Sources of Social Inefficiencies Flashcards
When CE is not PO?
1) tax distortion
2) externalities
3) asymmetric information
4) imperfect competition
5) market incompleteness
6) bounded rationality of agents
When is CE = PO?
when MRS = MPN
Suppose proportional labour income tax.
Tax rate = tau
Tax =
tauNw = tau(h - l)w
tau denotes proportional income tax. It can be taxed on either just labour income or on entire income. Here, considering proportional labour income tax.
The effect of tau on c* and l* is the same when taxed on just labour income or entire income
Proportional labour income tax affects ______ in the maximisation problem
budget constraint
When proportional labour income tax is applied, budget constraint is ________
c = -(1 - tau)wl + (1 - tau)hw + pi
When proportional labour income tax increases, slope of BC _______ and intercept of BC ________
decreases; decreases
Slope = (1-tau)w
tau increases –> (1-tau) decreases –> (1-tau)w decreases
Intercept = (1-tau)hw + pi
tau increases –> (1-tau) decreases –> (1-tau)hw decreases –> [(1-tau)hw + pi] decreases
When proportional labour income tax applied, MRS =
(1 - tau)w
after-tax wage rate
When proportional labour income tax increases, c* ________ and l* __________
decreases; is ambiguous
When tau increases, slope and intercept of BC decreases. This is akin to w decreasing. When w decreases, c* decreases and l* is ambiguous.
Proportional labour income tax increasing = w decreasing
When proportional labour income tax decreases, c* ________ and l* __________
increases; is ambiguous
When tau decreases, slope and intercept of BC increases. This is akin to w increasing. When w increases, c* increases and l* is ambiguous.
Proportional labour income tax decreasing = w increasing
Laffer curve is _____ vs _____ and is shaped _____
tax returns; tax rate (tau); upside-down U
