×
Log in to StudySoup
Get Full Access to AU - ECON 200 - Study Guide - Midterm
Join StudySoup for FREE
Get Full Access to AU - ECON 200 - Study Guide - Midterm

Already have an account? Login here
×
Reset your password

AU / Economics / ECON 200 / Who bears the burden of tax?

Who bears the burden of tax?

Who bears the burden of tax?

Description

School: American University
Department: Economics
Course: Principles of Microeconomics
Professor: O ozay
Term: Fall 2016
Tags:
Cost: 50
Name: Exam 2 Study Guide
Description: ECON 200 - Microeconomics Chapters: 6,8,9,10,19,24 (Cowen and Tabarrok) Exam 2 Study Guide
Uploaded: 03/29/2017
6 Pages 39 Views 3 Unlocks
Reviews


ECON 200 - Microeconomics


Who bears the burden of tax?



Chapters: 6,8,9,10,19,24 (Cowen and Tabarrok)

Exam 2 Study Guide

Chapter 6 - Taxes & Subsidies 

Taxes​: Government decides who pays a tax, but not who feels the burden of it. ● Elasticity determines the burden of the tax

■ More inelastic demand, larger the burden 

■ More elastic demand, smaller the burden 

Price of an object is $2

■ $2 tax on sellers / buyers

● Quantity falls

● Price buyers pay = $3

● Price sellers receive = $1

○ If on seller's, supply decreases

○ If on buyers, demand decreases

Subsidies​: Government decides who receives a subsidy, but not who feels the benefit of it. ○ Elasticity determines the benefit of a subsidy


How do subsidies affect the government?



■ More inelastic, larger the benefit

■ More elastic, smaller the benefit

○ Price of an object is $2

■ $2 subsidy on sellers / buyers

● Quantity rises

● Price buyers pay = $1

● Price sellers receive = $3

○ If on seller's, supply increases

○ If on buyers, demand increases If you want to learn more check out What is a risk and what is a hazard?

● Demand

○ Inelastic: fixed supply, few substitutes, short run, necessary

○ Elastic: Many substitutes, long run, luxury good

● Supply

○ Inelastic: hard to produce more at same cost, global supply chain ○ Elastic: eary to produce more at same cost, local supply chain Don't forget about the age old question of What are the characteristics of friendship?

Chapter 8 - Price Ceilings & Price Floors 


Why is supply inelastic in the short run?



Price ceiling:​ Maximum legal price on a good / service

● This creates:

○ Shortages (QD>QS)

○ Lower quantity

○ Black markets

○ Bundling

○ Wasteful lines

○ Favoritism

○ Poorly targeted

○ Lower quality

● Rent controls cause larger shortages over time

Price floor:​ Minimum legal price

● This creates:

○ Surplus (QD<QS)

○ Lower quantity

○ Black markets

○ Favoritism

○ Concessions by sellers

○ Poorly targeted

● If we increased the minimum wage we would lose jobs (3-16 million)

● People in poverty would see a 7% increase or maybe a 7% decrease in household pay

● Ban: a price ceiling at $0

○ Shortage is huge

○ Gap between price and marginal value is huge

○ Human Organ waiting list in USA

○ If let the market control it, they would reach P=MV (equilibrium) We also discuss several other topics like What are the different stages of mitosis?

Minimum Wage V Wage Subsidy

● Minimum Wage: (a price floor)

○ Higher wage

○ Lower employment

○ Weakly targeted

○ Regressive

■ The way is too high so firms don’t hire as many workers

● Wage Subsidy:

○ Higher wage

○ Higher employment

○ Strongly targeted

○ Progressive

■ The wage firms pay goes down, so they can hire more employees,

and the employee makes more with the subsidy

Chapter 9 - Analyzing Trade w/ S&D, Tariffs, Subsidized Imports, & Jobs Imports​: Occur when Pw<P, and are equal to the difference between Qs and Qd ● No foreign trade (P):

○ CS = A

○ PS = B + E

○ TS = A + B + E

● Free trade (Pw):

○ CS = A + B + C + D

○ PS = E

○ TS = A + B + C + D +

E

■ Benefits the country as a whole, even though We also discuss several other topics like What is the content of the eggshell plaintiff rule?

producer surplus drops, total surplus increases

Tariffs​: Raise the price of imported goods and decreases imports

● Trade with tariff (Pt):

○ CS = A + B If you want to learn more check out What is social aggregate?

○ PS = C + G

○ Government = E

○ TS = A + B + C + E + G

■ Hurts the country as a whole, consumer and total

surplus go down, producer and government surplus

goes up

■ Consumers lose money for jobs “saved” through

tariffs

Subsidized Imports​: Argument: Foreign companies receive subsidies, allowing them to compete unfairly with domestic companies

● Subsidized imports (Ps): If you want to learn more check out What is the definition of spontaneous?

○ CS = A + B + C + D + E + F

○ PS = none

○ TS = A + B + C + D + E + F

■ Benefits the country as w hole, consumer and total surplus

increase.

