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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.
How does a per-unit tax affect a firm's supply curve?
It shifts the supply curve upward (or to the left) because it increases the marginal cost of production.
How does a lump-sum tax affect a firm's decision to shut down in the short run?
It does not affect the shutdown decision because it doesn't change marginal cost. The firm will continue to produce as long as price is greater than average variable cost.
Why might a government choose to regulate a monopoly?
To reduce deadweight loss and increase social welfare by encouraging the monopoly to produce closer to the socially optimal level.
What happens if a regulated monopoly is forced to produce at the socially optimal point?
The monopoly may incur economic losses and require a subsidy to remain in operation.
If a city imposes a license fee on all taxi companies, is this a per-unit or lump-sum tax?
This is a lump-sum tax because it's a fixed fee regardless of how many rides the taxi company provides.
How does a per-unit subsidy affect the marginal cost curve?
A per-unit subsidy decreases marginal cost, shifting the MC curve downward.
How does a lump-sum subsidy affect the average total cost curve?
A lump-sum subsidy decreases average total cost, shifting the ATC curve downward.
Why is the fair-return price considered a compromise?
It allows the monopoly to break even without requiring subsidies, but it doesn't eliminate all deadweight loss.
How does government regulation impact a monopoly's output and price?
Regulation can lead to increased output and lower prices compared to an unregulated monopoly, moving the market closer to allocative efficiency.
What are the potential unintended consequences of regulating a monopoly at the socially optimal point?
The need for ongoing subsidies can create a burden on taxpayers and may lead to political challenges in maintaining the subsidy.
In a monopoly graph, where is the profit-maximizing quantity located?
Where marginal revenue (MR) equals marginal cost (MC).
In a monopoly graph, where is the socially optimal quantity located?
Where price (P) equals marginal cost (MC).
How does a per-unit tax affect the MC and ATC curves on a graph?
Both the MC and ATC curves shift upward.
How does a lump-sum tax affect the MC and ATC curves on a graph?
The ATC curve shifts upward, but the MC curve remains unchanged.
On a monopoly graph, how is deadweight loss represented?
The area between the demand curve and the marginal cost curve, from the monopoly's output to the socially optimal output.
On a cost curve graph, how is a per-unit subsidy shown?
A downward shift of the MC and ATC curves.
On a cost curve graph, how is a lump-sum subsidy shown?
A downward shift of the ATC curve only.
In a monopoly graph with a fair-return price ceiling, where is the new quantity produced?
At the intersection of the demand curve and the average total cost curve.
What does the area between the demand curve and MC curve represent?
Total surplus (consumer surplus + producer surplus).
How does a price ceiling affect consumer and producer surplus in a monopoly graph?
A price ceiling can increase consumer surplus and decrease producer surplus, but it depends on the specific level of the price ceiling.