Externalities
Sarah lives in Stalnaker Hall. Last Friday, she tried to go to sleep at 9pm because she was not feeling well. Unfortunately, Sarah struggled to fall asleep because she could hear very loud music coming from the frats. This is an example of a...
negative externality
What type of good is a subscription to Netflix?
club good
Which type of tax makes up the largest portion of government revenue?
income tax
Give an example of a positive externality
varied answers
What is deadweight loss?
The cost to society created by a market inefficiency. It does not benefit anybody.
Positive externalities are _____
Negative externalities are_____
(taxed or subsidized)
Positive externalities are subsidized
Negative externalities are taxed
What are excludable goods?
goods that must be paid for in order to use them
budget surplus
An economic activity that has a positive or negative spillover effect to a third party.
Why do governments tax and spend?
1. Raise revenues to pay for public goods
2. Redistribute income to address fairness issues
3. Finance operations of government
4. Correct market failures and externalities
What are the two ways we can address inefficiencies caused by externalities?
1. government solutions (taxes)
2. private solutions (coase theorem)
Goods that only one person can consume at a time
Are subsidies revenue or loss for the government?
loss
What is the Coase theorem?
the idea that private bargaining will result in an efficient allocation of resources
Give an example of a public good.
national defense, etc
A power plant is polluting the air in a small town and increasing asthma rates in the residents of the town. A tax on electricity production would cause a ____ in electricity production and a ______ in asthma in the town.
decrease, decrease
What is the free rider problem and what is the solution for it?
When an individual does not pay for a good because it is non-excludable. Solution: The government makes paying for it mandatory
Identify where the incidence on consumers is.
on graph
Who bears the burden of a tax
What type of good has a high rivalry but low excludability?
common pool resources
Considering Coase Theorem, when will bargaining be most likely to take place?
few effected parties, small externalities
What is the tragedy of the commons? Give an example
When common pool resources are overused.
Example: free to fish in a pond, too many people fish there resulting in overfishing
What determines if consumers or producers take more of a hit from a tax incidence?
elasticity
What is a pigouvian tax?
The tax necessary to incentivize a firm to produce the socially optimal level of output
Where does the federal money come from?
1. Individual income taxes
2. Payroll taxes
3.Corporate income tax
4. Other taxes (including taxes on specific goods such as excise taxes)