Chapter 1 Flashcards
1
Q
First Welfare Theorem
and the underlying assumptions
A
Under certain assumptions, competitive equilibrium is Pareto efficient
Assumptions:
- No market power (agents are price taker)
- Complete Markets (no transaction cost &symmetric information)
- No externalities
2
Q
Competitive Equilibrium
A
- Individuals maximize utility
- Firms maximize profits
- Equilibrium prices clear markets
3
Q
Pareto Efficiency
A
A state where on individual cannot be made better off without making anyone WORSE off by reallocating resources
4
Q
Defintion of Public Finance
A
- Normative and positive analysis of public expenditures and revenues
- But restriction on expenditures and revenues are sometimes artifical
Broad definiton:
- Economic analysis of goverments
5
Q
Musgraves three brances of GOVERNMENT
A
-
ALLOCATION: correctin market failures
* dealing with externalities, public goods, market power, information asysmmetries -
DISTRIBUTION: correcting efficient but perceived unjust distribution
* Redistributive taxation, equal opportunities -
STABILIZATION: avoiding econmoic fluctuations
* Installing built-in stabilzers, discretionary stimuli
6
Q
The CLASSICAL public finance view
A
- PF econmists as advisers of benevolent goverments
- PF as NORMATIVE ECONOMICS
7
Q
How to measure the size of governments
A
- Public Expenditre Quota:
= Total Gov. Expenditure / GDP
- Public Revenues Quota:
= Total revenues/GDP
etc.
8
Q
The Benevolent view of the growing Gov. sector
A
WAGNER’s LAW: (or the law of growing state expenditur)
- assumes that the growth of state expenditures and government quotas is not merely proportional, but disporportional to the GNP
- Econmic development requires more and more goverment services
9
Q
Public Choice View:
A
- “Leviathan” governments grow at the expense of taxpayers
- Leviathan = Allmacht des Staates!
10
Q
Baumol’s cost dieses View
A
- The public sector cannot substitute capital for labor (e.g. nurses)
- The Wage increase in the private sector feed through into cost increase in the public sector
- Maintaining a constant level of public sector output must therefore result in public sector expenditure increasing
