week 6

Question 1

when does market failure occur?

Answer 1

1. a buyer or seller has market power - the ability to affect the market price
2. transactions have side effects, called externalities, that affect bystanders (pollution)

Question 2

a tax burden is… (2 things)

Answer 2

1. distributed between producers and consumers
2. determined by the elasticity of supply and demand

Question 3

why do people propose a smaller government?

Answer 3

because they are sick of the very large deadweight loss from taxation

• a bigger government provides more services, but requires higher taxes which causes more deadweight loss

Question 4

which goods or services should the government tax to raise the revenue that it needs?

Answer 4

the one with the smallest deadweight loss
- theory is to tax the entity with the smallest deadweight loss, which the entity with the inelastic supply or demand

Question 5

if supply is more inelastic, the seller will…

Answer 5

bear more of the tax and have less surplus than the consumers

Question 6

who is the tax burden on?

Answer 6

on the entity with the more elastic supply, because the deadweight less is larger and more people are leaving the market behind (more potential for surplus)

Question 7

if a good is more elastic…

Answer 7

DWL is bigger and the quantity is smaller

Question 8

how big are deadweight losses from taxation?

Answer 8

depends on the elasticity
- if labor supply is inelastic, then the DWL is small
- if labor supply is elastic, then the DWL is larger

Question 9

what does a subsidy do on a supply and demand curve?

Answer 9

inserts a wedge on the right side, which increases the amount produced

Question 10

what does a subsidy do in the market?

Answer 10

1. reduces what the consumers pay
2. ups the benefit for the consumer

Question 11

total surplus with subsidy formula

Answer 11

CS + PS - GR

Question 12

government revenue

Answer 12

the subsidies that are considered a cost to the government paid by taxpayers

Question 13

deadweight loss to subsidies

Answer 13

the extra quantity that suppliers are able to produce with that subsidy

Question 14

producer surplus with the subsidy

Answer 14

new cost - willingness to sell

Question 15

are all surpluses bad?

Answer 15

NO. when there are positive effects outside of the market subsidies can increase total surplus
- they can also be necessary when assessing fairness and equity

Question 16

equally elastic curves. how do you distribute the tax burden?

Answer 16

it is equally distributed on both sides

Question 17

when there is a tax…

Answer 17

the consumer pays more and the supplier takes in less

Question 18

when there is a subsidy…

Answer 18

the consumer pays less and the suppliers take in more