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Finance Flashcards

Chapter 5 Market Failures & Chapter 16 Public Finance

market failures economically desirable goods are not produced or they are either overproduced or underproduced
demand-side market failures when demand curves do not reflect consumers’ full willingness to pay for a good or service
supply-side market failures when demand curves do not reflect the full costs of producing a good or service
consumer surplus the difference between the max price a consumer is willing to pay for a product and the actual price that they do pay
producer surplus the difference between the actual price a producer receives and the acceptable price that a consumer would have to pay the producer to make a particular unit of output available
production efficiency competition forces suppliers to use the best technologies
allocative efficiency when the right amount of quantity is produced relative to other goods and services
total surplus producing units maximizes combined area of consumer and producer surplus
efficiency losses reductions of combined consumer and producer surplus
deadweight loss efficiency loss to buyers and consumers since they are members of society ; also an efficiency to society
private goods goods offered for sale in stores, in shops, and on the internet
rivalry when one person buys and consumes a product, it is not available for another person to buy and consume
excludability when sellers can keep people who do not pay for a product from obtaining its benefits
individual demand when a consumer’s demand for a product will reflect an inverse relationship between the price of product and the quantity of it demanded
market demand the horizontal summation of the individual demand schedules
public goods the opposite characteristics of private goods
nonrivalry when one person’s consumption of a good does no preclude consumption of the goods by others
nonexcludability there is no effective way of excluding individuals from the benefit of the good once it comes into existence
free-rider problem once a producer has provided a public good, everyone, including nonpayers, can obtain the benefit
cost-benefit analysis deciding whether to provide a particular good and how much of it to provide
marginal-cost-marginal-benefit rule tells which plan provides the max excess of total benefits over total costs (the plan that gives society the max net benefit)
quasi-public good goods and services that could not be produced and delivered in such a way that exclusion would be possible (education, streets and highways, police stations, etc.)
externalities when some of the costs or benefits of a good or service are passed onto or “spill over to” someone other than the immediate buyer or seller
negative externalities causes overproduction and over allocation, which also causes supply side market failures
positive externalities causes underproduction and under allocation, which also causes demand-side market failures
government interventions -direct control (negative)-specific taxes (negative)-subsidies and government provisions (positive)
optimal reduction of an externality when society’s marginal cost and marginal benefit of reducing that externality are equal
ways to correct negative externalities -private bargaining–liability rules and lawsuits-tax on products-direct controls -market for externality rights
ways to correct positive externalities -private bargaining -subsidy to consumers-subsidy to producers-government provisions
public finance the subdiscipline of economics that studies the various ways in which governments raise and expend money
proprietary income the income that governments receive from running government-owned enterprises such as hospitals, utilities, toll roads, and lotteries
government purchases exhaustive, the products purchased directly absorb resources and are part of the domestic output
transfer payments nonexhaustive, products that do not directly absorb resources and are part of the domestic output
personal tax income the kingpin of the federal tax system and merits special comment
taxable income the incomes of households and unincorporated businesses after certain exemptions and deductions are taken into account
progressive tax people with higher income pay a larger percentage than do people with lower incomes
marginal tax rate the rate at which the tax paid on each additional unit of taxable income
average tax rate the total tax paid by total taxable income
payroll taxes taxes based on wages and salaries
corporate income tax tax levied on a corporation’s profit
sales and excise taxes taxes on commodities or on purchases: sales tax falls on a wide range of products; excise taxes are levied individually on a small, select list of commodities
property taxes 71% of local tax revenue
benefits-received principle asserts that households should purchase the goods and services of government in the same way they buy other commodities
ability-to-pay principle asserts that the tax burden should be apportioned according to taxpayers’ income and wealth
progressive taxes the average rate declines as income increases
regressive taxes the average rate declines as income increases
proportional taxes also flat taxes, the average rate of change remains the same regardless of the size of the income
tax incidence the degree to which a tax falls on a particular person or group
efficiency (deadweight) loss of the tax reduction of a product’s well-being
redistribute goods where government may wish to impose progressive taxes as a way to redistribute income
reducing negative externalities analysis of the efficiency loss of a tax assumes no negative externalities arising from either the production or consumption of the product in question
sin taxes excise taxes that are intended to reduce the production and consumption of products with negative externalities
applications of taxes -personal income (progressive)-sales tax-regressive-corporate income tax-proportional -payroll tax-regressive-property taxes-regressive
tax incidence the degree to which a tax falls on a particular person or group
elasticity vs.tax incidence -elastic demand=producers pay more-inelastic demand=consumers pay more-elastic supply=consumers pay more-inelastic supply=producers pay more
efficiency (deadweight) loss of the tax society’s sacrifice of net benefit, because the tax reduces production and consumption of the product below their levels of economic efficiency
US tax structure -federal=progressive-state & local=regressive-overall tax system=progressive

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