Unit 2 Microecon Terms

incidence of tax

a measure of who bears the burden of the tax

Total inefficiency of tax

sum of a tax’s deadweight loss and administrative costs

ability-to-pay principle of tax fairness

those with greater ability to pay should pay more/ you should pay taxes based on how much money you have

every tax consists of two pieces:

a tax base and tax structure

implicit cost of capital

the income the owner of the capital could have earned if the capital had been employed in its next best alternative

or the opportunity cost of the use of one’s own capital

cost-benefit analysis

when responsible governments try to estimate BOTH the social benefits and the social costs of providing a public good

artificially scarce good

good that is excludable but non rival in consumption

excise tax

extra money (tax) on certain products so the government can make more revenue

what happens due to excise tax?

both buyers and sellers share the pain, prices go up, people buy less, and government gets more money

tax / government revenue

tax per unit x quantity of product sold

administrative costs of tax

the resources used for tax collection, for the method of payment, and for any attempts made to evade the tax (the costs of managing and enforcing a tax)

what are the two principles of tax fairness?

the benefits principle and the ability-to-pay principle

the benefits principle

tax fairness principle that says those who benefit from public product should bear the burden of the tax of that product (ex gas, tolls)

trade-off between equity and efficiency

the system can be made more efficient only by making it less fair, and vice versa

proportional tax

all people pay the same percent of their income

tax base

the measure (such as income of property value) that determines how much tax and individual of firm pays

tax structure

specifies how the tax depends on the tax base

progressive tax

type of tax structure that taxes those with higher income more than those with lower income

regressive tax

type of tax structure that taxes those with lower income more than those with higher income

marginal tax rate

tells you what portion (percentage) of your next dollar goes to taxes

average tax rate

the total tax you pay divided by all the money you earned

lump-sum tax

a fixed amount of money everyone has to pay, regardless of how much they earn or spend

comparative advantage

being able to make something at a lower opportunity cost than someone else (ex certain things grow in better climates, giving a better advantage)

absolute advantage

being able to make more of something than someone else using the same time or resources

Autarky

when a country does not trade with anyone (no imports or exports) and tries to make everything it needs by itself

sources of comparative advantage

differences climate, factor endowments, technology

heckscher-ohlin model

countries export what they can make easily and import what’s harder for them to make

factor abundance

the supply of a factor of production relative to other factors

factor intensity

a measure of the quantity of a factor used in comparison with other factors

domestic demand curve

shows how the quantity of a good demanded by domestic consumers depends on the price of that good

domestic supply curve

shows how the quantity of a good supplied by domestic producers depends on the price of that good

world price

the price at which a good can be bought or sold abroad

trade protection

policies that limit imports

free trade

when countries buy and sell things from each other without extra taxes or rules

tariff

a tax on things a country buys from other countries

import quota

a legal limit on how much of something a country can buy from other countries

trade protection argument: national security

a country should protect domestic suppliers of crucial goods to be self sufficient

trade protection argument: job creation

trade protection creates additional jobs

trade protection argument: infant industry

new industries need a temporary period of protection to develop

international trade agreements

treaties in which a country promises to reduce import tariffs in return for a promise by the other country to do the same

explicit cost

when you have to pay money to get something

implicit cost

does not require payment of money, but you receive the benefits (ex salary while not working)

opportunity cost = …

total explicit cost + total implicit cost

Accounting profit = …

revenue - explicit cost

economic profit

revenue - opportunity cost (or explicit + implicit cost)

