ECO-2000 Study Guide - Comprehensive Midterm Guide: Tax Rate, Laffer Curve, Progressive Tax

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ECO 2000
MIDTERM EXAM
STUDY GUIDE
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Econ 3 NOTES 4/1/2014 8:04:00 PM
April 26- review at 5pm 102 bellamy
April 27 1 pm in 102 bellamy
28 office hours 2-2:30
Thursday: May 1 7:30am in HWC 3100 FINAL
#1 Government Promotes Economic progress by protecting the Rights of
individual and supplying goods that cannot be provided through markets
Four sources of market failure:
o Lack of competition
o Lack of information???
o Externalities-
Gov. should tax negative externalities and subsidies positive
externalities
Too little of positive externalities
Cleaning up on earth day- your getting the
benefit of cleaning up and the people are
happy too
Getting a flu shot- ou do’t at to get it ut
people benefit by not having to get sick from
you
Too much of negative externalities
Bloig our ig soke ito soeoe’s fae
Pollution- saves company money, but pollutes
world we live in
Mom watching me box, she only feels the hurt
not the fun of it
o Public goods have two key characteristics:
1. Non rival in consumption: making a good available to
one person does not reduce its availability to others
fire work show for you and everyone else: you seeing
it does’t iterfere ith e seeig it
Non excludable: its really costly/ impossible to exclude non
paying costumers from receiving the good
If ou do’t hip i to see the fire ork sho, seretl
you want to see it though, no one will stop you from
looking
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You a ath sho ee though ou did’t
pay for it
Free rider: a person who receives benefits of good without
paying for it
This causes a good to be under supplied
The Gov. has to protect me ee though I did’t pa
taxes
#2 Allocation through voting is fundamentally different the market allocation
We spend more carefully when its about us and ourselves
Not effiiet he spedig soeoe else’s oe oe soeoe else
o Gov.
There is no assurance that a policy favored by a majority will promote
economic progress
o If voters do not pay in proportion to the benefits received, then
the majority could pass unproductive projects
However when votes pay in proportion to the benefits they receive,
then productive projects will be passed and unproductive will not.
User Charges: requires people who use a service more to pay a larger
share of the cost
o People who use more water pay a higher water bill then those
who do not
o Paying more for the benefits they received
Ma eooist eliee that Go. progras should pass if…
o People pay in proportion to benefit
o Super majority
#3 The Cost of Gov. are not just taxes
The opportunity cost of private sector output that could have been
produced with the resources that are now employed producing the
goods supplied by the Gov.
The cost of resources expended in the collection of taxes and the
enforcement of Gov. mandates
o We pay 1.20 for every dollar made
The cost of price distortion resulting in taxes and borrowings
(deadweight)
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