Economics Test 2
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Price Ceiling or Price Cap
A government regulation that places an upper limit on the price at which a particular good, service or factor of production may be traded.
Example: Housing Rents
A regulation that makes it illegal to charge more than a specified rent for housing..
The effect of a rent ceiling depends on whether it is imposed at a level above or below the market equilibrium rent.
When a rent ceiling is set below equilibrium, this creates black markets and search activity.
An illegal market that operates alongside a government-regulated market.
- Using creative tricks to get around the law.
The time spent looking for someone with whom to do business with.
What determines if rent ceilings are efficient and fair?
Efficient - marginal cost must equal marginal benefit or deadweight loss occurs and places a wedge between the buyer and the seller.
A government regulation that places a lower limit on the price at which a particular good, service or factor of production can be traded.
Example - minimum wage
Unfair to employers and most job seekers, but not unfair to the ones who get hired.
Price floor (minimum price allowed) in an agricultural market maintained by a government guarantee to buy any surplus at that price.
- - Set above the market equilibrium price creates a surplus.
- - To maintain the price, the government buys the surplus.
A payment by the government to producer to cover part of the cost of production.
- When the government buys the surplus produced by farmers, it provides them with a subsidy.
The division of the burden of a tax between the buyer and the seller.
When a good is taxed, it has two prices: without the tax and with the tax.
- Buyers respond to the price that includes the tax.
- Sellers respond to the price that excludes the tax.
Who bears the burden of the tax the most? Buyer or Seller?
Whoever is more inelastic.
Burden of the tax
Equals the tax revenue plus the deadweight loss.
Deadweight loss from a tax.
Total income minus a personal exemption and a standard deduction (or other allowable deductions).
Marginal Tax Rate
The percentage of an additional dollar of income that is paid.
Average Tax Rate
The percentage of income that is paid in tax.
Tax that increases as income increases - efficient.
Tax whose average rate is constant at all levels.
Average rate decreases as income increases - nonefficient
What tax generates the greatest deadweight loss?
Taxes from capital.
A tax on employers based on the wages they pay their workers.
The proposition that people should pay taxes equal to the benefits they receive from public goods and services.
- The proposition that people should pay taxes according to how easily they can bear the burden.
- Compares people to: horizontal equity and vertical equity.
The requirement that taxpayers with the same ability pay the same taxes.
The requirement that taxpayers with a greater ability to pay bear a greater share of the taxes.
- A cost or a benefit that arises from:
- - Production that falls on someone other than the producer
- - Consumption that falls on someone other than the consumer
A production or consumption activity that creates an external cost.
A production or consumption activity that creates an external benefit.
Examples of a Negative Production Externality
Pollution, Noise and Congestion
Examples of Positive Production Externalties
Orchards to honey producers, who in turn provide positive production externalities to orchards.
Examples of Negative Consumption Externality
Smoking tobacco in a confined space, noisy parties.
Examples of Positive Consumption Externalities
A flu vaccination, restoration of a historic building, education and research.
Marginal Private Cost
Cost of producing an additional unit of a good or service that is borne by the producer of that good or service.
Marginal External Cost
Cost of producing an additional unit of a good or service that falls on people other than the producer.
Marginal Social Cost
Marginal cost incurred by the entire society - by the producer and by everyone else on whom the cost falls.
Marginal social cost (mcs) is the sum of marginal private cost (mc) and marginal external cost. (mcs = mc+maringal external cost)
The three main methods that governments can use to achieve a more efficient allocation of resources in the presence of external costs are:
- - Emission Charges
- - Marketable Permits
- - Taxes
Confront the producers with the external cost of pollution and provide an incentive to seek technologies that are less polluting.
Assigns to each producer in an industry an emission limit.
Producers will buy and sell permits until their marginal cost of pollution equals the marginal price of a permit.
A pollution tax is imposed that is equal to the marginal external cost arising from pollution.
The supply curve becomes the marginal private cost curve (mc) plus the tax. S = mc+tax
Describes the limits to consumption choices and depends on a consumer's budget and the prices of goods and services.
A Change In The Budget
When a consumer's budget increases, consumption possibilities expand.
When a consumer's budget decreases, consumption possibilities shrink.
A decrease in the budget...
Shifts the budget slope line leftward, but the slope doesn't change because the prices have not changed.
An increase in the budget....
Shifts the line rightward, but the slope does not change because prices have not changed.
Changes in Prices...
If the price of one good rises when the prices of other goods and the budget remains the same, consumption possibilities shrink (slope becomes more steep).
If the price of one good falls when the prices of other goods and the budget remains the same, consumption possibilities expand (slope becomes less steep).
rise (up and down) over run (side to side)
Another name for opportunity cost, which is the price of one good in terms of another good.
A relative price equals the price of one good divided by the price of another good and equals the slope of the budget line.
The benefit or satisfaction that a person gets from the consumption of a good or service.
Utility = Value
The total benefit that a person gets from the consumption of a good or service. Total utility generally increases as the quantity consumed of a good increases.
The change in total utility that results from a one-unit increase in the quantity of a good consumed.
Diminishing Marginal Utility
The general tendency for marginal utility to decrease as the quantity of a good consumed increases.
Example: candy bars
- The rule that leads to the greatest total utility from all the goods and services consumed. The rule is:
- 1-Allocate the entire available budget
- 2-Make the marginal utility per dollar equal for all goods
Texas State Senator
Senator Wendy Davis
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