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Chapter 6 Government

These slides supplement the textbook, but should not replace reading the textbook

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What is market failure?

A condition that arises when unrestrained operation of markets yields socially undesirable results

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How does the government establish

and enforcerules of the game?

It safeguards private property and enforces contracts

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What is the role of government?

The government ...

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Weights and measures. Strong national defense. Public goods. Protects us against social costs. Encourages merit goods. Helps poor and disadvantaged people. Taxes Establishes & enforces rules of the game Promotes competition Regulates natural monopolies Promotes a more equal distribution of income Strives for full employment and price stability

OVERVIEW OF CHAPTER

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What is aprivate good?

A good that has substitutes and does not have to be shared with others.

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What is apublic good?

A good that is available for all to consume, regardless of who pays and who does not

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What are some examples of

public goods? public education national defense roads

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What is amerit good?

Merit goods satisfy a want or a need like public education, safe food, helmets, and reliable brakes.

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How does the government promote

merit goods?Subsidies and regulations.

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What are examples of first and third party laws?Wearing helmets is a first party law

Good breaks is a third party law

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What is asocial cost?

Costs of production which businesses bear no responsibility

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What are examples of social cost, financial

and otherwise?

pollution unsafe working conditions depletion of resources

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What is an externality?

A cost or a benefit that falls on third parties and is therefore ignored by the two parties to the market transaction

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What is a negative externality?

The undesirable byproduct of the industrial process.

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How does the government deal

with externalities?It employs taxes, subsidies, and regulations to discourage negative externalities and to encourage positive externalities

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What is the conflict?

States versus the federal government, science versus politics, social needs versus growth, and favoritism (rent seeking).

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What is the problem with lengthy and detailed laws?

Complications and enforceability – tie versus beautiful tie analogy.

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What is the purpose of our present federal income tax system?

Politics!

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What is the point of George Orwell’s book

Animal Farm?

Centralized power leads to favoritism whereby “all animals are equal, but some animals are more equal than others.”

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What is theProgressive Movement?

Advocates wealth distribution to end conflict between the rich and the poor, limit big business, and segregate races.

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Would progressives be Austrians or

Keynesians?

Keynesians

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Why is Social Security a Ponzi Scheme?

Participants receive returns on their contributions from the latest contributors.

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How does this differ from private insurance?

Typically insurance companies pay claims from the return on principle, not from the principle itself.

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Why are unemployment

benefits a good idea economically as well

as socially?

Unemployment benefits supports spending during hard times.

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What is Medicare?

Provides health insurance to people 65 years and older and some disabled people.

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What is the differencepart A and part B?

Part A is hospital insurance and Part B is medical insurance.

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What is Medicaid?

Provides medical care for the poor.

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What is difference between

Medicare and Medicaid?

Medicare is insurance and Medicaid is an equity loan.

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What is ObamaCare?Requires citizens to have qualifying health coverage and expands Medicaid. People without coverage will pay a tax.

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What is anunfunded liability?

Government commits itself to spending money on programs but does not provide adequate funding.

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What is aFlat Tax?

A proportional tax is a tax whereby everyone pays the same rate regardless of income.

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What is aValue Added Tax?

A VAT tax is a tax on the purchase price of a good representing the value added along the supply chain.

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What is aProgressive Income Tax?A graduated income tax is a tax whereby tax payers pay in accordance to their tax bracket after exemptions and deductions.

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What ismarginal tax rate?

The percentage of each additional dollar of income that goes to taxes

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How does our federal income

tax work?• Exemptions• Deductions• Standard deduction• http://www.usdebtclock.org/

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What is aAlternative Minimum

Tax?

An AMT tax is a parallel tax system aimed at wealthy individuals limited deductions.

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What is tax incidence?The distribution of tax burden among tax payers

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What is the ability to pay principle of

taxation?Those with a greater ability to pay should pay more tax

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What is the benefits received principle of

taxation?Those who receive more benefits from government programs funded by a tax should pay more tax

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What is aregressive tax?

The tax as a percentage of income decreases as income increases

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What is a monopoly?The sole producer of a product for which there are no good substitutes

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How does the government promote

competition?Antitrust laws try to promote competition by prohibiting collusion and other anticompetitive practices

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What is anatural monopoly?

One firm that can serve the entire market at a lower per-unit cost than can two or more firms

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Can a natural monopoly take advantage of its

exclusive market?No, it is regulated by the government

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How does the government promote

full employment, price stability, & growth?

By using monetary and fiscal policies

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What is a fiscal policy?The use of government to influence aggregate economic activity through taxing and spending

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What is amonetary policy?

Regulation of the money supply in order to influence aggregate economic activity

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END