Chapter 5

Question 1

What is welfare economics

Answer 1

Assesses how well the economy allocates its scarce resources in accordance with the goals of efficiency and equity

Question 2

Efficiency addresses

Answer 2

the question of how well the economy’s resources are used and
allocated.

Question 3

Equity deals with

Answer 3

deals with how society’s goods and rewards are, and should be, distributed
among its different members, and how the associated costs should be apportioned.

Question 4

Give an example of efficiency and equity on tesla cars buyers

Answer 4

deals with how society’s goods and rewards are, and should be, distributed
among its different members, and how the associated costs should be apportioned.

Question 5

What is reservation price

Answer 5

A reservation (or reserve) price is a limit on the price of a good or a service. On the demand side, it is the highest price that a buyer is willing to pay; on the supply side, it is the lowest price at which a seller is willing to sell a good or service.

Question 6

What is consumer surplus

Answer 6

the excess of consumer willingness to pay over the market

price.

Question 7

What is supplier or producer surplus

Answer 7

excess of market price over the reservation price

of the supplier.

Question 8

What is intergenerational equity

Answer 8

Deals with whether the policies we adopt today are “fair” for the next generation

Example: If we emit an excess of greenhouse gases today, will the next generation have to pay for the current generation’s excess?

Question 9

Valuation is

Answer 9

The price that the consumer will give for some good

Question 10

Formula for price surplus

Answer 10

Price -C (willingness to accept reservation price)

Question 11

suppliers and demanders are willing to participate in the market because

Answer 11

They earn surplus

Question 12

How to find a consumer and producer surplus using the graph

Answer 12

CS- the area of the triangle below D curve above the price

PS- area of the triangle above the S curve below the price

Question 13

Total surplus is

Answer 13

The sum of producer and consumer surpluses

Question 14

What is an efficient market

Answer 14

An efficient market maximizes the sum of producer and consumer surpluses.

Question 15

What is marginal cost and marginal benefit and their relationship

Answer 15

The free market equilibrium may be efficient

At that equilibrium, the marginal benefit (on the D side) from consuming one more unit equals the marginal cost (on the S side) from producing one more unit provided the demand curve measures benefits correctly and the supply curve measures costs correctly

Question 16

The change if the supply curve if the tax is percentage and if fixed cost per unit

Answer 16

Fixed cost: parallel shift

Percentage: the incline changes

Question 17

What is tax wedge

Answer 17

the difference between the consumer and producer prices.

the price the consumer must pay and the
price that the supplier receives.

Question 18

What is the revenue burden

Answer 18

the amount of tax revenue raised by a tax.

Question 19

How to find government tax revenue from the graph

Answer 19

Rectangular
PtEtPtsA

where a is the projection of Et on the old supply curve

Question 20

The area on the graph for reduction of consumer and supplier surpluses

Answer 20

supplier surplus is reduced by the amount P0E0APts

reduce consumer surplus by
PtEtE0P0.

Question 21

What is the rectangular appendesis left on the left of demand and supply curve if we subtract government tax

Answer 21

The excess burden, or deadweight loss, of a tax is the component of consumer and
producer surpluses forming a net loss to the whole economy. (DWL)

Question 22

What is the distortion

Answer 22

A distortion in resource allocation means that production is not at an efficient output

Question 23

Influence of supply and demand curve elasticities on tax revenue and excess burden

Answer 23

Supply inelastic-> government will receive a lot of money
But if elastic, the government will have less money and

If the demand curve is elastic, government will receive less tax

Question 24

What is an externality and give examples of both negative and positive

Answer 24

Externality- a benefit or cost falling on people other than those involved in the
activity’s market. It can create a difference between private costs or values and social
costs or values.

Negative: pollution. electricity-generating plants
that use coal reduce air quality, which, in turn, adversely impacts individuals who suffer from
asthma or other lung ailments.

Positive: Externalities of the positive kind enable individuals or producers to get a type of ‘free ride’ on
the efforts of others.

When a large segment of the population is
inoculated against disease, the remaining individuals benefit on account of the reduced probability
of transmission.
A less well recognized example is the benefit derived bymany producers world-wide from research
and development (R&D) undertaken in advanced economies and in universities and research institutes.
The result is that society at large, including the corporate sector, gain from this enhanced
understanding of science, the environment, or social behaviours.

Question 25

difference between social and private optimum supply curves

Answer 25

Graphically the full or total supply costs are reflected in St, lying above S, which reflects only private costs The social optimum differs from the private optimum because it reflects all of the costs of production (denote it by Q*) The firm is thus over-producing from a social point of view Q* is to the left of Q 0

Question 26

A solution to negative externalities

Answer 26

A corrective tax that increases the price and reduces the output Production quotas

Question 27

solution to positive externalities

Answer 27

Furthermore, firms that invest heavily in research and development would not undertake such investment if competitors could have a complete free ride and appropriate the fruits. This is why patent laws exist An income tax credit to buyers: the vaccine is free to take Subsidies

Question 28

What subsidy dies to the supply and demand curves

Answer 28

Subsidy will shift the supply downward

Question 29

Besides externalities, there are many other cases of market failure, which mean that the equilibrium quantity generated by the market is not efficient Examples

Answer 29

Monopolies Public goods International externalities Insufficient information concerning the product

Question 30

What are green house gases

Answer 30

Greenhouse gases that accumulate excessively in the earth’s atmosphere prevent heat from escaping and lead to global warming

Question 31

Why monopoly is not efficient

Answer 31

Dead weight is big, society cannot get the full quantity benefit

Question 32

There are 2 types of public goods

Answer 32

Exclusion | Rivality ( some person will get, but then others will not ,competition exists)

Question 33

Different combinations of exclusion and rivality and what would that mean

Answer 33

Exclusion and rivality ->private good (cell phone) Exclusion (yes) and rivality (no)->club good (netflix subscription or lecture) Rivality(yes) and exclusion(no)-> common resources (public parking, public health) No exclusion and no rivality-> public good (military defense)

Question 34

In what units GHGs are measured

Answer 34

parts per million

Question 35

3 ways how polluters can be controlled

Answer 35

- Direct controls - Corrective taxes(a carbon tax)- market based - Tradable permits to pollute- market based

Question 36

What is the marginal abatement curve

Answer 36

the cost to society of reducing the quantity | of pollution by one unit. Has the negative slope

Question 37

An optimal quantity of pollution occurs when

Answer 37

the marginal cost of abatement equals the marginal | damage.

Question 38

What should be done to reduce GHGs with many polluters in the sector

Answer 38

With many polluters, the least cost policy to society requires producers with the lowest abatement costs to act first.

Question 39

International negative externality

Answer 39

GHGs

Question 40

What is tradable permits

Answer 40

A system of tradable permits is frequently called a ‘cap and trade’ system, because it limits or caps the total permissible emissions, while at the same time allows a market to develop in permits. Imagine that each firm is emitting 60 units of GHG, but they have permits to emit only 50 units each. And furthermore suppose it costs B $20 to reduce GHGs by one unit, whereas it costs A $30 to do this. In this situation A could pay B $25 for several permits and this would benefit both firms.

Question 41

What is the appropriate value of the tax on pollution>

Answer 41

the value that results in the quantity Q*

Question 42

Corrective taxes are also called

Answer 42

Pigovian taxes