Chapter 6 Flashcards
What is welfare economics?
A branch of economics that studies how the allocation of resources affects economic well-being.
What is consumer surplus?
The difference between the willingness to pay for a good and the price that is paid to get it.
What is producer surplus?
The difference between the willingness to sell a good and the price that the seller receives.
What is the total surplus?
(AKA social welfare) The sum of consumer surplus and total surplus.
What does it mean to be efficient?
An outcome is efficient when an allocation of resources maximizes total surplus.
What is equity?
Refers to fairness of the distribution of benefits within the society.
What does ‘there is no free lunch’ mean?
You can’t get something for nothing. Having lunch requires money, or at the very least, using resources to make your food.
What are excise taxes?
Taxes levied on a particular good or service.
What is the incidence of taxation?
The burden of taxation on the party who pays the tax through higher prices, regardless of whom the tax is actually levied on.
What do taxes cause?
Prices to rise.
What is deadweight loss?
The decrease in economic activity caused by market distortions (e.g. taxes)
What happens with tax revenue and deadweight loss when demand is INelastic?
Items such as cell phones are deemed a necessity by the majority of people. So, cell phone providers and government agencies can tax them and create additional charges without demand decreasing because the demand is so inelastic. The government can claim tax revenue on this and the quantity demanded will stay the same.
What happens with tax revenue and deadweight loss when demand is more elastic?
Consumer AND producer surplus are smaller because quantity demanded will decrease as there are more taxes placed on items with a relatively elastic demand. Both the consumer and the producer (and the government that’s taxing the item) will lose out.
What happens with tax revenue and deadweight lost when demand is highly elastic?
Sellers aren’t able to raise the equilibrium price because most consumers will find suitable substitutes - so the sellers bear the incidence of the taxation. Producers will be less willing to sell the product at all prices and shifts supply curve to the left; then since consumer demand is highly elastic, consumers pay the same price as before, but the tax incidence means the seller nets less.
