Chapter 5 Market Failures & Chapter 16 Public Finance – Flashcards
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economically desirable goods are not produced or they are either overproduced or underproduced
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market failures
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when demand curves do not reflect consumers' full willingness to pay for a good or service
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demand-side market failures
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when demand curves do not reflect the full costs of producing a good or service
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supply-side market failures
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the difference between the max price a consumer is willing to pay for a product and the actual price that they do pay
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consumer surplus
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the difference between the actual price a producer receives and the acceptable price that a consumer would have to pay the producer to make a particular unit of output available
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producer surplus
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competition forces suppliers to use the best technologies
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production efficiency
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when the right amount of quantity is produced relative to other goods and services
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allocative efficiency
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producing units maximizes combined area of consumer and producer surplus
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total surplus
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reductions of combined consumer and producer surplus
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efficiency losses
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efficiency loss to buyers and consumers since they are members of society ; also an efficiency to society
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deadweight loss
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goods offered for sale in stores, in shops, and on the internet
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private goods
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when one person buys and consumes a product, it is not available for another person to buy and consume
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rivalry
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when sellers can keep people who do not pay for a product from obtaining its benefits
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excludability
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when a consumer's demand for a product will reflect an inverse relationship between the price of product and the quantity of it demanded
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individual demand
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the horizontal summation of the individual demand schedules
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market demand
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the opposite characteristics of private goods
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public goods
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when one person's consumption of a good does no preclude consumption of the goods by others
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nonrivalry
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there is no effective way of excluding individuals from the benefit of the good once it comes into existence
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nonexcludability
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once a producer has provided a public good, everyone, including nonpayers, can obtain the benefit
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free-rider problem
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deciding whether to provide a particular good and how much of it to provide
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cost-benefit analysis
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tells which plan provides the max excess of total benefits over total costs (the plan that gives society the max net benefit)
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marginal-cost-marginal-benefit rule
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goods and services that could not be produced and delivered in such a way that exclusion would be possible (education, streets and highways, police stations, etc.)
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quasi-public good
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when some of the costs or benefits of a good or service are passed onto or "spill over to" someone other than the immediate buyer or seller
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externalities
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causes overproduction and over allocation, which also causes supply side market failures
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negative externalities
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causes underproduction and under allocation, which also causes demand-side market failures
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positive externalities
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-direct control (negative) -specific taxes (negative) -subsidies and government provisions (positive)
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government interventions
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when society's marginal cost and marginal benefit of reducing that externality are equal
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optimal reduction of an externality
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-private bargaining --liability rules and lawsuits -tax on products -direct controls -market for externality rights
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ways to correct negative externalities
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-private bargaining -subsidy to consumers -subsidy to producers -government provisions
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ways to correct positive externalities
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the subdiscipline of economics that studies the various ways in which governments raise and expend money
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public finance
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the income that governments receive from running government-owned enterprises such as hospitals, utilities, toll roads, and lotteries
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proprietary income
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exhaustive, the products purchased directly absorb resources and are part of the domestic output
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government purchases
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nonexhaustive, products that do not directly absorb resources and are part of the domestic output
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transfer payments
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the kingpin of the federal tax system and merits special comment
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personal tax income
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the incomes of households and unincorporated businesses after certain exemptions and deductions are taken into account
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taxable income
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people with higher income pay a larger percentage than do people with lower incomes
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progressive tax
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the rate at which the tax paid on each additional unit of taxable income
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marginal tax rate
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the total tax paid by total taxable income
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average tax rate
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taxes based on wages and salaries
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payroll taxes
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tax levied on a corporation's profit
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corporate income tax
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taxes on commodities or on purchases: sales tax falls on a wide range of products; excise taxes are levied individually on a small, select list of commodities
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sales and excise taxes
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71% of local tax revenue
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property taxes
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asserts that households should purchase the goods and services of government in the same way they buy other commodities
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benefits-received principle
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asserts that the tax burden should be apportioned according to taxpayers' income and wealth
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ability-to-pay principle
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the average rate declines as income increases
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progressive taxes
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the average rate declines as income increases
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regressive taxes
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also flat taxes, the average rate of change remains the same regardless of the size of the income
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proportional taxes
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the degree to which a tax falls on a particular person or group
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tax incidence
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reduction of a product's well-being
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efficiency (deadweight) loss of the tax
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where government may wish to impose progressive taxes as a way to redistribute income
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redistribute goods
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analysis of the efficiency loss of a tax assumes no negative externalities arising from either the production or consumption of the product in question
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reducing negative externalities
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excise taxes that are intended to reduce the production and consumption of products with negative externalities
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sin taxes
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-personal income (progressive) -sales tax-regressive -corporate income tax-proportional -payroll tax-regressive -property taxes-regressive
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applications of taxes
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the degree to which a tax falls on a particular person or group
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tax incidence
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-elastic demand=producers pay more -inelastic demand=consumers pay more -elastic supply=consumers pay more -inelastic supply=producers pay more
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elasticity vs.tax incidence
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society's sacrifice of net benefit, because the tax reduces production and consumption of the product below their levels of economic efficiency
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efficiency (deadweight) loss of the tax
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-federal=progressive -state & local=regressive -overall tax system=progressive
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US tax structure
