Glossary 623 GGlloossssaarryy Access pricing A charges for access to a service. Comparative advantage Exists when the opportunity cost Accrual accounting Expenses and income are recorded of production of a good (in terms of other goods when they occur, not when they are paid. forgone) is lower in one country than in another. The Ad valorem tax A tax on the value of sales. concept applies generally to all economic agents. Additive utilitarian social welfare function Social welfare Compensated demand The demand for goods as a function expressed as the sum of individuals’ utilities. of price, while holding utility constant. Adverse selection A problem in insurance markets that Compensated labour supply The supply of labour as a occurs because those taking up insurance contracts are function of wages when the income effect of wage likely to be worse risks than those who do not take up changes is removed. insurance. Compensating variation The amount of money that Allocative efficiency Allocating resources so as to produce ensures an individual is as well off with a change as he the optimal mix of goods. or she is without it. Arrow’s Impossibility Theorem No collective decision- Computable general equilibrium model A model with making rule compiles fully with six generally accepted equations for demand and supply for all sectors of the ethical criteria for voting. economy. Asymmetric information A situation in which economic Concentration ratio A measure of the proportion of a agents do not have the same information. market taken up by the largest firms in it. Benchmarking Comparing an agency’s costs with the costs Consolidated revenue The government account into which of similar providers. all taxes are paid unless they are ear-marked for a special purpose. Benefit-cost ratio The ratio of the present value of net recurrent benefits to the present value of capital Constitution Defines the basic institutions and rules of the expenditure. state and the methods of appointment and powers of the head of state and government. Black economy Unreported commercial transactions that do not enter into gross domestic product calculations. Constant prices A common set of prices used to value economic variables at different points in time. Budget constraint The limit to expenditure. Consumer surplus The difference between the maximum Budget sector Government services that are financed out of amount that a consumer is willing to pay for a good and the annual government budget. the amount that he or she actually pays. Capital gain An increase in the value of an asset. Contestable market A market in which entry and exit are Capitalisation The process whereby future income or free. payments are incorporated into the price of an asset. Contingent valuation A survey method used to elicit Categorical income transfer A payment that depends on individual values for a non-market good, contingent on the recipient belonging to a specified category of it being available. person. Corrective tax A tax that corrects for market failure by Certainty equivalent The amount of income that an adjusting the marginal private cost of a good to individual would give up in exchange for an uncertain internalise a negative externality. prospect. Cost-benefit analysis An evaluation method that compares Coase theorem Private actions will correct for externalities. the total social costs and benefits of a proposal as far as Common property resources Non-excludable resources possible in money terms. available freely to anyone who wants to use them. Cost-effective analysis A technique for comparing the costs of alternative proposals to find the minimum cost solution which achieves the given objective. Copyright 2018 Peter Abelson, Applied Economics www.appliedeconomics.com.au 624 Glossary Cost function A function relating total cost to the level of Equivalent variation The amount of money that ensures an output. individual is at least as well off without a change as he Cross-sectional data Data for individuals, firms, regions or or she is with it. countries at a given point in time. Excess burden The loss of welfare that occurs due to the Current prices Using the prices prevailing or forecast for imposition of a tax, over and beyond the tax collected. each point in time to measure economic magnitudes at Excise tax A tax on consumption of a selected commodity. that time. Expenditure substitute A tax concession that substitutes Deadweight loss A loss for which there is no offsetting for direct government expenditure. benefit. Experimental studies Studies based on a sample of Depreciation The loss of value of a capital asset in any individuals randomly assigned to a treatment and a given period. control group. Destination taxes Income or consumption is taxed where Externality Any effect that market exchanges have on firms received or consumed at point of destination. or individuals who do not participate in those Direct democracy A public choice in which all adult exchanges. citizens are entitled to participate by voting. Factor tax A tax on a factor used in the production process, Direct tax A tax that is borne by the entity paying the tax. such as capital or labour. Discount rate The interest rate used to discount future sums Factor price equalisation theorem Given free trade and no to present sums. transport costs, prices of factors of production will be Earned income tax credit A tax credit per dollar of earned equalised across trading partners. income. Financial analysis An account of the cash flows of a project Economic incidence of taxation Indicates who actually for a specified agency. bears the tax. Fiscal illusion Occurs when an agent does not understand Economic (pure) profit The excess of a firm’s revenue the real impact of a fiscal change. over the opportunity cost of all inputs. cf: accounting Fixed cost Costs independent of the level of production. profit which is the return on equity invested. Flat-rate tax A tax where the marginal tax rate is constant Economic rent The return to any factor of production in across all levels of income. excess of its opportunity cost. For a firm, economic Free riding Occurs when someone enjoys the benefits of a rent is the same as economic profit. good that is provided by others. Effective tax rate Actual taxes paid divided by the taxable General equilibrium A model of an economy that portray s base. the operation of many markets simultaneously. Effective marginal tax rate The percentage of an extra General purpose grant A grant with no conditions dollar that an individual loses due to tax and loss of attached. grants. Generational accounting Measuring the effects of a policy Elasticity The percentage change in one variable brought on the members of each generation. about by a one per cent change in another variable. Gini coefficient Measures the degree of inequality as the Elasticity of (technical) substitution A measure of the ratio of the area between the Lorenz curve for a given responsiveness of input combinations, such as labour income distribution and the 45 degree line of equality and capital, to changes in their relative prices, holding and the total area under the line of equality. output constant. Globalisation The worldwide integration of markets. Equal marginal sacrifice rule Tax should be arranged so Goods and services tax An Australian tax that is levied on that all persons paying tax have an equal marginal the value added at each stage of production (see also sacrifice. value-added tax). Equilibrium Occurs when no economic agent has an Head count ratio The number of households below the incentive to change their behaviour. poverty line as a proportion of total households. Equity When used in welfare economics, a term that is Horizontal equity Individuals in similar positions should be synonymous with fairness. treated equally. Equivalent taxes Two or more sets of taxes with the same incidence. Copyright 2018 Peter Abelson, Applied Economics www.appliedeconomics.com.au Glossary 625 Horizontal fiscal imbalance Occurs when sub-national population or income recipients from the poorest to governments have unequal fiscal capacity to provide richest. public services. Low income tax offset An increase in the threshold at Horizontal tax competition Tax competition between two which low earners are taxed. jurisdictions to attract or retain resources. Lump sum tax A tax that is independent of an individual’s Human capital model An individual invests in education to behaviour. increase the present value of their lifetime income. Marginal Additional, extra, incremental. Imperfect competition Occurs when an individual buyer or Marginal cost The incremental cost of producing one more seller can influence the market price. unit of output. Imputed rent The monetary value of services that an owner Marginal physical product The addition to output in of an asset receives from use of the asset, for example physical units per unit increase in any factor input. from owner-occupation of a dwelling. Marginal rate of substitution The rate at which an Income (Haig-Simons definition) The value of goods that individual is willing to trade one good for another can be consumed in any period without any change in while remaining equally well off. net wealth. Marginal rate of transformation The amount by which Income effect The change in consumption due to a change output of one good can be increased if the output of in real income. another good is reduced by a small amount. Income in-kind Income in the form of goods and services Marginal revenue The additional revenue obtained with the rather than cash payments. sale of one more unit of output. Indexation The use of an index, such as the consumer price Marginal revenue product The addition to revenue from a index, to adjust nominal prices and maintain constant unit increase in factor input.