Week 4 - Government policies, market efficiency and costs of taxation and subsidies Flashcards
What is the Price Ceiling?
a legal maximum on the price at which a good can be sold.
What is the Price Floor?
a legal minimum on the price at which a good can be sold.
What os the National Minimum Wage?
the minimum pay per hour workers are entitled to in a particular industry.
Define Awards?
the minimum wage rates that can be paid to particular workers in particular industries.
Fill in the following one-word gap: A _______ minimum wage makes the poor better off.
higher
All types of governments use taxes to raise revenue for?
public projects, such as roads, schools and national defence
What is Tax Incidence?
the study of who bears the burden of taxation.
Do taxes encourage or discourage market activity? Why?
Taxes discourage market activity. When a good is taxed, the equilibrium quantity is reduced.
Define Subsidy?
a payment from the government, to consumers or sellers, for each unit of a good that is bought or sold. It could be known as the opposite of tax.
What is Welfare Economics?
the study of how the allocation of resources affects economic wellbeing.
Define Willingness to Pay?
the maximum amount that a buyer will pay for a good.
Define Consumer Surplus?
a buyer’s willingness to pay minus the amount the buyer pays.
Define Cost?
the value of everything a seller must give up to produce a good.
Define Producer Surplus?
the amount a seller is paid for a good minus the seller’s cost.
Define Total (Economic) Surplus?
Sum of consumer and producer surplus.
What is the formula we can use to calculate consumer surplus?
Consumer Surplus = Value to Buyers - Amount paid by buyers
What is the formula we can use to calculate producer surplus?
Producer Surplus = Amount received by sellers - costs of sellers
What is the formula we can use to calculate the total surplus?
Total Surplus = Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers
What does efficient allocation do?
Maximizes total surplus (consumer + producer). Equilibrium of supply and demand achieves this, reflecting the market’s efficient resource allocation.
What is Deadweight Loss?
the reduction in total surplus that results from a market distortion such as a tax or a monopoly price.
How do taxes create deadweight losses?
because they prevent buyers and sellers from realising some of the gains from trade.
