What was your opinion about restrictions on international trade before reading this chapter? Have you changed your mind? Strengthened your opinion? In what ways and why? What was the most interesting part of the chapter to you? Why?
Prior to reading this chapter, I thought that restrictions on international trade were a bad thing. The idea that any countries would not be able to trade with others and experience the benefits of a greater variety of goods, lower costs through economies of scale and increased competition led me to believe that any restrictions on international trade would cause both producers and consumers to be at a disadvantage. However, chapter 9 makes very clear that you need to take into consideration the changes in total surplus and what effect that has on trade. My opinion of this was strengthened by the two respective conclusions of importing and exporting that when trade is allowed, although one party (consumer, producer) is better off, no matter who is worse off, the benefits exceed the drawbacks thereby making it beneficial for society as a whole. In light of this new understanding I still think that restrictions on international trade are a bad thing, only now for a completely different reason. This is a good example of what was most interesting in not only this chapter, but economics as a field of study so far, which is a greater understanding of economic concepts that dismiss some seemingly logical perspectives.
Saturday, February 15, 2014
Chapter 8 Reflection
1. How important do you think the concept of a deadweight loss to taxation is? Why or why not?
2. Should politicians and other taxing authorities consider DWL when making their decisions?
The concept of a deadweight loss to taxation is very important. As the text explains, the welfare of both consumers and producers falls because when a tax is imposed because buyers buy less, as the good becomes more expensive and producers sell less as it becomes more expensive to produce the good. These acts combined reduce total surplus. Furthermore, it not only reduces total surplus, but does so at the expense of superseding the total revenue raised for the government. I think it is extremely important to take this into consideration when voting for excise tax increases because if you only operate from the perspective that the tax gains are beneficial in some way (federally or locally) it wouldn't be a well-rounded decision on the individual level. One may not realize the adverse effects it has on their own personal economic welfare.
Politicians should absolutely consider the deadweight tax loss when making their decisions. Although initially tax revenue increases, will begin to decrease if the tax becomes too large. I enjoyed learning why this is because without doing so logic may lead you to believe that the larger the tax, the larger the tax revenue, but as the text explains this is not the case. Since the DWL of a tax is the area of a triangle computed by the square of its size, the DWL rises exponentially is response to the size of the tax. An overzealous politician or one that is more concerned with equality than efficiency may choose to implement a tax increase that ultimately compromises the economic welfare of society as a whole.
2. Should politicians and other taxing authorities consider DWL when making their decisions?
The concept of a deadweight loss to taxation is very important. As the text explains, the welfare of both consumers and producers falls because when a tax is imposed because buyers buy less, as the good becomes more expensive and producers sell less as it becomes more expensive to produce the good. These acts combined reduce total surplus. Furthermore, it not only reduces total surplus, but does so at the expense of superseding the total revenue raised for the government. I think it is extremely important to take this into consideration when voting for excise tax increases because if you only operate from the perspective that the tax gains are beneficial in some way (federally or locally) it wouldn't be a well-rounded decision on the individual level. One may not realize the adverse effects it has on their own personal economic welfare.
Politicians should absolutely consider the deadweight tax loss when making their decisions. Although initially tax revenue increases, will begin to decrease if the tax becomes too large. I enjoyed learning why this is because without doing so logic may lead you to believe that the larger the tax, the larger the tax revenue, but as the text explains this is not the case. Since the DWL of a tax is the area of a triangle computed by the square of its size, the DWL rises exponentially is response to the size of the tax. An overzealous politician or one that is more concerned with equality than efficiency may choose to implement a tax increase that ultimately compromises the economic welfare of society as a whole.
Efficiency
Efficiency is the economic idea that output cannot be maximized beyond what it is without increasing the number of inputs. "The most bang for your buck", if you will. When taking into consideration a free market economy there are two ideas that contribute to whether or not resources are being allocated efficiently - consumer/producer surplus and market failure. Consumer surplus is a buyer's willingness to pay minus what they actually pay for a good. Similarly, producer surplus is what a seller is paid minus what it cost to produce a good. Resources are considered efficient when the sum of consumer and producer surplus is maximized. In more practical terms, producers who sell a good at the highest price possible are going to yield the smallest amount demanded by buyers thereby not being very efficient. Sellers in this situation basically have produced too much with very few people willing to buy. In contrast, producers who sell their good at the lowest possible price are going to yield the greatest amount demanded, thereby by maximizing the total amount of producer surplus and becoming most efficient. Relatedly, goods will be sold to buyers who either value the good the most and/or have the greatest willingness to pay. Both of these resource allocations lead to market efficiency.
In contrast, market failure - which can be characterized by market power and externalities - are the forces that prevent markets from existing efficiently. Market power is the idea that a small group, or perhaps just one producer is the driving force behind market prices due to not having any competition. For example, say Sony was the only manufacturer of TV's and for this reason charged as much as it costs for a car to purchase a television. This act would disrupt the otherwise natural equilibrium of supply and demand of TV's. No one is going to want to nor be able to afford a Sony television making the market for TV's inefficient. The other disruptive force of efficiency are externalities. These are influences beyond either the producer or consumers control. They are not things taken into consideration on either side when deciding how much to purchase or how much to manufacture. As a result of these unforeseen influences, it can alter the equilibrium of what is in the best interest of all people affected, again making the market inefficient.
