Ch 4 - The Role of Government

Question 1

optimal mix of output

Answer 1

the most desirable combination of output attainable with existing resources, technology, and social values

Question 2

market mechanism

Answer 2

the use of market prices and sales to signal desired outputs (or resource allocations)

Question 3

market failure

Answer 3

an imperfection in the market mechanism that prevents optimal outcomes - establishes a basis for government intervention

Question 4

4 sources of market failure

Answer 4

public goods, market power, externalities, equity

Question 5

private good

Answer 5

a good or service whose consumption by one person excludes consumption by others

Question 6

public good

Answer 6

a good or service whose consumption by one person does not exclude consumption by others

Question 7

free-rider dilemma

Answer 7

everyone waits for someone else to pay for a good or service

Question 8

free ride

Answer 8

an individual who reaps direct benefits from someone else’s purchase (consumption) of a public good

Question 9

externalities

Answer 9

costs (or benefits) of a market activity borne by a third party; the difference between the social and private costs (benefits) of a market activity

Question 10

social demand

Answer 10

when ever externalities are present/ market prices aren’t a valid measure of a good’s value to society; market will overproduce those that generate external costs and underproduce goods that yield external benefits

Question 11

product yields external benefits

Answer 11

the social demand is greater than the market demand

Question 12

monopoly

Answer 12

a firm that produces the entire market supply of a particular good or service

Question 13

market power

Answer 13

the ability to alter the market price of a good or a service

Question 14

antitrust

Answer 14

government intervention to alter market structure or prevent abuse of market power

Question 15

natural monopoly

Answer 15

an industry in which cone firm can achieve economies of scale over the entire range of market supply

Question 16

transfer payments

Answer 16

payments to individuals for which no current goods or services are exchanged, like social security, welfare, and unemployment benefits

Question 17

merit good

Answer 17

a good or service society deems everyone is entitled to some minimal quantity of

Question 18

unemployment

Answer 18

the inability of labor-force participants to find jobs

Question 19

inflation

Answer 19

an increase in the average level of prices of goods and services

Question 20

goal of macro intervention

Answer 20

foster economic growth - to get us on the PPC (full employment), maintain a stable price level (price stability), and increase our capacity to produce (growth)

Question 21

micro failures of the marketplace

Answer 21

we are at the wrong point on the PPC or inequitably distributing the output produced

Question 22

most of the growth of federal spending

Answer 22

increased income transfers, not purchases of goods and services

Question 23

cost of government spending

Answer 23

measured by the private-sector output sacrificed when the government employs scarce factors of production

Question 24

progressive tax

Answer 24

a tax system in which tax rates rise and incomes rise

Question 25

proportional tax

Answer 25

a tax that levies the same rate on every dollar of income

Question 26

regressive tax

Answer 26

a tax system in which tax rates fall as incomes rise

Question 27

government failure

Answer 27

government intervention that fails to improve economic outcomes

Question 28

efficiency & opportunity costs

Answer 28

the issue of government waste encompasses 2 distinct ??

Question 29

public choice

Answer 29

theory of public-sector behavior emphasizing rational self-interest of decision makers and voters