Midterm 2 Material

Question 1

price floor

Answer 1

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

Question 2

price ceiling

Answer 2

a legal maximum on the price of something

• not binding = above equilibrium
• binding = below equilibrium
• ex.) gas, rent, energy bills

Question 3

effeciency

Answer 3

a resource allocation that maximizes the total surplus received by all members of society

Question 4

tax revenue

Answer 4

the size of a tax multiplied by the new equilibrium quantity

Question 5

dead weight loss (DWL)

Answer 5

the fall in total surplus that results from a tax

=(1/2)bh

Question 6

laffer curve

Answer 6

relates the tax rate to tax revenue raised by the tax

-government starts loosing money when the tax is too high

Question 7

externality

Answer 7

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

Question 8

internalizing an externality

Answer 8

altering incentives so that people take account of their external effects of their actions
-by implementing a tax

Question 9

direct regulation

Answer 9

ex. ) education

- regulate amounts that can be used

Question 10

corrective tax

Answer 10

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

Question 11

create new markets

Answer 11

ex.) cap and trade

Question 12

private solutions

Answer 12

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

Question 13

excludable good

Answer 13

a good that people can be prevented from using

Question 14

rival in consumption

Answer 14

a good where one person’s use diminishes another’s use

Question 15

private good

Answer 15

excludable and rival

-ex.) ice cream, houses, gas, taxis

Question 16

public good

Answer 16

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

Question 17

club good

Answer 17

excludable and non-rival

-ex.) club that isn’t full, movie, show, golf course

Question 18

common resource

Answer 18

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

Question 19

marginal tax rate

Answer 19

the tax paid on one additional dollar of income

Question 20

average tax rate

Answer 20

= total tax rate / total income

Question 21

lump sum tax

Answer 21

everyone pays the same amount

-the average tax rate would be much higher on the poor

Question 22

proportional tax

Answer 22

everyone pays the same percentage

Question 23

regressive tax

Answer 23

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

Question 24

progressive tax

Answer 24

high income earners pay a higher average tax than low income earners
-ex.) the USA tax system