Chap 4 Flashcards
Optimal mix of output
most desirable combination of output attainable with existing resources, technology, and social values
Market Mechanism
use of market prices and sales to signl desired outputs
Market Failure
term used to refer to situations where the market generates imperfect (suboptimal) outcomes
- market failure implies that the forces of supply and demand havent led us to the bes tpoint on the production possibilities curve
What are the 4 sources of market failure
- public goods
- externalities
- market power
- inequity
Private Good
a good or service whose conumsption by one person excludes consumption by others
- think doughnut example, you alone get satisfaction form eating the doughnut, no one else does
Public good
a good or service whose consumption by one person does not exclude consumption by others
- missle shield example
- flood control damn
free ride
an individual who reaps direct benefits from soneone else’s purchase (consumption) of a good)
- if you purchase a defense mechanism and I get to be protected without paying for it
Externalities
refers to all costs or benefits of a market activity borne by a third party, someone other than the immediate producer or consumer
- such as second hand smoke
- costs the other person negatively even though they arent smoking
Social Demand
Market Demand + or - Externalities
Explain social demand
social demand curve tells us is how much society woul dbe willing and able to pay for cigarettes if the prefences of both smokers and nonsmokers were taken into account
- opinions of non smokers would bring down the demand
how are externalities positive?
- externalitie could be pollution of a power plant ruining local forests which hurts community
- externalities can be positive
- if a person gets immunizations against a disease, they benefit as well as the people they come into contact with who wont get the disease from him
how does the market fail?
- Overproducig goods that have external costs
- underproducing goods that have external benefits
- to get optimal mix we need government intervention
Market Power
ability to alter the market price of a good or service
Antitrust
government intervention to alter market structure or prevent abuse of market power
Natural Monopoly
an industry in hich one firm an achieve eonomics of scale over the entire range of market supply
- such as local telephone service, subway systems, and cable
Transfer Payments
income payments for which no goods or services are exchagned
- such as welfare
- used to bolster the incomes of those whom the market iself provides too little
merit goods
good or service society deems everyone is entitled to some minimal quantity of
what happens when people don’t get merit goods?
when the market doesnt help these people out the govt step in in the form of in-kind transfers (food stamps, housing vouchers, medicaid) rather than cash transfers ex welfare chcks and social security ebenfits
what is Macro instability
- micro failures of the marketplace imply taht were at the wrong point on the production possibilities curve or inequitably disturbing the output produced
Unemployment?
- inability of labor force participants to find jobs
inflation
situation in which the average price level of goods and services is increasing
opportunity costs:
most desired goods or services that are forgone in order to obtain something else
income tax?
individual income tax has become the largest source of govenrment revenue
progressive tax?
take a arger fraction of high incomes than of low incomes. tax system in which tax rates rise as income rises
- people with high incomes not only ay more taxes but also pay a larger fraction of their income taxes
social security tax?
second major source of federal revenue
- transfer part of their earnings to retired workers by making “contributions” to social security
- not a proportional tex but a regressive tax
proportional tax
tax that takes the same fraction of every taxpayers income
- high salary earns pay little social security tax where as minimum wage people do
Regressive tax?
tax system in which tax rates fall as incomes rise
corporate taxes
taxes received from coprorations
Excise taxes?
- taxes imposed on specific goods and services
- taxes liquor, gasoline, cigarettes, air fares, firearms, gambling
government failure and when is it desirable?
when the government intervention fails to move us closer to our economic goal
- government intervention is desirable only to the extent that it improves market outcomes
What are the two subjects government failure encompasses?
efficiency and opportunity cost
what is the question about government failure regarding efficiency
Are we getting as much service as we could form the resources we allocate to government?
what is the question about government failure regarding opportunity cost
Are we giving up too many private sector goods in order to get those services?
bond referenda?
direct requests by government unit for voter approval for specific public spending projects
Public choice
theory of public sector behavior emphasizing rational self-interest of decision makers and voters
- essentially extends analysis of marke tbehavior to political behavior
