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Economics Test 3
Terms in this set (95)
the study of how the allocation of scare resources affects economic well being
the ____ of supply and demand maximizes the total benefits received by all buyer sand sellers combined
the maximum amount that a buyer will pay for a good
Willingness to pay
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
measures the benefit that buyers receive from a good as the buyers themselves perceive it
the buyer who would leave the market first if the price were any other
Area below the demand cure and above the price measures ____ in a market
_____ is a good measure of economic well being if policy makers want to satisfy the preferences of buyers
the value of everything a seller must give up to produce a good (willingness to sell services)
the amount the seller is paid for a good minus the cost of production
measures the benefit sellers receive from participating in a market
the seller who would leave the market first if the price were any lower
The area below the price and above the supply curve measures _____
Formula to calculate total surplus
CS + PS+ tax revenue
the property of a resource allocation of maximizing the total surplus revived by all members of society
the property of distributing economic prosperity uniformly among the members of society
Free markets allocate the supply of goods to the buyers who value them the _____ , as measured by their willingness to pay
Free markets allocate the demand for goods to sellers who can produce them at the ___ cost
Free markets produce the _____ of goods that maximizes the sum of consumer and producer surplus
A tax on a good causes the size of the markets for that good to ____
Measures public benefit of tax
Formula to calculate tax revenue
Tax x quantity
the fall in total surplus that results from a market distortion, such as a tax
Taxes cause markets to allocate resources ____
____ cause deadweight loss because they prevent buyers and sellers from realizing some of the gains from trade
DWL is larger when supply and demand curve is more _____
the greater the _____ of supply and demand, the greater the DWL of a tax
the uncompensated impact of one person's actions on the well being of a bystander
Market equilibrium is not efficient when there are _____; meaning, market equilibrium fails to maximize the total benefit of society as a whole
altering incentives so that people take into account the external effects of their actions
Internalizing the extranality
____ externalities lead markets to produce a larger quantity than is socially desirable.
_____lead markets to produce a smaller quantity than is socially desirable
government can internalize the externality by taxing goods that have ____ externalities
government can internalize the externality by subsidizing goods that have _____ externalities
Government can respond to externalities in two ways:
Command and control polices
Market based polices
_____ policies regulate behavior directly
Command and control
_____ policies provide incentives so that private decision makers will choose to to solve the problem on their own
government can remedy an externality by requiring or forbidding certain behaviors
Command and control policies
_____ align private incentives with social efficiency
Market based polices
a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality
the property of a good whereby a person can be prevented from using it
the property of a good whereby one person's use diminishes other people's use
Rivalry in consumption
goods that are both excludable and rival in consumption
ice cream cones, clothing, congested toll roads are examples of
goods that are neither excludable nor rival in consumption
Examples of ____
tornado siren, national defense, uncontested nontoll roads, research, fighting poverty
a person who receives the benefit of a good without paying for it
Free rider problem
a study that compares the costs and benefits to society of providing a public good
Cost benefit analysis
Because ____ are not excludable, the free rider problem prevents the private market from supplying them; however, the gov can remedy the problem if they decide the total benefits of public goods exceeds the total costs by providing the ____ with tax revenue
goods that are rival in consumption but not excludable
Main concern of ___ goods:
Policymakers need to be concerned about how much of the good is used
Examples of ____:
fish in the sea, the environment, congested nontoll roads, clean air/ water
a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole
Tragedy of the commons
Private decision makers use common resources too much, as result gov often regulates behavior or impose fees to solve the problem of ____
____ measures buyers' gains from participating in the market
____ measures sellers' gains from participating in the market
___ measure total gains from trade in a market
The market ____ quantity maximizes total surplus
The market ____ is efficient. No other outcome achieves higher total surplus.
Government cannot raise ____ by changing the market's allocation of resources.
the notion that govt should not interfere with the market.
"Allow them to do"
Market failures occur when:
externalities exist & buyer or seller has market power
the ability to affect the market price.
A ____ drives a wedge between the price buyers pay and the price sellers receive.
A ____raises the price buyers pay and lowers the price sellers receive.
A ____reduces the quantity bought & sold.
Which goods or services should govt tax to raise the revenue it needs?
Those with the smallest DWL
When supply & demand is inelastic, DWL is ____
The more elastic is supply & demand, DWL is
When a ___ increases, DWL rises even more.
shows the relationship between the size of the tax and tax revenue.
A tax on a good reduces the welfare of buyers and sellers. This welfare loss usually ____ the revenue the tax raises for the govt.
An _____ in the size of a tax causes revenue to rise at first, but eventually revenue falls because the tax reduces the size of the market.
the uncompensated impact of one person's actions on the well-being of a bystander.
____ can be negative or positive, depending on whether impact on bystander is adverse or beneficial.
Examples of ___ externalities:
- Air pollution from a factory
- The neighbor's barking dog
- Late-night stereo blasting from the dorm room next to yours
- Noise pollution from construction projects
- Health risk to others from second-hand smoke
- Talking on cell phone while driving makes the roads less safe for others
____ curve shows private cost, the costs directly incurred by sellers.
___ curve shows private value, the value to buyers (the prices they are willing to pay).
private + external cost =
value of the negative impact on bystanders
When market participants must pay social costs, market eq'm is ____
Examples of ___ externalities:
- going to college
- getting vaccinated
_____ policies provide incentives so that private decision-makers will choose to solve the problem on their own.
Corrective taxes & subsidies:
- align private incentives with society's interests
-make private decision-makers take into account the external costs and benefits of their actions
- move economy toward a more efficient allocation of resources.
private solutions to externalities
Moral codes and social sanctions, charities, contracts.
If the transaction yields ___ externalities, the market quantity exceeds the socially optimal quantity.
If the externality is ____ , the market quantity falls short of the social optimum.
Public goods are difficult for private markets to provide because of the _____
Free rider problem
Result of the free rider problem
The good is not produced, even if buyers collectively value the good higher than the cost of providing it.
If the benefit of a public good exceeds the cost of providing it, govt should provide the good and pay for it with a ____ on people who benefit.
The role of government in monitoring column resources:
Seeing that they are provided; ensuring that they are not overused
When price falls, consumer surplus ____
2 ways to argue that equilibrium is an efficient allocation of resources
People with greases willingness to pay get good; sellers that make goods at lowest cost produce
People fulfill their own interest, if benefits > cost there is potential for net gain
Taxes ___ quantity
Demand for helath insurance is ___
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