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price ceiling/price cap
answer
a government regulation that places an upper limit (maximum) on the price at which a particular good, service, or factor of production may be traded. Example: rent control
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binding price ceiling
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set below the market price
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non-binding price ceiling
answer
set above the market price
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Price floor
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a government regulation that places a lower limit (minimum) on the price at which a particular good, service, or factor of production may be traded.
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A binding price floor
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imposes a limit above the market price.
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A non-binding price floor
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imposes a limit at or below the market price.
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Price support
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a price floor in an agricultural market maintained by a government guarantee to buy any surplus output at that price.
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Subsidy
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a payment by the government to a producer to cover a part of the cost of production. When the government buys the surplus, it provides a subsidy.
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Taxes place a wedge between
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the price buyers pay and the price sellers receive.
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Tax incidence
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the division of the burden of a tax between the buyer and the seller.
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When a good is taxed, it has two prices:
answer
• A price that includes the tax.
Buyers respond to the price that includes the tax.
• A price that excludes the tax.
Sellers respond to the price that excludes the tax.
Buyers respond to the price that includes the tax.
• A price that excludes the tax.
Sellers respond to the price that excludes the tax.
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Calculation for the burden of the tax
answer
= the tax revenue + the deadweight loss.
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When the price elasticity of demand is higher than the price elasticity of supply, an excise tax falls mainly on who?
answer
producers.
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When the price elasticity of supply is higher than the price elasticity of demand, an excise tax falls mainly on who?
answer
consumers.
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There are two conflicting principles of fairness of taxes:
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The benefits principle
The ability-to-pay principle
The ability-to-pay principle
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The ability-to-pay principle
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the proposition that people should pay taxes according to how easily they can bear the burden.
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The benefits principle
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the proposition that people should pay taxes equal to the benefits they receive from public goods and services.
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National comparative advantage
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the ability of a nation to perform an activity or produce a good or service at a lower opportunity cost than any other nation.
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A nation with an educated population and abundant capital but few natural resources has an advantage in what?
answer
manufactured goods.
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A nation with abundant agricultural resources, little capital and lots of unskilled labor is likely to specialize in what?
answer
the production of basic foods.
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Governments restrict international trade to protect who from what?
answer
domestic producers
competition.
competition.
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The four sets of tools the government uses to protect international trade:
answer
• Tariffs
• Quotas
• Other import restrictions
• Export subsidies
• Quotas
• Other import restrictions
• Export subsidies
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Tariff
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a tax on a good that is imposed by the importing country when an imported good crosses its international boundary.
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Quota
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A quantitative restriction on the import of a good that limits the maximum quantity of a good that may be imported in a given period.
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Two other import restrictions government puts on international trade:
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o Health, safety, and regulation barriers
Example: FDA restrictions
Consequences: Limit international trade
o Voluntary export restraints
Example: FDA restrictions
Consequences: Limit international trade
o Voluntary export restraints
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Export Subsidies
Example:
Consequences:
Example:
Consequences:
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Payments by the government to a producer of an exported good.
ex: Farm products
Consequences: Overproduction in domestic economy, underproduction in the rest of the world
ex: Farm products
Consequences: Overproduction in domestic economy, underproduction in the rest of the world
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An externality is a cost or a benefit that arises from:
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Production that falls on someone other than the producer or
Consumption that falls on someone other than the consumer
Consumption that falls on someone other than the consumer
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Four types of externalities:
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Negative production externalities
Positive production externalities
Negative consumption externalities
Positive consumption externalities
Positive production externalities
Negative consumption externalities
Positive consumption externalities
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Marginal private cost
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the cost of producing an additional unit of a good or service that is borne by the producer of that good or service.
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Marginal external cost
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the cost of producing an additional unit of a good or service that falls on people other than the producer.
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Marginal social cost
Equation?
Equation?
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the marginal cost incurred by the entire society—by the producer and by everyone else on whom the cost falls.
MSC = MC + Marginal external cost
MSC = MC + Marginal external cost
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Property rights
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legally established titles to the ownership, use, and disposal of factors of production and goods and services
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Pollution limits
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A pollution limit is imposed that restricts production to the efficient quantity.
