Why is a tax inefficient?
What will be an ideal response?
The imposition of a tax on a market causes a wedge to be driven between the price received by the seller and the price paid by the buyer. This causes the marginal social benefit from the last unit sold to be higher than its marginal social cost, and the market will under-produce the good or service being taxed. If more of the good or service were produced, the marginal social benefit gained would be greater than the marginal social cost incurred, and the net benefit to society would increase.
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Consider a small open economy that is in equilibrium with a current account surplus
(a) Draw a diagram showing this situation. (b) Now suppose that future income increases. Show what happens in your diagram. What happens to the world real interest rate and the equilibrium quantities of saving, investment, and the current account balance? (c) Repeat parts (a) and (b) for the case of a large open economy, showing a situation in which the home country initially has a current account surplus. Draw a diagram and describe how the rise in future income in the home country affects all four variables (the world real interest rate and the equilibrium quantities of saving, investment, and the current account balance) in both countries.
Any business wanting to attract financial capital must expect to
A. keep implicit costs as close to zero as possible. B. earn a positive economic profit. C. pay a normal rate of return. D. pay a below normal rate of return in order to make a positive rate of return itself.