Microeconomics Review

deadweight loss + administrative cost

total inefficiency of tax =?

administrative cost

resources used

benefits principle

those who benefit from public spending should bear burden of the tax for that spending

ability-to-pay principle

those with greater ability to pay a tax should pay more

tax base

the measure, income/property value; determines how much tax individual/firm pays

income tax

depends on income from wages and investments

payroll tax

depends on the earnings an employer pays an employee

sales tax

depends on the value of goods sold

profits tax

depends on a firms profit

property tax

depends on the value of a property such as a home

wealth tax

depends on an individual’s wealth

tax structure

specifies how the tax depends on the tax base

progressive tax

larger share of income, higher-income taxpayers than lower-income taxpayers. e.g., income taxes, estate taxes, wealth taxes

regressive tax

smaller share of income, higher-income taxpay than lower-income taxpayer. e.g., sales taxes, excise taxes (cigarettes, gasoline), payroll tax

supply curve goes up

when tax is levied on sellers

demand curve goes down

when tax is levied on consumers

Ep < Es

burden mainly on consumer

Ep > Es

burden mainly on producers

½ (tax) (decrease in Q)

deadweight loss in taxation

heckscher-ohlin model

country exports goods that intensively use its abundant resources

Qd-Qs

imports = ?

imports

Pw < Pdomestic

exports

Pw > Pdomestic

Qs-Qd

exports = ?

tariff

tax on imports (raises domestic price)

½ (tariff) (change Qd + change Qs)

deadweight loss of tariff

Qd-Qs

quota

infant industry

new industries need temporary protection

national security

protect important industries

explicit cost + implicit cost

total opportunity cost = ?

explicit cost

requires actual payment

implicit cost

no direct payment, value of what you give up

accounting profit

revenue - explicit cost

economic profit

revenue - implicit cost - explicit cost

either-or decision

choose between 2 alternatives

how much decision

marginal decision

MB = MC

profit maximizing rule

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

present value equation

negative externality

external cost

positive externality

external benefit

MSC = MSB

socially optimal quantity

negative externalities

Qmarket < Qoptimal

coase theorum

if property rights are clear and transaction costs low, people can find efficient outcomes without gov. intervention

emissions/pigouvian tax

tax on pollution, goal = reduce negative externalities

pigouvian subsidy

a subsidy to encourage socially beneficial activity to reduce positive externalities

private goods

excludable and rival

public goods

nonexcludable and nonrival

common resources

nonexcludable and rival

artificially scarce goods

excludable and nonrival

excludable

can prevent non-payers from using it

nonexcludable

cannot easily stop non-payers

rival

one person’s use reduces availability

nonrival

multiple people can use the same unit simultaneously

free-rider problem

someone who benefits without paying

MB1 + MB2

public good MSB = ?

overconsumption

common goods lead to

underconsumption

artificially scarse goods lead to

the welfare state

government programs designed to reduce economic hardship

gini coefficient

measures income inequality from 0 —> 1

means-tested

only low-income households qualify

non-means-tested

available regardless of income

in-kinds benefits

benefits provided as goods/ services instead of cash

death spiral

healthy people opt out causing only sick people to remain, leads to a system collapse

medicare

government health insurance for 65+ funded by payroll taxes

medicaid

for low income households, funded by state taxes