Ch 4 - The Role of Government Flashcards
optimal mix of output
the most desirable combination of output attainable with existing resources, technology, and social values
market mechanism
the use of market prices and sales to signal desired outputs (or resource allocations)
market failure
an imperfection in the market mechanism that prevents optimal outcomes - establishes a basis for government intervention
4 sources of market failure
public goods, market power, externalities, equity
private good
a good or service whose consumption by one person excludes consumption by others
public good
a good or service whose consumption by one person does not exclude consumption by others
free-rider dilemma
everyone waits for someone else to pay for a good or service
free ride
an individual who reaps direct benefits from someone else’s purchase (consumption) of a public good
externalities
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
social demand
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
product yields external benefits
the social demand is greater than the market demand
monopoly
a firm that produces the entire market supply of a particular good or service
market power
the ability to alter the market price of a good or a service
antitrust
government intervention to alter market structure or prevent abuse of market power
natural monopoly
an industry in which cone firm can achieve economies of scale over the entire range of market supply
transfer payments
payments to individuals for which no current goods or services are exchanged, like social security, welfare, and unemployment benefits
merit good
a good or service society deems everyone is entitled to some minimal quantity of
unemployment
the inability of labor-force participants to find jobs
inflation
an increase in the average level of prices of goods and services
goal of macro intervention
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)
micro failures of the marketplace
we are at the wrong point on the PPC or inequitably distributing the output produced
most of the growth of federal spending
increased income transfers, not purchases of goods and services
cost of government spending
measured by the private-sector output sacrificed when the government employs scarce factors of production
progressive tax
a tax system in which tax rates rise and incomes rise
proportional tax
a tax that levies the same rate on every dollar of income
regressive tax
a tax system in which tax rates fall as incomes rise
government failure
government intervention that fails to improve economic outcomes
efficiency & opportunity costs
the issue of government waste encompasses 2 distinct ??
public choice
theory of public-sector behavior emphasizing rational self-interest of decision makers and voters
