Chapter 5 Flashcards
Market Failure
when the quantity of goods or services supplied is not equal to the quantity of goods or services demanded
What are the two externalities?
Positive & Negative
Positive Externality
A beneficial side effect or spillover of an economic activity that positively impacts individuals or entities not directly involved in that activity.
Negative Externality
A harmful side effect or spillover consequence of an economic activity that negatively impacts individuals or entities not directly involved in that activity.
Ex. of negative externality
pollution
Ex. of positive externality
getting a flu shot
What are the different approaches the gov can do to reduce negative externalities?
Set regulations, effluent fee (pollution tax)
What are the different approaches the gov can do to correct positive externalities?
Regulations, gov financing and production, subsidies
Third parties
Parties who are not directly involved in a given activity or transaction
5 economic functions of the government
providing a legal system, promoting competition, providing public goods, ensuring economic stability, & income redistribution
Providing a Legal System
-enforcing contracts
-defining and protecting property rights
-establishing legal rules of behavior
Promoting competition
-antitrust legislation
-monopoly power
Antitrust legislation
Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices
Monopoly
A firm that can determine the market price; in the extreme case, the only seller of a good or service
Providing public goods
These are goods that may be consumed jointly by many individuals at the same time.
Free Rider Problem
The free-rider problem arises when some individuals take advantage of the fact that others will take on the burden of paying for public goods.
Ensuring economic stability
-Smooth ups and downs in overall business activity.
-Full-Employment Act, 1946
2 political functions of the government
government-sponsored goods & government inhibited goods
Government-sponsored goods
Goods deemed socially desirable through the political process. Ex. Museums
Government inhibited goods
Goods deemed socially undesirable.
Ex. Certain psychoactive drugs
Transfer Payments
a payment made by a government or another organization to an individual, household, or entity for which no goods or services are exchanged.
What are the 3 stabilization goals?
price stability, economic growth, & full employment
