ECON 1110 - Prelim 2

tax base

what/who is being taxed

tax structure

how is it being taxed (the rules for the tax)

proportional tax system

same percent rate independent of the base value (often called a flat tax)

progressive tax system

the percent rate is increasing as the base value increases (like US income tax system)

regressive tax system

percent rate is decreasing as the base value increases

mean tax rate

average tax paid across your income

marginal tax rate

tax rate that is applied to the next/last dollar earned (which tax bracket is highest for income)

the benefits principle

those who benefit from public spending on a good/service should pay taxes related to that good/service

the ability-to-pay principle

those with more resources should pay more in taxes (ie: progressive tax systems)

fungible

describing a good/asset that is interchangeable/replaceable by another of the same kind or value

wealth

a measure of all assets an individual has: savings, cars, residence (stock of assets accumulated over time)

gini index

describes how wealth or income are distributed from 0 to 100 (closer to 0 means more equality in the distribution)

poverty line

takes into consideration the size of family and gets adjusted each year to account for rising price levels (inflation); if a family income falls below this, they are considered to be in poverty

persistent poverty

poverty in a given household that persists over generations

poverty spillover effect

poverty among unrelated households in a given location leads to higher incidence of persistent poverty

welfare state

a collection of programs designed to alleviate economic hardship and promote the well-being of citizens

monetary transfers

direct provision of money to an individual or household

in-kind benefits

goods or services provided instead of cash

means-tested

benefits or programs where eligibility and the amount of assistance received are determined by an individual's or household's income and assets

employer-based health insurance

mandatory for all employees so it pools risk of illness within a firm, guaranteeing a pool of healthy and unhealthy people for private insurance companies

externality

a side effect of an (economic) activity that affects bystanders whose interests are not taken into account by the market

marginal social benefit (MSB)

sum of marginal private benefit and marginal external benefit

marginal social cost (MSC)

sum of marginal private cost and marginal external cost

Pigouvian tax

a tax on a market with a negative externality (tax is equal to the MEC)

Coase Theorem

if bargaining is costless and property rights are clearly established and enforced, the externality problems can be solved by private bargaining/side payments

nonexcludable

one cannot prevent others from using a good/service

nonrival

when enjoyment of good/service does not diminish other people’s enjoyment of the good

public good

nonexcludable and nonrival in consumption

free-rider problem

bystanders who didn’t pay for provision of public good but are able to enjoy its benefits (causes market to underproduce or fail to produce good at all)

utility function

represents consumer preferences, mapping the quantity of a good consumed to a numerical value (utility) a happiness score of sorts

diminishing marginal utility

an economic principle stating that as consumption of a good or service increases, the additional satisfaction (utility) derived from each subsequent unit decreases

indifference curves

a graphical representation of all combinations of two goods that provide a consumer with the same level of satisfaction or utilitysub

substitution effect

measures the change in consumption (due to changes in price of a good) such that the consumer's level of utility does not change (shown through a movement along the indifference curve)

income effect

a change in a consumer's purchasing power (real income) affects their consumption choices, ultimately causing a shift in their indifference curve