All Flashcards
What is a per-unit tax?
A tax levied on each unit of a good or service produced.
What is a lump-sum tax?
A fixed tax amount, regardless of the quantity produced.
Define marginal cost (MC).
The change in total cost resulting from producing one more unit of a good or service.
Define average total cost (ATC).
Total cost divided by the quantity of output.
Define average fixed cost (AFC).
Fixed cost divided by the quantity of output.
What is the socially optimal point?
The point where price equals marginal cost (P=MC), leading to allocative efficiency.
What is the fair-return point?
The point where price equals average total cost (P=ATC), allowing the firm to break even.
Define deadweight loss.
The loss of economic efficiency that occurs when the equilibrium for a good or service is not Pareto optimal.
What is a price ceiling?
A government-imposed limit on how high a price can be charged for a product.
What is a natural monopoly?
A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
What is the key difference in how per-unit and lump-sum taxes affect a firm's costs?
Per-unit taxes affect marginal costs, while lump-sum taxes affect fixed costs.
Compare the socially optimal and fair-return pricing strategies for monopolies.
Socially optimal pricing leads to allocative efficiency (P=MC) but requires subsidies, while fair-return pricing allows the firm to break even (P=ATC) but results in some deadweight loss.
Compare the effects of per-unit taxes and subsidies on market equilibrium.
Per-unit taxes increase prices and decrease quantity, while subsidies decrease prices and increase quantity.
What is the difference between allocative and productive efficiency?
Allocative efficiency occurs when P=MC, while productive efficiency occurs when production is at the minimum of the ATC curve.
Compare the short-run and long-run effects of a lump-sum tax on a perfectly competitive firm.
In the short run, a lump-sum tax reduces profits. In the long run, firms may exit the industry, decreasing supply and increasing the market price until firms earn normal profits.
Compare the effects of a price ceiling and a price floor.
A price ceiling set below the equilibrium price creates a shortage, while a price floor set above the equilibrium price creates a surplus.
Compare the goals of government intervention in perfectly competitive markets versus monopolies.
In perfectly competitive markets, intervention aims to correct market failures. In monopolies, intervention aims to reduce deadweight loss and increase social welfare.
Compare the effects of a per-unit tax on a monopoly versus a perfectly competitive firm.
For both, it increases the price and reduces quantity. However, a monopoly may absorb some of the tax burden, while in perfect competition, the tax burden is shared between consumers and producers.
What are the differences in the impact of a lump-sum tax on a firm's MC and ATC?
A lump-sum tax does not impact MC, but it shifts the ATC curve upward.
Compare the effects of a per-unit subsidy and a lump-sum subsidy on a firm's output.
A per-unit subsidy directly incentivizes increased production by lowering MC, while a lump-sum subsidy provides a general cost reduction that may not directly affect output.
What is a potential drawback of using a per-unit tax to correct a market failure?
It can increase production costs and prices, potentially harming consumers.
What is a potential benefit of using a subsidy to encourage production?
It can lower production costs and prices, potentially benefiting consumers and increasing output.
What are the challenges of implementing a socially optimal price for a natural monopoly?
It often requires government subsidies, which can be difficult to sustain politically and financially.
What are the advantages of implementing a fair-return price for a natural monopoly?
It allows the monopoly to remain profitable without requiring government subsidies, making it a more sustainable regulatory option.
How does a price ceiling impact a monopoly's profits?
It can reduce or eliminate the monopoly's profits, depending on the level at which the ceiling is set.
How does a per-unit tax affect the quantity supplied in a competitive market?
It decreases the quantity supplied.
How does a per-unit subsidy affect the quantity supplied in a competitive market?
It increases the quantity supplied.
What are the potential effects of regulating a monopoly's quality of service?
It can lead to higher costs for the monopoly, potentially resulting in higher prices or reduced output.
What is the impact of a price floor on a monopolistic market?
A price floor above the market price will lead to a surplus, while a price floor below the market price will have no effect.
How can the government encourage competition in a monopolized market?
By breaking up the monopoly into smaller firms, reducing barriers to entry, or encouraging innovation.