29 terms

Welfare Economics


Terms in this set (...)

Welfare Economics
Studies how the allocation of resources affects economic well-being
Willingness to Pay
The maximum amount the buyer will pay for that good
Consumer Surplus
The amount a buyer is willing to pay minus the amount that the buyer specifically pays
the value of everything a seller must give up to produce a good
Marginal seller
the seller who would leave the market if the price were any lower
Producer surplus
The amount a seller is paid for a good, minus the seller's cost
Laffer Curve
Shows the relationship between the size of the tax and tax revenue
A tax on imports
Import quota
A quantitative limit on imports of a good
The uncompensated impact of one person's actions on the well-being of a bystander
Private Value
The value to buyers
Private Cost
The cost directly incurred by sellers
External cost
Value of the negative impact on bystanders
Social cost
Private+external cost
Internalizing the externality
Altering incentives so that people take account of the external effects of their actions
Corrective Tax
a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality
Coase theorem
If parties can costlessly bargain over the allocation of resources they can solve the externalities problems on their own
A person can be prevented from using a good
Rival in consumption
One person's use of a good diminishes another's use
receives the benefit of a good but avoids paying for it
Common resource
not excludable, rival in consumption
Average tax rate
total tax paid divided by total income
marginal tax rate
The extra taxes paid on an additional dollar of income
Benefits principle
the idea that people should pay taxes based on the benefits they receive from government services
Ability to pay principle
The idea that taxes should be levied on a person according to how well that person can shoulder the burden
Vertical Equity
the idea that taxpayers with a greater ability to pay taxes should pay more
Regressive Tax
High income taxpayers pay a smaller fraction than low-income taxpayers
Progressive Tax
High income taxpayers pay a larger fraction of their income than low income taxpayers
Horizontal Equity
The idea that taxpayers with similar abilities to pay taxes should pay the same amount