Chapter 5 Flashcards
(21 cards)
Welfare Economics
The branch of economics that studies how the allocation of resources affects economic well-being.
Willingness to pay
The maximum price a consumer is willing to pay for a good or a service.
Consumer Surplus
The difference between the willingness to pay for a good and the price that is paid to get it.
Willingness to Sell
The minimum price a seller will accept to sell a good or service.
Producer Surplus
The difference between the price that the seller receives at the price at which a seller is willing to sell a good or service.
How do producers determine their willingness to sell?
1) The direct cost of producing the good 2) Indirect costs or opportunity costs.
Social Welfare
The sum of all consumer surplus and producer surplus. Measures the well being of all participants in a market, absent of any government intervention.
Efficient Outcome
When an allocation of resources reaches maximum total surplus
Equity
Refers to the fairness of the distribution of benefits among members of society.
Excise tax
Tax levied on a particular good or service.
Incidence
Refers to the burden of taxation on the party who pays the tax through higher prices, regardless of whom the tax is actually levied on.
Why do politicians refer to tax the seller rather than the buyer?
A tax on the buyer is highly visible and much more likely to cause buyers to get angry or change their behavior.
T/F The tax on a good is split between the buyer and seller due to shifts in the demand or supply fuction.
True.
Dead weight loss
The decrease in economic activity caused by market distortions.
Why is it a smart idea for governments to tax inelastic goods?
Because the demand is inelastic, it is unlikely that a tax on cigarettes would cause consumers to buy less This avoids a dead weight loss scenario because there is no loss in quantity demanded. Tax burden is placed solely on the consumer.
What happens as demand becomes more elastic
More and more of the tax burden is placed on the seller of a good rather than the consumer.
How does DWL change as demand becomes more elastic
The DWL grows as tax revenue shrinks. Consumer surplus disappears.
How do you determine the effect of elasticity of supply on tax revenue and dwl?
The steeper the supply curve, the more the tax is levied on the consumer and the smaller the DWL.
What happens to DWL as taxes increase
The size of the tax revenue decreases as the DWL increases. Quantity demanded decreases sharply as taxes rise.
- Suppose, in the relevant range, the supply elasticity for fidget spinners is +4.5 while the demand elasticity is -3.5. If Athens city council imposes a $2 tax on fidget spinner customers we should expect ___
A. Firms to pay the entire tax.
B. Consumers to pay the entire tax.
C. Firms to pay a smaller portion of the tax than consumers.
D. Consumers to pay a smaller portion of the tax than firms.
C) Firms to pay a smaller portion of the tax than consumers. Because the proportion of taxes rise the more inelastic the supply or demand relative to one another.
- A tax is imposed on the electric scooters market at its current price. Which market will have the largest deadweight loss as a result of the tax?
A. Demand elasticity = -2; Supply elasticity = +3
B. Demand elasticity = -2; Supply elasticity = +0.5
C. Demand elasticity = -0.4; Supply elasticity = +3
D. Demand elasticity = -0.4; Supply elasticity = +0.5
A) Because the more elastic the supply and demand the more the resulting dead weight loss.
