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Question 1

Which two ideological views concerning the relationship between the individual and the state confronts the Reigning Prince in this argument?

Answer 1

Organic and Mechanistic view. Two Major opinions/approaches on how the G should function in the economic sphere, based on ideological view concerning the relationship between the individual and the state.

Question 2

Two general reasons for market failure?

Answer 2

Market power: firms with market power can raise the price above marginal costs. monopoly, duopoly

Non-existence of markets: asymmetric information: when one party engaged in an economic transaction has better information about the good or service traded than the other party

Question 3

What is a Pigouvian tax?

Answer 3

a tax imposed (tas ut) on each unit of an externality-generator´s output in an amount equal to the marginal damage at the efficient level of output

Question 4

Under which assumptions will a Pareto efficient allocation of resources emerge in a production economy?

Answer 4

1. All producers and consumers are perfect competitors, no one has any market power
2. A market exists for each and every commodity.

Question 5

State Arrow´s Impossibility Theorem

Answer 5

Arrows conclusion of his analysis is that in general it is impossible to find a rule that satisfies all six criteria. A democratic society cannot be expected to make consistent decisions

Question 6

What is Horizontel equity?

Answer 6

People in equal positons should be treated equally.
Problem: measuring equal positions, wages? whealth? Income? It measures the outcome of their decision and not position.
Solution: measure utility!

Question 7

State Haig-Simons definiton of income

Answer 7

“Income is the money value of the net increase in an individual’s power to consume during a period”

Question 8

Items included in H-S income.

Answer 8

Wages, salaries, rents, royalties, business profits, interest, employer pension, insurance purchases, capital gain, transfer payments

Question 9

What is the flypaper effect?

Answer 9

The Flypaper effect is described as when a community is receiving a dollar in a funding by the government, it results in greater public spending than a dollar increases in commodity income.

Question 10

Three philosofies under mechanistic view

Answer 10

Libertarianism: G should punish crimes and enforce voluntary agreements but no redistribute income, as long as the income distribution is achieved fairly, even if this distribution is unequal. Focus on the process, the process might lead to a good outcome!

Utiltariansism: G should choose policies that maximize society´s utility.

Liberalism: G should choose policies deemed to be just by an impartial observer behind a “veil of ignorance”.