Unit 3 - Externalities and Market Issues Flashcards
consumer surplus
above equilibrium to D curve
what ____ pay going up to D curve
producer surplus
below equilibrium to S curve
real price is Qeqm for producers since the amount of tax goes to gov’t (not really producers), get to keep Qeqm + original costs represented by S curve
S curve after tax is imposed
represents to firms
-# of units willing to produce
-comes from MC curve
costs
ingredients, workers, electricity
tax revenues
PxQ = per unit tax x Q
represented by rectangle
DWL
lost gains from trade. after tax, lower Q is produced
post-tax world
person who values good/service at a higher P and producer out of luck
social surplus
CS+PS+tax revenues
why are tax revenues neutral (not a loss)?
it goes back to society
DWL is the only clear loss
burden of a tax
doesn’t always fall on person who writes the tax
usually shared between consumers + producers (not always 50-50)
why does it not matter who pays the tax?
that person isn’t necessarily the only person paying the burden of the tax
Social Security tax
6.2% paid by employees, 6.2% paid by employers (deduct $ from your paycheck on your behalf)
12.4% out of employees’ pocket –> entirely to SS
how does Social Security work?
work for 10 years (40 quarters) to qualify
will take highest 35 earning years and bring up to today’s wage value with wage index, benefits based on this (more income –> higher amount)
perfectly inelastic D
consumers bear more of burden
perfectly inelastic S or D
no DWL
externality
when the production or consumption of a good generates a cost or benefit to someone other than the consumer or producer
types of externalities
negative or positive, consumption or production
negative consumption externalities
hairspray, gasoline, cigarettes
