Economics Test #2

Budget deficit

A fiscal condition occurring when government spending exceeds net tax revenues during a specific time period.

National debt

The total cumulative amount of money owed by the federal government resulting from accumulated budget shortfalls.

Excise tax

A targeted tax applied to the manufacture, sale, or consumption of a specific commodity, such as gasoline or tobacco.

Tax incidence

The distribution of the actual economic burden of a tax between buyers and sellers, which is independent of legal liability.

Elasticity rule of tax incidence

The economic burden of a tax falls more heavily on whichever side of the market is relatively more price inelastic.

Deadweight loss of taxation

The loss of total economic surplus caused by market distortion from a tax, which is larger when demand and supply are price elastic.

Tax credit versus tax deduction

A credit provides a dollar-for-dollar reduction in total taxes owed, whereas a deduction lowers the total amount of income subject to tax.

Marginal tax rate

The tax rate assessed on each additional dollar of taxable income earned.

Regressive tax

A tax structure where the effective tax rate decreases as an individual's income rises, disproportionately impacting lower earners.

Pigouvian tax

A corrective tax imposed to internalize a negative externality by shifting marginal private cost up to equal marginal social cost ($MSC$).

Coase Theorem

The idea that private market actors can negotiate mutually beneficial solutions to externalities on their own if property rights are well-defined and transaction costs are negligible.

Public good

A good that is both non-rival in consumption and non-excludable to non-payers, such as national defense or street lighting.

Tragedy of the Commons

The tendency of shared common resources to be overexploited and depleted because they are rival in consumption but non-excludable.

Economic profit

Total revenue minus all opportunity costs, calculated as $\text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs})$.

Law of diminishing returns

The principle that adding units of a variable input to a fixed input will eventually cause the marginal physical product of the variable input to decline.

Intersection of $MC$ and $ATC$

The point where the marginal cost curve intersects the average total cost curve, which corresponds exactly to the minimum point of $ATC$.

Economies of scale

A long-run condition where a firm's average total cost ($LRATC$) declines as its output scale expands.

Minimum efficient scale ($MES$)

The smallest level of production output at which all economies of scale are fully achieved.

Price taker

A firm that cannot set its own prices due to intense market competition and must sell goods at the prevailing market price ($P = MR$).

Universal profit-maximization rule

The decision rule stating that any firm maximizes profit or minimizes loss by producing at the output level where $MR = MC$.

Short-run shutdown rule

The operating decision stating that a firm must cease operations immediately if market price falls below average variable cost ($P < AVC$).

Operating at a short-run loss

The condition occurring when $AVC \le P < ATC$, where a firm stays open because revenue covers all variable costs and contributes toward fixed costs.

Productive efficiency

The market outcome achieved in long-run competitive equilibrium where goods are produced at the lowest possible per-unit cost ($P = \min(ATC)$).

Allocative efficiency

The market outcome where resources are distributed to produce the optimal mix of goods valued by society, achieved where $P = MC$.