- government regulates them
marginal tax rate
the tax paid on one additional dollar of income
average tax rate
= total tax rate / total income
lump sum tax
everyone pays the same amount
-the average tax rate would be much higher on the poor
proportional tax
everyone pays the same percentage
regressive tax
high income earners pay a lower average tax than low income earners
- encourage people to work and “get rich”
- ex.) tax on milk and eggs
progressive tax
high income earners pay a higher average tax than low income earners
-ex.) the USA tax system