In contrast, market failure - which can be characterized by market power and externalities - are the forces that prevent markets from existing efficiently. Market power is the idea that a small group, or perhaps just one producer is the driving force behind market prices due to not having any competition. For example, say Sony was the only manufacturer of TV's and for this reason charged as much as it costs for a car to purchase a television. This act would disrupt the otherwise natural equilibrium of supply and demand of TV's. No one is going to want to nor be able to afford a Sony television making the market for TV's inefficient. The other disruptive force of efficiency are externalities. These are influences beyond either the producer or consumers control. They are not things taken into consideration on either side when deciding how much to purchase or how much to manufacture. As a result of these unforeseen influences, it can alter the equilibrium of what is in the best interest of all people affected, again making the market inefficient.
Saturday, February 8, 2014
Module 1
1. Should the minimum wage be increased annually
at the rate of inflation? (Or alternatively, to $15.00)
(2013) 1.6% 2.0% 1.5%
1.1% 1.4% 1.8% 2.0% 1.5% 1.2% 1.0% 1.2% 1.5% 1.5%(avg.)
(2012) 2.9% 2.9% 2.7%
2.3% 1.7% 1.7% 1.4% 1.7% 2.0% 2.2% 1.8% 1.7% 2.1%(avg.)
I took a
statistical approach to answering this question and believe that the minimum
wage should be increased annually at the rate of inflation. The above percentages show inflation rates
for each month over the last two years, with the last value representing the
average, according to the Bureau of Labor Statistics. For example, take the average inflation rate
for 2013. The minimum wage for both
years is $7.25/hr. For the minimum wage
to have been increased at the rate of inflation would have equaled .11 raising
the rate to $7.36/hr. and .04 raising the rate to $7.40/hr., respectively. If we look at a greater number of historical
inflation rates as well as minimum wage rates we can statistically determine
whether increasing the minimum wage at the rate of inflation has either a
significant or negligible effect. Taking
into consideration the last ten years (2003-2013), the minimum wage has
increased three times: starting at $5.15 from ’03-’06 to (1) $5.85 in ’07, to
(2) $6.55 in ’08 then to (3)$7.25 from ’09-’13.
The overall wage increase was $2.07 ($7.25-$5.30) and the average
inflation rate was 2.78%. Although there
was a steady increase in the minimum wage, the average inflation rate over the
last ten years was neither higher nor lower than any value by a large standard
deviation. This leads me to believe that
as long as inflation rates fluctuate, which they certainly always will, it will
offset by how much the minimum wage will rise.
Opponents of this issue say raising the minimum wage will not reduce
poverty, but I believe that the greater an increase of the cost of living, the
more money people will recirculate into the marketplace, thereby increasing
demand as well as supply – leading to the favorable equilibrium price. To answer the question more specifically,
though, I think the increase of the minimum wage at the rate of inflation has a
relatively negligible effect on the government (or the state, if their price
floor differs from the government) to really be of much consequence to them
while increasing the purchasing power of the working class (as long as
inflation rates don’t get too high).
2. Should a tax be imposed on
"Cadillac" health insurance plans?
In a word, no. If in 2014 it became mandatory for all
individuals to purchase health insurance, I am inclined to think that those who
did not have it before and did choose to get it this year are those people who
opted to get low-premium, high deductible plans. You can think of this as people trying to do
what they are told, but at the same time doing the least they can to be in
compliance, since mainly so many people disagree with the mandate. If a person opts for a “Cadillac” health plan
that covers conditions that lesser plans have always denied like mental health,
travel consults (deeming them not medically necessary) they are still putting
more money into the pool to help even out the costs for everyone else, as I
think is the goal of Obamacare. I
suppose opponents would argue that like higher tax rates for the wealthy, it
would make sense to tax the policy holders or employers of more expensive
plans. Also, if a person is able to
purchase a “Cadillac” plan when they could easily get away with a less
expensive plan, but choose to do it anyway – why should they be burdened with a
tax? I believe there are many
individuals who whether they are engaged in high-risk activities, have many
family dependents or for employers with a disproportionately older work force,
according to the United Health Care website, should not be penalized with an
excise tax. I think the key to lowering
medical cost does not lie in excise taxes or public mandates, but rather to
focus on cost control of services. There
should not be such a variance of cost from one facility to another if you need
to get an MRI done or have your appendix removed. Our
text also states that when the supply curve is elastic (supplier = insurance
company) and is elastic because their supply doesn’t change much based on the
change in price of policies and the demand curve is inelastic (buyer =
policyholders) because their demand doesn’t change significantly due to changes
in price – most people want health coverage, the price received by sellers
falls only slightly while the price paid by buyers rises substantially. As a consequence the buyers take on most of
the burden.
3. Should the Federal government
impose a price ceiling on essential items such as bottled water during an
emergency such as Hurricane Sandy?
Yes. This is no more complicated than to be
explained by the concept of fairness.
According to a Sept. 13, 2013 article in the Denver Post “Colorado
floods: Price-gouging not illegal during emergencies” law enforcement said as
long as consumers agreed upon a price there was nothing illegal about
price-gouging, except when it came to prescription drugs. According to the Colorado Assistant Attorney,
as long as there is full disclosure it is not considered a scam. Who cares?
Ethically and morally it is reprehensible for suppliers to increase
their prices so as to exclude certain buyers from being able to purchase if
they can’t afford the product. As long
as the government doesn’t impose a price ceiling that is below the equilibrium
price, creating a shortage and forcing the sellers to ration their goods; a
price ceiling that is not binding would control the cost and make it illegal to
take advantage of people in such dire circumstances. Opponents take the position of it being
entrepreneurial and in theory does undermine our free-market economy, but from
the same article, a University of Denver finance professor said “"There's
no economic justification for the increase in price when the supply can come
back," he said, "It's a huge issue in the finance and business world,
of a company's social responsibility, of being a good corporate citizen.
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