Week 4 - Welfare

Question 1

Statutory burden vs. Economic burden

Answer 1

Statutory burden — Who is assigned the tax
Economic burden — Who experiences a greater loss as a result of the tax

Question 2

Tax incidence

Answer 2

Division of economic burden of a tax between buyers and sellers

Question 3

Who has tax incidence

Answer 3

• Factor that is more elastic bears a smaller share of economic burden
• If supply is elastic: sellers bear less economic burden
• If demand is elastic: buyers bear less economic burden

Question 4

Who has subsidy incidence

Answer 4

• Whoever has higher elasticity receives less from the subsidy
• If demand is elastic: buyers capture less of a subsidy
• If supply is more elastic: sellers capture less of a subsidy

Question 5

Mandate vs quota

Answer 5

Mandate — requirement to buy/sell a min amount of a good
Quotas — max quantity of good that can be bought/sold

Question 6

Positive analysis vs. Normative analysis

Answer 6

Positive analysis — describes what is happening, explaining why, or predicting what will happen
Normative analysis — describes what should happen, involving value judgements

Question 7

Welfare

Answer 7

happiness, well-being, prosperity

Question 8

5 main sources of market failure

Answer 8

1. Market power
2. Externalities
3. Private info
4. Irrationality
5. Gov’t regulations

Question 9

Deadweight loss (looking at price vs. quantity)

Answer 9

Quantity determines total economic surplus, hence DWL
Analyze price if you want to know who enjoys more economic surplus

Question 10

2 Limits of efficiency

Answer 10

1. Distribution matters
2. Budget problem