Purpose of Assignment
In Week 2, students will employ the supply and demand model to develop consumer surplus and producer surplus as a measure of welfare and market efficiency. Students learn about welfare economics–the study of how the allocation of resources affects economic well-being–and will discover that under most circumstances, the equilibrium price and quantity is also the one that maximizes welfare. Students will review different sources of externalities and a variety of potential cures and will see that while markets are usually a good way to organize economic activity, governments can sometimes improve market outcomes. Students will see how the U.S. government raises and spends money and the difficulty of making a tax system both efficient and equitable.
Using the textbook, Principles of Microeconomics, as your only source (do not quote the textbook they will not count towards your answers, put everything in your own words) answer each of the following questions making sure to number each answer:
- Explain why equilibrium of supply and demand is desirable.
- Explain the efficiency of markets is determined using consumer and producer surplus.
- Explain the impact of taxation on consumer and producer surplus.
- Explain how international trade affects consumer and producer surplus.
- Explain how externalities may prevent market equilibrium. Provide a personal example.
- Explain the various governments policies used to remedy the inefficiencies in markets caused by externalities.
- Explain the difference between the efficiency of a tax system and the equity of a tax system as it refers to the costs imposed on taxpayers.
- Explain the difference between the ability to pay principle and the benefits received principle of taxation.
Cite the textbook as your only source. Failure to properly cite and reference the presentation is considered plagiarism, even if you use your own words (paraphrase). Remember, you should not quote the textbook or any other source. Quotations will not count towards your answers. See the CWE page of the Library on how to prevent plagiarism.
The correct in-text citation for the textbook is (Mankiw, 2015) and the reference (make sure it is a hanging indent) is:
Mankiw, N.Gregory. (2015). Principles of Microeconomics, 7th Edition, Stamford, CT. Cengage Learning.