Jobs​: Argument: When you buy a foreign product, you destroy a domestic job ● Buy a domestic item = domestic job

● Buy a foreign item = two different kind of domestic jobs

○ You will lose a job in the import-competing industry, BUT will create a job in an exporting industry through lower prices (import cheaper than

domestic good)

○ Causes a shift in jobs, not a loss

○ This increases overall consumption

○ The money will always come back to US, because of the currency

difference

Chapter 10 - Externalities, Government Solutions, Market Solutions, & Tradeable Allowances Externalities​: Costs or benefits that affect bystanders

● Invisible hand: self-interest leads to efficient outcomes

● Institutional failure: self-interest leads to inefficient outcome

○ Goods with external benefits are underproduced (demand shifts to the right and is higher than equilibrium, so not enough available in market)

○ Goods with external costs are overproduces (supply is lower than

equilibrium, so there is more available in the market than needed)

Government Solutions​:

● Command and Control: make actions forbidden or mandatory

○ Effective when solution is well-known and success requires widespread compliance

○ Ineffective when solution must be discovered or when there is no

universal solution (vaccine)

● Pigouvian tax: tax on a good with external costs

○ Alcohol creates external costs, so the market produces too much alcohol ○ If make an alcohol tax = to external cost market would produce an

efficient quantity (supply would decrease).

● Pigouvian subsidy: subsidy on a good with external benefits

○ Honey creates external benefits, so the market produces too little honey ○ If make a honey subsidy = to external benefit, market would produce enough (demand would increase).

Market Solutions​:

● Coase Theorem: when transaction costs are low, bargaining can solve externality problems

○ Honey creates external benefit for farmers

○ Honey producers make less than efficient quantity of honey

○ If the farmer pays the producer to make more honey

○ Honey output rises toward efficient quantity

Tradable Allowances​:

● Command and Control: government requires each firm to reduce pollution by 1 ton

○ Firm A

■ $200 to reduce each ton of pollution

○ Firm B

■ $800 to reduce each ton of pollution

○ Total cost: $1,000

● Tradeable allowances: government issues an allowance that allows the owner to pollute a certain amount

○ Try to limit pollution by limiting the number of allowances

■ Firm B buys Firm A’s allowance, so they don’t have to reduce

emission

■ Firm A reduces two tons of pollution

○ Total cost: $400

● Allowances reduce the cost of pollution reduction

● If a private group buys allowance from Firm A, but does not pollute more than allowances enable private efforts to reduce pollution

Chapter 19 - Non-Excludability, Public Goods, Common Resources, & Property Rights Excludable:​ Someone can be prevented from using it

Rival​: One person’s use reduces amount available for others

● Excludable & Rival = private good (painting)

● Excludable & Non-Rival = non-rival private good (TV subscription)

● Non-excludable & Rival = common resource (TOC - fish)

● Non-excludable & Non-Rival = public goods (radio)

○ Markets may fail to produce non-excludable goods even when they are desired

Public Goods​:

● Free-rider problem​: people will refuse to pay for goods if they can receive the benefits for free

○ Government solution: force beneficiaries to pay for public goods

■ Difficult to determine efficient quantity of these goods without

market prices

■ Someone has to pay for goods even if they aren’t seen as

valuable to them (Forced-rider problem​)

○ Market solution: bystanders may provide public goods to beneficiaries ■ Aka companies that buy ads on radio/tv

Common Resources​:

● Tragedy of the Commons​: common resources will be overused and under-maintained

○ Solution: limit the number of users

○ Individual Transferable Quota (ITQ): government issues an allowance that allows the owner to catch a certain amount of fish

■ Limit total catch by limiting number if ITQ’s issued

Property Rights​: institution that uses self-interest to avoid the TOC

● Limits the number of users

● Creates a link between effort and reward

● Aligns owner’s interests with interests of others

Chapter 24 - Asymmetric Information & Signaling 

Asymmetric Information​: One side knows more about product quality

● Low quality = $8,000 (50%)

● High quality = $12,000 (50%)

○ No way for consumer to tell which is which

○ Offer $10,000 for car of unknown quality

○ All high-quality cars leave market

● Adverse selection​: when product quality is uncertain, low quality drives out high quality and market may fail to produce goods even though buyers will pay for them

Signaling​: Action taken by informed party to send information to uninformed party ● Effective signal is costly but less costly for high-quality party than low-quality party

○ Car, dating, gift giving examples

Countersignaling​: Lack of signaling as a signal of high quality

● Now we have: Low, Medium, and High quality

○ Enough information to separate highs from lows

○ Not enough to separate high from medium or low from mediums

■ Mediums signal heavily to separate from lows

■ Highs refrain from signaling to separate from mediums

Signaling Theory of Education: College Wage Premium & Implications 

Human Capital Theory​: college teaches skills desired by employers

● Problems:

○ Most students study subjects unrelated to their work

○ Most classes teach no job skills

○ Most professors only know how to be professors (no real work xp)

Signaling Theory​: college diploma is a signal of desirable skills

● Desirable skills are hard to observes, so a college diploma correlates to them ○ Intelligence

○ Motivation

○ Obedience

○ Meeting deadlines

○ Conformity

● You view college as signaling if:

○ Pay tuition

○ Celebrate when class is canceled

○ Cheat

○ Worry about exams, not forgetting info later in life

○ Worry if one credit short of graduating

● If college is human capital accumulation ,then it is in your self-interest and it makes society better off

● If college is signaling, then it is in your self-interest and makes society worse off ○ Wasteful competition, wasting time and resources to get this piece of paper

Page Expired
5off
It looks like your free minutes have expired! Lucky for you we have all the content you need, just sign up here