Week 5 - Taxes, expected value, and policies

Question 1

What does an imposed tax do?

Answer 1

An imposed tax shifts the supply up by the tax amount and that price goes up and the supply goes down

Question 2

who pays the brunt of the tax on an inelastic good?

Answer 2

The consumer

Question 3

who pays the brunt of the tax on an elastic good?

Answer 3

the producer

Question 4

who pays for tax responsibility?

Answer 4

both the consumer and the producer share the tax but one party takes the brunt of the tax

Question 5

Why should we tax?

Answer 5

•Raise revenues for government
•Curb behavior◦Raise price and reduce demand on certain products
◦Focus on goods with relatively elastic demand
◾Taxing cigarettes doesn’t usually curb behavior (inelastic demand)
•Taxing products with elastic demand: Designed to curb behavior
•Taxing products with inelastic demand: Designed to raise revenue

Question 6

what is the concept of asymmetric information

Answer 6

one side of the transaction, either buyers or sellers, have more information that than the other.

Question 7

what is moral hazard

Answer 7

one side of an economic relationship takes undesirable or costly actions that the other side of the relationship cannot observe.

•Notion of “not taking care”

a person might take more risks knowing he has very good health care coverage

Question 8

what is adverse selection?

Answer 8

•Segment of population with built-in bias that works against it.

example:
•Population of United States divided into “healthy” and “sick”
•Group that wants health insurance: Sick people
•Group insurance companies want to insure: Healthy people
•Adverse selection: Biased toward sick people and not a random selection of healthy and sick people