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Quiz # 4


efficiency loss
demand side failure

Producer surplus

actual price vs min price accepted
benifits from higher price

Consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
benifits paying less than max price

Demand side faliures

impossible to charge consumers what they want to pay
some can enjoy benifs without pay
full willingness pay

allocative efficiency

right amount produced


rival nonrivial
excludable private club
nonexcludable impure public pure public


effeciency loss
supply side fails

private good

a good that is both rival and excludable

public goods

Goods, such as clean air and clean water, that everyone must share
provided by the government or community
nonmarketball goods
free rider problem

supply side failures

overallocating of resources
occur when private supply curves understated

quasi public good

government sponsers produce to prevent an underallocation of resources

Government intervention

Negative Positive
Specific taxes Subsides
Spillovers cost Spillovers benefits
overproduction underproduction

Cost-Benefit Analysis

economic model that compares the marginal costs and marginal benefits of a decision
determines whether the public good is worth producing and its optimal quantity.


A cost or benefit accruing to a third party external to the transaction

Negative Externalities

Too much is produced
Supply-side market failure

Positive Externalities

Too little is produced
Demand-side market failure

Government's Role in the Economy

correcting externalities
lead to government failures

Government Failures

overregulation or underregulation that lead to an inefficient level of externality reduction

Government Intervention

Correct negative externalities
Direct controls
Specific taxes and other economic incentives
Correct positive externalities
Subsidies and other economic incentives

Apportioning the Tax Burden

Size, distribution, and impact of the costs that taxes impose on society
Benefits-received principle
Ability-to-pay principle

Progressive tax

average tax rates increase as income increases

Regressive tax

average tax rate declines as income increases

Proportional tax

average rate stays the same as income increases

Public choice theory

economic analysis of governmnet decision making, elections, polities

Principal-Agent Problem

Representative's interests are misaligned with those he/she represents
, A problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him

Median Voter Model

Median voter preference will determine size of government

Consmer surplus is the difference between the ______ price a consumer is willing to pay for a product and the price paid


The supply curve for any good, private or public, is its marginal _____ curve


Market Faulure in competitive markets can be classified into

demand side and supply side

Reductions of combined consumer and producer surplus associated with nderproduction or overproduction of a product

deadweight loss

A____ to a producer is a payment from the government to decrease the producers cost in order to encourage more output of a product beneficial to society


public goods are distingushed by

nonexcludability and nonrivalry

The situation when people can receive the benefits from a good without having to pay for it is known as the ___ problem


A positive externaility is an uncompensated spillover ____


In order to correct for positive externalities,government may choose to ___ buyers and or producers, as well as to provide ___ goods.


Characteristics of a private good


A_______ aka a spillover cost, is a market failure that occurs whne a third party to a transaction experiences uncompensated costs

negative externality

What must rise as more of a good is produced beyond the point at which diminishing returns sets in

Marginal costs

in performing its allocation function, govt not only produces public goods but also corrects for market failures called ____ or spillovers


A cost-____ analysis involes an assessent of marginal changes


market failures cna be used to justifity:

government intervention in the economy

____ surplus is the differences between the actual price a seller receives and the minimum acceptable price


What is the difference between the maximum price a consumer is willing to pay for a product and the actual price

consumer surplus

The market demand curve for positive externalities reflects

only the direct, private benefits to those who demand and use the product

The direct way to reduce negative externalities from a certain activity is to pass ___ limiting that activity


What do points on the demand curve represent

marginal benefit

Polices for coping with the overallocation of resources caused by negative externalities

market for externality rights
liability rules and lawsuits
private barganining
direct control
specific taxes

What is achieved at the equilibrium quantity

allocative effeiciency
productive efficiency

deadweight loss is also known as

an efficiency loss

goods that are provided by competitive markets because they make a profit are know as

private goods

direct controls ____ the marginal cost of production because the firms must operate and maintain pollution control equipment


the -___ rule actually tells us which plan provides the maximum excess of total benefits over total cost, or in other words, the plan that provides society with the maximum net benefit

marginal cost-marginal benefit

A tax is ____ if its average rate increase as income increase


regressive tax

it may claim a larger absolute or dollar amount of income as income rises
the average rate declines as income increases
it claims a smaller proportion of income as income rises
it might not clain a larger absolute or dollar maount of income as income rises

A proportional tax is one in which the average rate ____ regardless of income


the benefits received principle and the ability to pay principle refer to alternative methods

how to apportion the economys tax burden
the distribution of income

If demand is ____, a significant price ____ shifts the burden of a tax on the product to consumers


redistrubtive tax goals

an excise tax on luxury goods
imposing progessive taxes as a way to redistribute income
reducing the income gap between the rich and the poor through tax system adjustments

The social secuirty payrool tax is

borne by workers and employers

result of a government imposed tax on producers

tax maybe shared in some proportion between producers and the consumers
equal output falls and equal price rises
supply curve shifts upward

sales taxes tend to be shifted in their entirerty from ____ to____


owner occupied property owners

bear the entire property tax on their properties

The rich are more affected by _____ taxes, whereas the poor fell the pinch more from___ taxes


Given a specific amount of demand, the more ____ the supply, the larger is the portion of the tax borne by producers


excise taxes

consumers, producers ... depending on elasticities

The economic analysis of government decisionmaking, politics ad eletion is know as

public choice theory

in economic terms, a payment beyond the amount necessary to keep a resource supplied in its current use is called ___ seeking


The provision of public goods and services is inherently inefficient because

scare resources are inefficiently utilized toproduce goods and services that people don't want
actingin the public sector, people are forced to buy goods and services they dont want

the median voter

holds the middle position in an issue

When inherent shortcomings within the public sector produce inefficient outcomes, the result is

government failure

a situation in which society may not be able to rank its preferences consistently through paired choice majoirty voting is known as

the paradox of voting

those who benefit the most from ___ goods and services should pay the ___ necessary to finance them


conflicts that occur when those who are supposed to be acting in the best interests of others instead take actions that help themselves are called

the principal agent problem

the appeal to government for special benefits at the expense of tax payers is called


special interest effect

large gains, small indicidual losses

very narrow, specidically desgnated authorization of expenditires are called


political officeholders favor programs that have immediate and clear cut ___ and vague or deferred ___


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