L1: Introduction to Public Finance Flashcards
2 major reasons for government intervention
market failure
redistribution
market failure
problem that causes the market economy to deliver an outcome that doesn’t maximise efficiency
externality
example of a market failure
third-party affected by a transaction who isn’t part of it in the first place (positive/negative)
e.g. vaccination, pollution, etc.
internality
individual failures - mistakes by individuals that cause their decisions to not reflect their true preferences
consumer sovereignty, paternalism
e.g. smoking, not saving for retirement
how might the government intervene?
taxes/subsidies
quotas/mandates
public provision
public financing of private provision
effects of interventions
direct
- effects that would be predicted if individuals didn’t change their behaviour in response to the intervention
indirect
- effects that arise only because individuals change their behaviour in response to interventions
redistribution
shifting of resources from some groups in society to others
key facts surrounding government
government is larger in developed countries
government has grown over time
government spending has grown slower in the US than other countries
in the US, state and local spending is 1/3 of total government spending
budget surplus
government revenues (taxes) > spending
budget deficit
spending > government revenues (taxes)