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Terms in this set (39)
What is a price ceiling?
a legally mandated MAXIMUM price
What is a price floor?
a legally set MINIMUM price
When a price ceiling is ABOVE the equilibrium price and has NO impact, it is _______.
When a price ceiling is BELOW the equilibrium price and WILL have an impact, it is _______.
What do binding price ceilings lead to?
buyers increase the quantity demanded and sellers reduce the amount they make available in markets
What is the outcome of a binding price ceiling?
When a price floor is BELOW equilibrium price and there is NO impact, it is ______.
When a price floor is ABOVE equilibrium price and there IS an impact, it is _______.
What does a binding price floor result in?
What is one of the only examples of a price floor?
What are taxes?
levies on economic activity as a means for government to obtain resources to provide the goods and services that it furnishes to society
Taxes are ______ ALWAYS.
Does tax revenue provide benefits to society?
yes- it supplies roads, schools, and police and fire protection
How do taxes have a NEGATIVE impact on buyers and sellers?
-they create a burden on market participants (tax incidence)
-they alter behavior leading buyers and sellers to attempt to avoid or lessen the effects of taxes on their wellbeing
What is legal incidence?
who pays the tax
Does it matter who the tax is imposed on?
no- it ultimately does not matter who the tax is imposed on but rather how the tax affects each side of the market (depends on elasticity)
How do you show the effect of tax on any market?
find the distance between the demand and supply curve that exactly equals the amount of tax (left of equilibrium quantity)
There is more tax imposed on the buyer when the demand curve is more _______.
The more tax burden falls on the sellers when the demand curve is more _______ than supply.
What is an example of a price ceiling?
rent control (in big cities like NYC)
What is tax incidence?
how taxes are shared; the manner in which the burden of a tax is shared among participants in a market (i.e) buyers and sellers
When does the tax fall more heavily on the buyer?
when demand is more inelastic than supply
When does tax incidence fall more heavily on the sellers?
when supply is more inelastic than demand
You expect _____ deadweight loss when buyers and sellers respond ALOT to changes in price.
What is deadweight loss?
loss in total surplus
When do you have less deadweight loss?
when there is more inelastic supply and demand
The more elastic demand and supply results in a _______ deadweight loss.
What does a laffer curve show?
relationship between the rate that we charge and the tax revenue that we raise
If you're on the ____ side of the laffer curve and you make slight cuts you can still increase tax revenue.
What is an externality?
-an intervention in an otherwise failed market
-an uncompensated impact of one person's actions on a bystander (not buyer, seller, producer, consumer, just happen to live near the Sriracha factory)
What is a negative externality?
-not benefitting anybody except the people who roast the peppers, buy the peppers
-exists when the social cost (includes private cost-amount to make the good or service and cost to the rest of society) is greater than the private cost
-if you don't pay the full cost of your behavior, you're going to do more of it (parent's paying for gas)
What does the graph of a negative externality look like?
ALWAYS has 2 supply curves
What is a positive externality?
-exists when your behavior creates more value
-exists when the social value (private value + benefit to society) of a good is larger than the private value of the good
-happens when you don't capture the full value of your behavior causing you to to do too little of the action (picking up trash on the beach but only on a small section)
What does the graph of a positive externality look like?
there is ALWAYS 2 demand curves
How do you make one demand curve equal another?
introduce a subsidy to pay the people to do more of the good work
Who compensates an externality?
either the government or the people
What are the options that the government could take to take care of externalities?
-Command and control: Alabama has a law where you have to go to school until you are at least 16
-Market Based Policies: includes taxes and subsidies
-Corrective tax (Pigovian tax): designed to induce private decision makers to take account of the social cost that arises from a negative externality (gas tax goes to fixing roads so the guy that causes more damage to the road is going to pay more for gas)
-Corrective Subsidy: a payment from the government designed to induce private decision makers to take account of the social value that arises from a positive externality; makes it cheaper for you to consume a good or service; in-state tuition gives people more of an incentive to do something to reduce "brain drain effect"
-Tradeable (Pollution) Permits: EPA limits the number of pollution permits (supply) and the intersection with the demand curve for pollution rights determines the price of pollution; works well when EPA wants to regulate pollution to an acceptable level but is unsure of the demand curve for pollution (and thus appropriate size of tax needed to induce optimal behavior)
-Private Solutions to Externalities (The Coase Theorem): not involving the government; as long as there is property rights, if you don't like a house, you can buy it and tear it down; the initial distribution of rights does not matter as long as they exist (can matter in terms of outcome but in terms of who has to pay for the outcome); if he has the right to let the dog bark (in the country) you're going to be paying to get rid of the dog to have peace and quiet but if he doesn't have the right (apartment in NYC) then you don't have to pay to get rid of the dog. In both instances the dog is gone
What is the "brain drain effect"?
-people contribute to a state but then later leave for education elsewhere that may never return
What is the Coase Theorem?
-if private parties can bargain without cost (can't bc opportunity cost) over the allocation of resources, then as long as property rights are well-defined and enforced, the private market will always solve the problem of externalities and allocate the resources efficiently
-it doesn't work if you have to pay for an interpreter, lawyer (cost is higher than both are willing to pay), irrationality, high transaction cost
ex) the embarrassment of peeing in the pool is valued much higher than having to pee so you're not going to pee in the pool (tax)
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