Alf questions with correct answers 2024

Alf questions with correct answers 2024 demand the quantity that consumers are willing and able to purchase at various prices reinterpret demand shows buyers max "willingness to pay" for some quantity of output WTP - P* consumer surplus consumer surplus The difference between a buyer's willingness to pay and the price actually paid supply shows the quantity producers are willing and able to sell at various prices reinterpret supply shows sellers minimum "willingness to accept" for some quantity of output P* - WTA producer surplus producer surplus the difference between actual price and the sellers minimum WTA economic surplus the sum of consumer surplus and producer surplus Economic surplus is always maximized at equilibrium deadweight loss beneficial transactions that get eliminated because of things like a price ceiling etc deadweight loss is 0 when at equilibrium true tax= price paid by buyers - price received by sellers When a tax is imposed on the buyers tax revenue is now included tax revenue is also 0 when at equilibrium also true Anti-Price Gouging Laws legal maximum price *another way of saying "imposing a price ceiling" Anti-Price Gouging Laws always lead to shortages two options when it comes to disasters 1. price gouging ~shortage of affordable products [Q<0] 2. abundant products at higher prices ~better option taxes are "shared" by both buyers and sellers, regardless of who pays the tax CS above price, below demand curve PS above supply curve, below price Q* - Qt no longer sold Burden of a Tax is felt by the more inelastic side of the market economists prefer efficient taxes ~those with the most tax revenue, but the least dwl small tax raises a small amount of revenue dwl- small medium tax medium revenue dwl- increases some large tax very large dwl -not good Laffer Curve demonstrates that tax size and tax revenue are both most efficient when at 50% Who pay taxes? people, NOT corporations export A good or service produced in the home country and sold in another country Imports goods produced abroad and sold domestically international trade based on comparative advantage has many benefits product variety, lower prices, more competition which encourages innovation and discourages monopoly sewers of comparative advantage 1. climate or natural resources 2. abundant cheap labor 3. abundant capital, human capital (depends on previous investments) 4. external economies: cost savings of locating in a particular geographic area tariff tax on imports Quota numerical limit on quantity of imports when free trade comes into play, gains is now another part of the chart Tariff Revenue (bxh)(1/2bxh) voluntary export restraint a country agrees to voluntarily limit their exports to another country *any restriction on international trade leads to a decrease in economic surplus Arguments for Protectionism We should protect American jobs counterargument- free trade creates jobs, restriction destroys jobs Arguments for Protectionism Protect American wages counterargument- free trade raises living standards Arguments for Protectionism Protect infant industries so they become dominant (tax breaks, low/no interest loans, tariffs/quotas) counterargument- never become dominant on their own, cannot decide future Arguments for Protectionism Protect military repardness (industries producing key resources) counterargument- where does the protection stop? Arguments for Protectionism Protect against trading with countries who: *have lax environmental standards *allow child labor *abuse human rights counterargument- *america is a huge hypocrite *competition among ideas speeds up the adjustment process Arguments for Protectionism Protect against dumping: *foreign producers sell abroad at a loss *sell cheaper abroad than domestically (eliminate domestic competitors and create/obtain monopoly power) counterargument- wont work- never won a dumping case @ W.T.O Arguments for Protectionism Use protectionism as a bargaining chip counterargument- leaves you with only bad options: *follow through --> decreases trade *back down --> lose credibility If arguments for protectionism are so bad, why do they persist? 1. benefits concentrated, the costs are dispersed. 2. job loses to int'l trade are very visible. gains are difficult to identify. 3. jobs "saved" in one industry lead to losses in others. losses>saved 4. supporters of protectionism want limits on trade to be compulsory not voluntary 5. temporary measures always become permanent, because they dont work Externality cost/benefit to a third party not directly involved in the transaction *non-existent in most markets external benefit *also called spillovers ex) education, vaccines, lawn care, condoms negative externality *aka spillover cost ex) smoking, pollution, car/ home alarm re purpose demand private benefits- level of well being or satisfaction enjoyed by the consumer social benefit- well being or satisfaction enjoyed by society re purpose demand equation Social benefits = private benefits + positive externalities *Usually SB=PB bc no positive externalities re purpose supply private costs- expenses incurred by the producer of a product social costs- all expenses incurred by society to produce some output re purpose supply equation social costs = private costs + negative externalities *at equilibirum, SB must be equal to SC solution to underconsumption subsidy- government agency provides financial incentive to encourage the consumption of some product solution to overproduction *move to social equilibrium where SB=SC *impose tax equal to the DWL created market failure anytime markets have SB not equal SC excludibility the good/ service cannot be consumed if the buyer does not pay for it -excludable or non excludable rivalry when one persons consumption limits the consumption of others -rival or non rival rival and excludable private goods ex) health care *market works well rival and non excludable common resource ex) wildlife problem: tragedy of the commons aka overconsume solution: private property rights & regulation non-rival and excludable quasi-public goods ex) cable tv, internet non rival and non excludable public good ex) flood controls, public parks free loaders consume without paying