Week 5 - MC Applications Flashcards
Explain the impact of introducing a tariff.
The introduction of a tariff in a small price taking country (facing perfectly elastic import supply) would result in the price of imports increasing.
CS, PS and TS all fall (therefore not efficient) while the government gains. The dead weight loss is the two triangles on each side (between import and imports after tax).
What is the impact of an import quota?
AN import quota means domestic producers need a permit for each unit the import, which the government auctions.
This fixes imports at a lower level shifting S total slightly right of s domestic. When the quota is reached, the domestic supply line is followed. P dom2 - Pworld is the most someone would pay for a permit.
CS, TS fall, the gov and producers gain.
What is the impact of introducing a consumption tax?
A consumption tax creates a wedge (demand is less), this means that CS, PS and TS fall while the government gains. A production tax functions in the same way.
Explain the difference between economic and legal incidence
The legal incidence of a policy is who the policy is imposed on while the economic incidence is who bears the economic impact. These are often not the same.
What is the effect of increasing a consumption (or production) tax?
This creates a larger wedge and demand is set at a lower quantity. The dead weight loss increases, CS, TS and PS are further reduced while the gov gains more.
What is the marginal excess burden from increases tax?
Ratio of marginal dead weight loss caused and marginal tax revenue raised.
MEB = DWL2-DWL1/TR2-TR1
What is the impact of a production subsidy?
A production subsidy can be though of as a negative tax. In pushes quantity to the right and increases CS and PS while Gov loses. TS falls.
What is the impact of a minimum wage?
A minimum wage imposes a binding price, this means that more labour is demanded than supplied (difference in unemployment). CS falls, PS gains part and loses another part and TS falls.
What is the impact of a rent ceiling?
A rent ceiling results in excess demand (therefore a shortage) and imposes a maximum price. This means that some consumer are better off but others are unable to find accommodation. Producers lose and TS falls.
Who bears the burden of a policy
The part with the most inelastic bears the brunt of a policy as they are less able to change their behaviour.
What is the identification problem?
It can be hard to distinguish what type of curve you have in empirical studies and if the variation in price quantity pairs is generated by supply shifts or the points lie on difference demand curves.
What do you need to be able to identify a curve?
One or more variables that affect one curve but not the other. These are called inclusion/exclusion restrictions.
What is the impact of an export subsidy?
The export subsidy means that the price per unit from domestic producers rises as they won;t sell to somestic consumers for less than the total amount they could make selling overseas (P+subsidy). Consumers can but from foreign producers at the same price.
Exports and Imports both increase.
Can a tax without dead weight loss raise revenue?
Yes. In a situation where either supply or demand is perfectly inelastic, the tax has no effect on the quantity and has no dead weight loss.
Can a tax that raises no revenue for the government have a deadweight loss?
Yes - a tax that is so high that is causes all market activity to cease would have a huge dead weight loss and raises no revenue.