“either-or” decision making principle

when faced with an either-or choice between two things (all else equal), choose the one with the positive economic profit

marginal analysis

comparing the marginal benefit with the marginal cost

marginal cost

the additional cost incurred by producing one more unit of that good or service

increasing marginal cost

each additional unit costs more to produce than the previous one

constant marginal cost

each additional unit costs the same to produce as the previous on

decreasing marginal cost

each additional unit costs less to produce than the previous one

total cost vs marginal cost

total cost rises as marginal cost falls

marginal benefit

the additional benefit derived from producing one more unit of a good

decreasing marginal benefit

when each additional unit of the activity yields less benefit than the previous unit

optimal quantity

the quantity that generates the highest possible total profit

profit-maximizing principle of marginal analysis

the largest quantity at which the marginal benefit is great than or equal to the marginal cost

sunk cost

a cost that has already been incurred and is NOT recoverable

a rational decision maker always chooses the available option that leads to…

the outcome they most prefer

4 reasons people might rationally choose a worse payoff

concerns about fairness, nonmonetary rewards, bounded rationality, risk aversion

bounded rationality

making a choice that is close to but not exactly the one that gives you the best pay off — the “good enough” decision

risk aversion

willingness to sacrifice some economic payoff in order to avoid a potential loss

7 common decision making mistakes

over confidence, misperceptions of opportunity costs, unrealistic expectations, counting dollars unequally, loss aversion, framing bias, FOMO, status quo bias

loss aversion

an oversensitivity to loss that leads to an unwillingness to recognize a loss and move on

status quo bias

the tendency to avoid making a decision altogether

present value (PV)

the amount of money needed today to receive a future value (FV) after n periods, given an interest rate of r x 100%

present value equation

PV = (FV)/ (1+r)^n

external cost

an uncompensated cost that an individual or firm imposes on others (ex pollution, text and driving)

external benefits

benefits that individuals or firms confer on others without receiving compensation (ex education)

externalities (spillovers)

the impact on third parties of a transaction between others that are uncompensated

negative externalities

actions that affect others negatively

positive externalities

actions that affect others positively

marginal social cost (MSC)

How much it costs society (everybody) when one more unit of something is made

marginal social benefit (MSB)

how much everyone benefits when one more unit of something is made

socially optimal quantity

the quantity society would choose if all costs and benefits were fully accounted for (MSB = MSC)

avoided costs of abatement

the money you save by not having to fix damage

abatement

cleaning up or reducing pollution

coase theorem

when people can solve some problems themselves by making deals, if negotiating is easy

internalizing externalities

when individuals take externalities into account — allowing for an efficient outcome without government intervention

transaction costs

the costs of making a deal (often prevents internalized externalities and prevents mutually beneficial trade from ocurring)

3 ways the gov’t deals with pollution

environmental standards, emissions taxes, tradable emissions permits

environmental standards

rules that protect the environment by specifying actions by producers and consumers

emissions taxes

costs that depend on the amount of pollution a firm produces

pigouvian tax

a type of emissions tax that is designed to reduce external costs

tradable emissions permits

licenses to emit limited quantities of pollutants; licenses can be bought and sold by polluters

pigouvian subsidy

money the government gives to people or businesses to help them do or make something that yields external benefits

climate change

human-made change in Earth’s climate from the accumulation of greenhouse gases caused by the use of fossil fuels

greenhouse gases

gases that trap heat in the Earth’s atmosphere

fossil fuel

fuel derived from fossil sources such as coal and oil

renewable energy sources

energy sources that inexhaustible

clean energy sources

energy sources that do not emit greenhouse gases

technology spillover

a positive externality that results from spread among individuals and firms

network externality

when the value of a good to an individual is greater when a large number of people also use the good

positive feedback (bandwagon effect)

if large numbers of people use it, others will be more likely to use it — how network externalities arise

excludable good

people who don’t pay can be easily prevented from use a good (ex new clothes)

nonexcludable good

People who don’t pay cannot be easily prevented from using a good (ex national defense)

rival in consumption

the same unit of the cannot be consumed by more than one person at a time (or at all)

nonrival in consumption

more than one personal can consume the same unit of the good at the same time

private good

something you can buy and use, and others can’t use it at the same time (buying candy)

4 types of goods

private goods, artificially scarce goods, common resources, public goods

excludable +