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BU / Economics / EC 101 / What is welfare economics?

What is welfare economics?

What is welfare economics?

Description

School: Boston University
Department: Economics
Course: Principles of Economics: Microeconomics
Professor: Edson
Term: Fall 2016
Tags: Microeconomics
Cost: 50
Name: Midterm 11/21 Review Guide
Description: This review guide condenses the notes from chapters 7 to 11. Graphs and examples are also in the guide.
Uploaded: 11/16/2016
9 Pages 78 Views 14 Unlocks
Reviews


EC


What is welfare economics?



101 AA o Midterm Review 11/21

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• Welfare Economics: the study of how the allocation of [resources affect economic well-being a

In any market, the equilibrium of supply and demand maximizes the total benefits received by all

buyers and sellers combined to Willingness to pay: Maximum amount that a buyer will pay


What is willingness to pay?



for a good ; how much the buyer values that good! Consumer Surplus: amount a buyer is willing to pay minus amount buyer actually pays for it = willingness to pay - price paid We also discuss several other topics like Punitive damages are what?

s At any quantity, the price given by the demand curve

shows the willingness to pay of the marginal buyer


What are tradable pollution permits?



cs = Value - Payment

• Producer Surplus: amount a seller is paid for a good

minus the seller's cost of providing it

- price recieved – willingness to sell

• cost: value of everything a seller must give up

to produce agood i measure of willingness to sell Market Efficiency

Total Surplus o "net value" to society 23 - Consumer Surplus & Producer Surplus We also discuss several other topics like What is electric potential?

= Value - payment) & (Revenue - Cost) If you want to learn more check out What is the impact of colonial rule in india?

* Demand curve shows value while supply curve shows cost Price

- Value

Consumer

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Surplus I Producer

Sour

Surplus

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QE

Quantity

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• Efficiency: maximizing total surplus recieved by all

members of society - Equality e property of dismibuting economic property uniformly We also discuss several other topics like Define covalent bond.

If moved output to Q, ooo Price

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Total Surplus Lo

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value

D

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Qq

Qe

Q We also discuss several other topics like How the sun provides heat?
Don't forget about the age old question of What country stands to gain the most from opening the arctic?

Quantity

Cost

> value

inefficience

If moved out put to Q...

deadweight loss Laissez faire: let people do as they will - government doesn't have to direct resources

- the market will adjust on its own Deadweight Loss of Taxation

tax levied on buyers = demand shifts downwards

tax levied on sellers = supply shifts upwards. PL

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tax.

tax

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on sellers

Deadweight Loss

on

Deadweight Loss

buyers

ND

roup

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up

Quantity

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tax А

No tax Consumer Surplus A+B+C Producer Surplus DEIF

Total Revenue or

Total Surplus ABCDEF

-

change - (B+CY -(D+E) + B + D) -/C+E)

B+D ABDF

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Ex

Consumer Surplus : B.C. Producer Surplus: DIE

Deadweight Loss: C+E * Tax revenue that goes to the government (B+D) isn't better or worse off to society So isn't a loss

(transfer = welfare neutral) Joe landscaping (producer) Kayla: Homeowner (consumer)

minimum amount Joe will accept for a job=480 maximum amount Kayla will pay = $120

Total Surplus = value - Cost = $120950 $40

& Tax = 450 1.) Tax levied on producer

each time Joe takes care of yard has to pay $5o! SO... min amount of pay is now $130 Kayla rejects deal

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Kayla)

$50

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2.) Tax levied on consumer (Kayla)

→ Each time hires Joe, has to pay So... max pay is now $70 Joe rejects deal

Price elasticity of supply and Demand - more elastic supply curve

larger deadweight loss - more elastic demand curve w larger deadweight loss

Marginal Tax Rate : tax rate on last dollar of

earnings Ex) Income

$0-$40,000 20% $41,000 60,000 * 61,000+ 40%

Tax

30%

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L. If you

• If you make 870,000 : 40,000 (12) +20,000l.3) + 10,0001.4) = would be your texes

