1- Introduction Flashcards
what is the main role of the government in the economy
- regulation
- collecting taxes
- expenditures = fund public goods (infrastructure, defence), social state (health, education)
- macroeconomic stabilisation (IR, inflation, FP, bailout policies)
why does the government need to intervene
why cant social institutions be replaced by markets
- markets = not in the best interest for the whole of society - humans dont think rationally - they are cooperative
- need social cooperation to take care of young, sick and old
- best interest
what would happen if you let markets decide education
- economic theory = student loans
- really = lifetime burden-people will not get educated
what would happen if you let markets decide retirement benefits
- economic theory = save yourself - how much to save? when will you die?
- really = need institutions to help
what would happen if you let markets decide health care
- economic theory = pay yourself - cant afford - inequality
- really = need gov
are there situations where markets can help
yes
individualistic forces can undermine institutions
what are the 3 public econ questions
- when should they interevene
- what is the effect of that intervention
- why do governments intervene in that way
when should governments intervene
(2)
- market failures (externalities, imperfect competition, imperfect info)
- redistribution - there is inequality in economic resources across people
what is a market failure = inefficient distribution of goods and services in the free market - rational decisions are wrong decisions for the whole group
when the market doesnt deliver an outcome that if efficient
1. externalities
2. imperfect competition
3. imperfect/asymmetric info
4. individual failures
externalities
when the consumption/production of a good or service benefits or harms a third party
imperfect competition
monopoly - one party has too much control can create imbalanced pricing and lead to market failure
- disrupt balance of demand, supply and price
imperfect/asymmetric info
- buyer or seller lacks access to info on which prices are based = will overpay/undercharge for a good or service
individual failure
people dont behave as fully rational beings
- people will not save for retirement
why gov needed for redistribution
(even if market is efficient?)
- what do govs do to help
- market equilibrium could be generating economic disparity across people
- taxes and transfers redistribute wealth across people from rich to poor
what is the tradeoff between equity and efficiency about
the more we try to be equal be redistributing wealth the less incentive there are for the rich to be richer = dampens economic incentive
- reduces incentive to work - if youre getting taxed more
what is regressive tax
universal tax not based on income
takes a larger percentage of income from the low income earners compared to the high
what is a progressive tax
tax based on income
tax disproportionately affects people with a high income
higher income = pay proportionally more taxes
what is the benefit of progressive tax
reduces tax burden on low income earners
reducing inequality
reduces the share of income held by top earners and increases the share held by low earners (transfers)
what is the difference between direct effect and indirect effect of gov intervention
direct effect = the intended effect that was predicted if individuals dont change their behaviour in response to the intervention
indirect effect = unintended effect = individuals change their behaviour - higher tax rate = work less or find a way to evade
what is the difference between normative and positive economics
normative = how things should be - value judgement = theoretical
positive = fact = how things actually are = empirical
what has happened to gov growth over process of development
size of government relative to national income grows
more developed = higher Gov spending as share of GDP
government size stabilizes in rich countries
what has caused the government size to grow
expansion of social state, public education, retirement, healthcare, income support
how does the government regulate - what is their regulatory role
- UK national living wage = inequality
- Food standard agency = safety and labelling
- Health and Safety Executive = workplace safety
- The environment Agency = water quality, flooding, regulate industry
why are there debates over what to do with healthcare, taxes, climate change
- politics - different sides - benefits others
- decrease/increase taxes on big corporations
what are the 3 main sources of TAX revenues the government raise
- VAT
- National Insurance
- Income tax
what is the difference between direct and indirect tax and how does it affect poor people
direct = income tax and national insurance are progressive taxes = rich people pay a greater share of their income toward the tax - helps with lower income earner inequality
indirect tax = low income earner pay a higher proportion of their income on VAT - spend most of their income on consumption
which are the direct taxes on low income earners
income tax - top quintile pays more income tax = progressive
NIC
council tax - bottom quintile pays more council tax - as a % of gross household income = regressive
what is the indirect tax on low income earners
VAT = regressive - poor people spend more of their income % on consumption
