Externalities
These are the two types of externalities we deal with.
What are negative and positive externalities?
Define tariff
What is a tax on imported goods
Tax on inelastic demand/supply is _____ efficient.
more, less
more --> add tax and people will still buy good
Public goods are _____ and _____.
Give one example of a public good
hint: rival, non-rival, excludable, non-excludable
Public goods are non-rival and are non-excludable.
ex: lighthouse, tornado siren
Give an example of a government regulation.
taxes and subsidies are the ones we discuss in class
What do all of these stand for?
SMB
SMC
PMB
PMC
EMB
EMC
SMB = Social Marginal Benefit
SMC = Social Marginal Cost
PMB = Private Marginal Benefit
PMC = Private Marginal Cost
EMB = External Marginal Benefit
EMC = External Marginal Cost
Taxes on elastic demand/supply are _____ efficient
More, less
Less --> add tax and people will go find substitute
Private goods are _____ + _____.
Give one example of a private good
hint: rival, non-rival, excludable, non-excludable
Private goods are excludable and rival.
ex: any kind of food
These are the two characteristics that make an externality.
1. affects a third party
2. there is not a market for this externality
SMC stands for what? What is the formula?
SMB stands for what? What is the formula?
*hint: ______ + _______
Social Marginal Cost = PMC + EMC
Social Marginal Benefit = PMB + EMB
What are the differences between proportional, regressive, and progressive taxes?
Proportional taxation: each person pays the same percent --> ex: At 20%, one pays $3,000 and the other pays $1,000,000
Progressive taxation: tax rate rises as income rises
ex: One with less income pays 10% = $1500 and One with more income pays 30% = $1,500,000
Regressive taxation: tax rates fall as income rises ex: One with less income pays 30% = $4,500 and one with more income pays 10% = $500,000
Open access goods are ____ + ____.
Give one example of an open access good
hint: rival, non-rival, excludable, non-excludable
Open access goods are non-excludable and rival.
Ex: fish in the sea, freshwater, Earth's environment
give an example of a positive externality. give an example of a negative externality. Why are these considered externalities?
neg ex: pig farm produces odor
pos ex: bee farm pollinates plants
** are externalities because third party is affected and there is not a market for the externalities
Define excludability.
Define rival.
Excludability: the ability to exclude someone from a good/service once it is produced
Rival: how does one person's use of the good affect anothers?
How does elasticity play a role in taxes?
How do we measure tax efficiency?
hint: in terms of ___ and ___
- Tax items with low elasticity the highest
- Decrease tax rates as elasticity rises
Maximizes efficiency (in terms of DWL / Tax Revenue)
Extremely “unfair”: low-income people devote larger percent of income to items with low elasticity
Club goods are ____ + ____.
Give one example of a club good
hint: rival, non-rival, excludable, non-excludable
club goods are non-rival and excludable.
ex: football tickets
BEFORE INTERVENTION, Market Price is too_____ and market quantity is too ______ for
1. Positive externality
2. Negative externality
positive externality:
market q is too low, market price is too low for producers and too high for consumers
negative externality:
market q is too high and market price is too low
What is horizontal equity and vertical equity?
HORIZONTAL EQUITY: consider two people who earn the same amount of money doing different things
-taxpayers with equal income should pay equal tax
VERTICAL EQUITY: Consider two people who earn different amounts of money doing different things
-taxpayers with different income should pay different amounts of taxes (more income, more taxes)
Highly progressive tax --> Try to tax very high incomes, wealth, large-ticket items the most. This is the least efficient (in terms of DWL / Tax Revenue). Why?
very high incomes, wealth, large-ticket items = high elasticities of demand
-larger elasticity, more flexible = add a tax and they will spend their money somewhere else
What kind of a good is education?
hint: falls somewhere in between the four types of goods.
Hybrid good-
-Why do we see some goods produced by both the private sector and public sector?
-They have some components that are public in nature but also some components that are private in nature:
-Education – Society needs people to have a basic level of education. But individuals can expect higher salaries the better educated they are.
-Some government involvement in either provision or funding will be necessary to achieve allocative efficiency in these markets