Government Intervention

Question 1

What is a market failure

Answer 1

An imperfection in the market mechanism that prevents optimal outcomes

Establish a need for gov’t intervention

The forces of supply and demand have NOT led to the best point on the production possibilities curve

Question 2

Optimal mix of output

Answer 2

The most desirable combination of output attainable with existing resources, technology, and social values

Question 3

Market mechanism

Answer 3

The use of market prices and sales to signal desired outputs (or resource allocations).

Question 4

Laissez faire

Answer 4

Adam smith

“Leave it alone”

Late 1700s

Nonintervention by gov’t in the market mechanism

Question 5

4 sources of a microeconomic market failure

Answer 5

Public goods
Externalities
Market power
Inequity

Question 6

Public good

Answer 6

A good or service whose consumption by one person does not exclude consumption by others

Examples
National defense
Flood controlled dams

Question 7

Private good

Answer 7

A good or service whose consumption by one person excludes consumption by others

Examples
Donuts
Soda

Question 8

Free rider

Answer 8

An individual who reaps benefits from someone else’s purchases (consumption) of a public good

Example
Illegals

Question 9

Externalities

Answer 9

The 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

Question 10

The market will _____ goods that yield external benefits

Answer 10

Underproduce

Question 11

The market will ______ goods that generate external costs.

Answer 11

Overproduce

Question 12

Market demand expresses only the anticipated _______ benefits of consumption.

Answer 12

Private

Question 13

________ costs must be taken into account to fully account for collective wellbeing

Answer 13

External

Question 14

Externalities drive a wedge between

Answer 14

Market demand and social demand

Question 15

When external costs exist, firms will produce ____ of the good than socially desirable

Answer 15

More

Question 16

When external costs exist, a _____ firm will not allocate its resources and operate its plants in such a way to maximize social welfare.

Answer 16

Private

Question 17

Social costs

Answer 17

Are full resource costs of an economic activity, including externalities.

Question 18

Private Costs

Answer 18

The costs of an economic activity directly borne by the immediate producer or consumer (excluding externalities).

Question 19

External cost are equal to

Answer 19

External costs= Social costs- private costs

If pollution costs are an external, firms will produce too much of a polluting good.

Question 20

How does the government discourage production and consumption activities that impose external costs on society?

Answer 20

Alter market incentives

Bypass market incentives

Question 21

Market incentives can be altered via ______ charges.

Answer 21

Emission

Question 22

Emission charge

Answer 22

A fee imposed on polluters based on the quantity of pollution.

Emission fee increases private marginal cost and thus encourages lower output

Question 23

The Clear Air Act of 1970

Answer 23

Mandated fewer auto emissions and the processes to reduce those emissions

Question 24

Market incentives can be bypassed through

Answer 24

Direct regulation.

Gov’t specifies that the required outcome and the process by which it is to be achieved

Example
Clean Air Act

Question 25

What year was The Clean Air Act?

Answer 25

1970

Question 26

What is Market power?

Answer 26

The ability to alter the market price of a good or service.

Question 27

Antitrust policy

Answer 27

Government intervention to alter market structure or prevent abuse of market power

Question 28

Government intervention goal

Answer 28

Prevent or dismantle concentrations of market power

Question 29

Sherman Act 1890

Answer 29

Prohibits “conspiracies in restraint of trade” including mergers, contracts, or acquisitions that threaten to monopolize an industry

Violators are subject to fines up to $1 million

Question 30

The Clayton Act (1914)

Answer 30

Outlaws specific antitrust behavior not covered by the Sherman act

PREVENT THE DEVELOPMENT OF MONOPOLIES

Question 31

The Federal Trade Act (1914)

Answer 31

Created an agency to study industry structure and behavior so as to identify anticompetitive practices

Question 32

Antitrust legislation has been used to break up

Answer 32

Monopolies

Examples
Steel and tobacco (early 1900)
AT&T (1980s)
Recently Microsoft

Question 33

____ entails lack of fair distribution in the market

Answer 33

Inequality

Question 34

The government alters the distribution of income with?

Answer 34

Taxes

Transfers

Question 35

Income transfers and examples

Answer 35

Payments to individuals for which no current goods are exchanged

Examples
Social security (largest)
Welfare
Unemployment

Question 36

Micro Failures

Answer 36

Concern producing at the wrong point on the production possibilities curve or uneven distribution of the output produced

Question 37

The goals of macro intervention

Answer 37

To foster economic growth

To get us on the production possibilities curve (full employment)

To maintain a stable price level (price stability)

To increase our capacity to produce (grow)

Question 38

Government failure

Answer 38

Government intervention that fails to improve economic outcomes

Question 39

Example of market intervention

Answer 39

Clean Air Act of 1970