Chapter 1 Content Flashcards
What is Public Finance?
Public finance studies the government’s role in the economy.
What are the four fundamental questions that public finance seeks to answer?
- When should the government intervene in the economy?
- How should it intervene?
- What are the effects of intervention?
- Why do governments intervene as they do?
What is one reason for government intervention in the economy?
Market Failures.
What is another reason for government intervention?
Redistribution.
What are some methods of government intervention?
- Taxes and subsidies
- Regulations
- Public Provision
- Public Financing of Private Provision
What are the direct effects of government intervention?
Immediate intended outcomes.
What are the indirect effects of government intervention?
Unintended consequences.
How are government policies shaped?
By political forces, not just efficiency.
What has been the trend in government spending over time?
Government spending has grown.
What percentage of GDP does the U.S. government spend?
About 20% of GDP.
What types of programs now dominate U.S. government spending?
Social programs, e.g., Social Security, Medicare.
What has happened to revenue sources in the U.S.?
- Corporate taxes have declined
- Payroll taxes have increased.
What has led to rising government debt in the U.S.?
Persistent budget deficits.
What is the current state of U.S. debt as a percentage of GDP?
Over 100% of GDP.
How do state/local budgets compare to the federal government’s?
Typically more balanced.
What public finance issues were highlighted by Covid-19?
- Government’s role in economic shutdowns and mandates
- Structure of financial relief.
What are some key takeaways about government intervention?
- Necessary but comes with trade-offs
- Influenced by economic theories, political ideologies, and social needs.
What is the equity vs. efficiency trade-off?
Why redistribution often reduces economic efficiency.
What are externalities in public finance?
How individual decisions create societal costs.
What is the difference between public and private provision?
Government providing services directly vs. financing private provision.
What is the difference between deficit and debt?
Deficit is the yearly shortfall; debt is the accumulated total.
What did the Covid-19 response illustrate in public finance?
Economic and political rationale behind different interventions.
