Up to Final

Question 1

Taxation

Answer 1

-Changes individual behaviour of firms and consumers.
-Reduction in CS and PS exceeds government revenue (DWL).
-Used to mitigate inefficiencies created by externalities.

Question 2

Principle of Taxation

Answer 2

The policymakers’ objectives when designing a tax system:
-Efficiency
-Equity

-Primary aim for it is to raise money for government services. It is also used to influence behaviour (e.g., sin taxes, externalities.)

Question 3

Efficiency (Taxation)

Answer 3

A tax system is more efficient if it raises the same amount of revenue at a smaller cost to taxpayers.

Cost to Taxpayers:
-Tax payments
-DWL
-Administrative costs
Efficiency signifies that these would be smaller.

Question 4

Average Tax Rate

Answer 4

Taxes paid / total income.

Captures cost paid by taxpayer.

Question 5

Marginal Tax Rate

Answer 5

Additional tax paid on additional dollar.

Captures degree of behavioural distortion in the tax system.

Question 6

Lump-Sum Taxation:

Answer 6

The same amount taxed to every taxpayer. (Such as fees to the city.)

Question 7

Equity Principles (Taxation)

Answer 7

-Benefits principle
-Ability to pay principle

Question 8

Benefits Principle (Taxation)

Answer 8

People should pay taxes based on the benefits they receive from the government services.
-Gasoline taxes –> fixing the roads.

Question 9

Ability-to-Pay Principle (Taxation)

Answer 9

Taxes should be levied (imposed) according to how well a taxpayer can shoulder the burden (equal sacrifice).
-Progressive taxation
-Public goods

Question 10

Horizontal and Vertical Equity (Taxation)

Answer 10

Horizontal: taxpayers with similar abilities pay similar amounts.

Vertical: if taxes are based on ability to pay, then wealthier taxpayers should pay more than the poorer taxpayers.

Question 11

Proportional Tax

Answer 11

A tax for which high-income and low-income taxpayers pay the same fraction of income.

Question 12

Regressive Tax

Answer 12

A tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers.

Question 12

Progressive Tax

Answer 12

A tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers.

Question 13

Adverse Selection

Answer 13

Participation in a market (e.g. used cars) or contract (e.g. insurance) by those with unobserved and undesirable attributes that are costly to the other party.

-Arises in markets where sellers more about the attributes of the good being sold more than the buyer.

Question 14

Primitives of a Market (Market Economy)

Answer 14

-Preferences
-Institutions
-Private information

Question 15

Utilitarianism

Answer 15

Government should choose policies to maximize the total utility of all in society.
-It is based on assumption of diminishing marginal utility.

Question 16

Liberalism

Answer 16

Government should choose policies deemed to be just, as evaluated by an impartial observer behind a “veil of ignorance.” (Rawls)
-Raise welfare to those worse-off in society in order to maximize minimum utility (maximin).

Question 17

Libertarianism

Answer 17

Government should punish crimes and enforce voluntary agreements but not redistribute income.

Question 18

Property Rights

Answer 18

Key institution for a market economy is to secure property rights.

They secure the incentives to trade:
-Patents provide incentive to invest in R&D.
-Income security provides incentives to invest in human capital.

Without it, it can lead to collapse:
-Atlantic cod fishery
-Tragedy of the commons

Question 19

Tragedy of the Commons

Answer 19

Common pool resources get overused because individuals do not recognize the external costs their use puts on others (e.g. congestion).

Government solutions include:
-Reducing use of resource through regulation or taxes
-Turning resource into a private good.

Question 20

Dictator Game

Answer 20

Individual is given a sum of money $X and asked to allocation a proportion to another person (between $0 and $X).
-Typically people will give on average of 20%.

Question 21

Condorcet Paradox

Answer 21

Majority voting may to intransitive (not having objective) preferences at societal level.

Question 22

Arrow’s Impossibility Theorem

Answer 22

There is no method for aggregating presences that satisfies all conditions in society.

Question 23

The Median Voter Theorem

Answer 23

When a policy is chosen based on majority voting, the option preferred by the median voter will be chosen.

Question 24

Social Preferences

Answer 24

Fairness: people care about outcomes relative to others.

Reciprocity: many people seem to desire reciprocity (if someone is kind/unkind to me then I should be the same to them).

Question 25

Overall Biases

Answer 25

-People are influences by baselines (inertia: or tendency to remain unchanged)
-People have limited attention and make mistakes as result of simplifying complex problems
-People aren’t very good at sophisticated math

Question 26

Price/Valuation Biases

Answer 26

-People have trouble doing present value calculations
-How choices are framed heavily influences decisions
-The presence of other options can bias choices
-People reject all choices if there are too many

Question 27

Expectation and Preference Biases

Answer 27

-People are overconfident in ability to stick to plans such as saving
-People are overly optimistic about themselves and their futures
-People “live for today” expecting to be more patient tomorrow but tomorrow is today
-People place more value of items in their possession than the same item not in their possession

Question 28

Choice Architecture

Answer 28

Central Idea: How to sequence or lay out decisions to encourage efficient decisions that counteract other biases.

Question 29

Rationality

Answer 29

Studies of human decision-making have tried to detect systematic mistakes the people make:
-People are overconfident
-People give too much weight to a small number of vivid observations
-People are reluctant to change their minds
-Time inconsistency