Vocabulary 3.0 Flashcards
Moral Hazard
the risk of being dependent on the morality of others
Adverse Selection
asymmetric information
Free Rider
a person who benefit from a good without paying for it
How can the optimum provision of a public good be found on a graph?
where the marginal cost intersects with the MSB (marginal social benefit) curve
Tragedy of the Commons
unbalanced use of common resources
Excludable goods
prevent some people from using it
Rival goods
reduce people’s ability to use the same amount of the good
Merit goods are…(education, health)
under-consumed if left to the market, thus, government intervenes
Demerit goods are…(alcohol, tobacco)
over-consumed, thus governments intervene
Internalising externalities
incentives so people take into account the external effects of their actions
Coase Theorem
if private actors can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
(optimal efficient outcome)
What is Deadweight Loss?
the loss producers make due to the imposed tax on the good
(reduction in total surplus)
Elasticity of Supply Curves and Deadweight loss of taxes
- when supply is relatively elastic
- when the supply is relatively inelastic
deadweight loss of a tax is relatively small
deadweight loss of a tax is bigger
Elasticity of Demand Curves and Deadweight loss of taxes
- when demand is relatively elastic
- when the demand is relatively inelastic
the deadweight loss of a tax is larger
the deadweight loss of a tax is smaller
Pigovian Tax
tax enacted to tackle negative externalities
Production isoquants
represent all possible combinations of factor inputs that can be used to produce a given level of output
What do we use to analyse how taxes affect economic wellbeing?
we use tax revenue to assess how much the government benefits from the tax (TxQ)
Adam Smith 4 Canons of Taxation
Equality
each person should pay taxes according to their ability to pay, so that the rich should pay more in taxes than the poor.
Adam Smith 4 Canons of Taxation
Economic
any tax system must ensure that the cost of collecting and administering taxes is less than the amount collected.
Adam Smith 4 Canons of Taxation
Certainty
taxpayers need to know what taxes they are liable for and be able to plan ahead on this basis.
Adam Smith’s 4 Canons of Taxation
Convenience
paying taxes should be made as easy as possible, and tax systems should be designed to be as simple as possible to help maximize tax revenue.
Lump Sum Tax
a tax that is the same amount for every person regardless of the earnings or actions that people take
Proportional Tax (Flat)
both low and high-income taxpayers pay the same fraction of income
Regressive Tax
high-income payers pay a smaller fraction of their income than low-income payers do
Progressive Tax
high-income payers pay a higher fraction of their income than low-income payers do
Tax burden
amount of tax that buyers & sellers share
