Microeconomics Exam 2 craft

Price Control (Rent Control)

Shortage occurs because the price is held below the equilibrium ($P < P_e$), causing quantity demanded to exceed quantity supplied.

Inefficiencies of Price Control

Allocative: Too few units are produced/available compared to the social optimum. Productive: Resources are wasted; for example, people spend hours searching for apartments or 'bribing' landlords. Consumptive: The people who value the housing most may not get it.

Secondary Effects of Price Control

Quality drops, black markets emerge, and discrimination increases.

Minimum Wage

Surplus of Labor occurs because the wage is above equilibrium, leading to unemployment.

Deadweight Loss (DWL)

Represents the lost gains from trade between employers and workers that would have happened at a lower wage.

Tax Incidence

Who actually pays the tax depends on elasticity; the more inelastic side bears more of the burden.

Efficiency of Taxes

To minimize DWL, governments should tax goods with inelastic demand.

Marginal Tax Rate

The tax paid on the next dollar earned.

Average Tax Rate

Total tax paid divided by total income.

Progressive Tax

Higher income = higher tax rate (e.g., Federal Income Tax).

Regressive Tax

Lower income earners pay a higher percentage of their income (e.g., Sales Tax).

Proportional Tax

Everyone pays the same percentage (Flat Tax).

Negative Externality

Social Cost = Private Cost + External Cost (e.g., Pollution).

Positive Externality

Social Benefit = Private Benefit + External Benefit (e.g., Safety/Herd Immunity).

Coase Theorem

Private parties can bargain to reach an efficient outcome regardless of who holds the initial rights.

Tradable Permits

Efficient because firms that can easily reduce pollution will sell their 'right to pollute' to firms that find it expensive to cut back.

Public Goods

Nonrivalry and Nonexcludability; people can't be stopped from using it (e.g., a lighthouse).

Free-Rider Problem

People have no incentive to pay if they can get it for free; solution is government provision funded by taxes.

Adverse Selection

Sick people are more likely to buy insurance than healthy people, driving up premiums.

Moral Hazard

People take more risks or use more medical services because they know insurance covers the cost.

Comparative Advantage

Trade is based on Opportunity Cost; focus on what can be produced most cheaply relative to other goods.

Tariffs

A tax on imports that raises domestic prices and helps domestic producers but hurts domestic consumers.

Quotas

A physical limit on imports; similar to tariffs but revenue usually goes to foreign firms.

Arguments for Protectionism

Includes national security, infant industry, dumping, and saving jobs, each with critiques.