0.40 = would be your marginal tax rate

Tax revenue Tax rate Tax output

T t. a

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T = t.Q

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* If you

on the

lower faxes, might raise more tax revenue depending extent of the effect on Q min

n

Laffer

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Curve

o

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Vid=0% = 771 qt = Gl=dT

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W orld Price & Price of a good that prevails in the world market

on Price & opportunity cost of the good on the domestic market

If world price domestic price export

If world price L domestic price = import Exporting Country → After trade, domestic price rises to world price

s domestic sellers better off

domestic consumers worse off

Overall good for economy Price 1

world price

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nexports

TD

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Quantity Importing Country → Afted trade, domestic price falls to equal world price s Domestic sellers worse off

Domestic consumers better off e Overall good for economy

Price I

us

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world Price

Imports

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on

goods

Quantity produced abroad

and

sold

Tariff: tax domestically

Protectionism 1. Tariff

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bon

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2. Import Quota (directly limits how much can come in 3. VER = "Voluntary" Export Restraints (go to trace.

representative) The Effects of a Tariff Price

Domestic

Supply

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Tariff

Stue

Е

Imports with

Tariff

World Price Domestic

Demand

Quantity

Stu

[Consumer Surplus Producer Surplus

Total Surplus I Government Revenue

Imports Before

Tariff Before

After A.BICIDE IF

A+B G

G+C Arbr (+D+E+FIG. A + B + C + EG

o

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- Price rises by tariff - Domestic quantity demand decreases - Domestic quantity supply increases - Reduce imports Arguments for trade restrictions - Jobs Argument

- National Security - Infant Industry

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- Unfair Competition

- Protection - as-a- bargaining - chip

"trade restrictions can be useful when we bargain

with our trading partners" Market Failure: amount produced is not lefficient" o does not create maximum total surplus

Externality: the uncompensated impact of one person's actions on the well-being of a bystander (third party) - Negative Externality: Impact is adverse - Positive Externality: Impact is beneficial Negative Externalities - Social Cost curve is above the supply curve

• takes into account the external costs imposed on society Price

So (all costs)

/ sp Welfare loss

from producing

too much

(value)

Qoptimal Om Quantity - Government - Correct market failure

• Internalizing the externality: altering incentives so that

people take account of the external effects of their

actions (Taxes) is Positive Externality - - Social value is greater than private value - Social value curve above climand curve

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Costi

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Price

→ Study

Welfare loss

from producing too little

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-

Quantity

Qm

Qootimal

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- Government-correct market Failure

Subsidy: corrective taxes = Pigovian Texes Tradable Pollution Permits : voluntary transfer of the right to pollute from one firm to another

new scarce resources: pollution permits

firms pay for pollution on

corrective taxes: pay to the government

pollution permits: pay to buy permits or Corrective Tex

Pollution Permits Price

Supply of

Pollurion Permits

Price

Corrective

Tax

P/

Quantity

tudy

ested neorener

• Demand for

Pollution Rights

Demand for

pollution Righ

Quantity

• Types of private solutions - moral codes and social sanchions

- charities - self-interest of relevent parties - Interested parties can enter into a contract The Coase Theorem: If Private parties can bargain without Cost over the allocation of resources, they

can solve the problem of externalities on their own

• Why private solutions dont work

high transaction costs: costs that parties incur. in the process of agreeing to and following through on a bargain bargaining breaks down

large number of interested parties

• Coordinating everyone is costly

Tom Jono

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SUV SOUT

Excludability: Property of a good whereby a be

person can prevented from using it as hivalry in Consumption property of a good whereby one.

person's use diminishes other people's use

Private Goods - Excludable and Rival in Consumption

• Public Goods

- Not excludable and not rival in consumption

Common Resources : Rival in consumption and not excludable Club Goods excludable and not rival in consumption

Free Rider: person who recieves the benefit of a good but avoids paying for it

- public goods are not excludable - prevents the private market from supplying goods The tragedy of common resources : parable that

shows why common resources are used more than

desirable - Social and private incentives differ

-arises because of a negative externality

one person uses a common resource = diminishes

other people's enjoyment - Government can solve the problem,

o regulation / taxes to reduce consumption o turn the common resource to a private good

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