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Pollution charge or tax
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A pollution charge or tax is imposed that is equal to the marginal external cost of pollution.
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Positive Externality:
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A production or consumption activity that creates an external benefit
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Marginal private benefit
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the benefit of an additional unit of a good or service that the consumer of that good or service receives.
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Marginal external benefit
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the benefit of an additional unit of a good or service that people other than the consumer of the good or service enjoy.
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Marginal social benefit
equation?
equation?
answer
the marginal benefit enjoyed by society—by the consumer of a good or service and by everyone else who benefits from it.
MSB = MB + Marginal external benefit
MSB = MB + Marginal external benefit
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3 Government Actions In the Face of External Benefits:
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Public provision
A subsidy
A voucher
A subsidy
A voucher
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Public provision
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the production of a good or service by a public authority that receives the bulk of its revenue from the
government.
government.
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A subsidy
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a payment that the government makes to private producers to cover part of the costs of production.
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A voucher
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a token that the government provides to households that can be used to buy specified goods or services.
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As a result of importing a good, domestic consumers ________ the quantity consumed and the price of the good ________.
answer
increase; falls
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If a rent ceiling is below the equilibrium rent, some allocation scheme must be used. The allocation methods include all of the following EXCEPT
A) charging the equilibrium rent.
B) refusing to rent to individuals on the basis of sex, race, or some other attribute.
C) requiring a payment, such as key money, in addition to the rent.
D) the creation of a black market.
E) increased search activity.
A) charging the equilibrium rent.
B) refusing to rent to individuals on the basis of sex, race, or some other attribute.
C) requiring a payment, such as key money, in addition to the rent.
D) the creation of a black market.
E) increased search activity.
answer
charging the equilibrium rent.
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Neither the demand nor the supply of gasoline is perfectly elastic or inelastic. When the government increases the federal tax on gasoline, the effect on buyers is that the price they pay....
answer
rises.
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An example of a good with external benefits is
A) a pizza.
B) a dose of flu vaccine.
C) a sewing machine.
D) an imported good.
E) a pair of running shoes.
A) a pizza.
B) a dose of flu vaccine.
C) a sewing machine.
D) an imported good.
E) a pair of running shoes.
answer
B) a dose of flu vaccine.
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The demand for gasoline is inelastic and the supply of gasoline is elastic. Therefore, who bears most of the incidence of a tax on gasoline?
answer
buyers bear most of the incidence of a tax on gasoline.
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How does a price ceiling work?
-creates housing shortage
-inefficiency
-unfairness
-example:
-creates housing shortage
-inefficiency
-unfairness
-example:
answer
- a price ceiling set above the equilibrium price has no effects
-a price ceiling set below the equilibrium price creates a shortage and increased search activity or a black market
-a price ceiling is inefficient and unfair
-ex: rent ceiling
-a price ceiling set below the equilibrium price creates a shortage and increased search activity or a black market
-a price ceiling is inefficient and unfair
-ex: rent ceiling
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How does a price floor work?
-how does minimum wage create unemployment
-inefficiency
-unfairness
-example:
-how does minimum wage create unemployment
-inefficiency
-unfairness
-example:
answer
- a price floor set below the equilibrium price has no effects
-a price floor set above the equilibrium price creates a surplus and increased search activity or illegal trading
-a price floor is inefficient and unfair
-ex: minimum wage
-a price floor set above the equilibrium price creates a surplus and increased search activity or illegal trading
-a price floor is inefficient and unfair
-ex: minimum wage
question
how a price support in the black market for an agricultural product creates a surplus, inefficiency, and unfairness
answer
- a price support increases the quantity produced, decreases the quantity consumed, and creates a surplus
-to maintain the support price, the government buys the surplus and subsidizes the producer
-a price support benefits the producer but costs the consumer/taxpayer more than the producer gains- it creates a deadweight loss
- a price support is inefficient and usually unfair
-to maintain the support price, the government buys the surplus and subsidizes the producer
-a price support benefits the producer but costs the consumer/taxpayer more than the producer gains- it creates a deadweight loss
- a price support is inefficient and usually unfair
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