Lecture 1 - Intro Flashcards

1
Q

3 functions of gov (Musgrave)

A

1) Allocative –> economic efficiency
2) Distributional –> equity
3) Stabilisation –> macroeconomic management

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Stats on gov spending (UKx2 + OECD)

A
  • 44% of UK’s national income, from less than 15% in 1900

- varies widely in OECD, from ~33% in Korea to 60% in Slovenia

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

2 perspectives on analysing the public sector

A

1) Positive = what explains its economic behaviour?

2) Normative = what should be its role? its optimal size? Typically thought of in terms of market failure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

First Fundamental Theorem of Welfare Economics

A

A perfectly-competitive market economy leads to a Pareto optimum, provided certain conditions are met.
–> about efficiency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Second Fundamental Theorem of Welfare Economics

A

After a suitable redistribution of initial wealth, any desired Pareto-efficient allocation can be achieved by a perfectly-competitive market economy, provided that certain conditions are met.
–> about efficiency AND equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Sources of market failure include (3)

A

1) presence of monopoly power (either for buyers or sellers in a market)
2) incomplete or asymmetric info (some Pareto-improving trades do not take place)
3) absence of markets for certain types of commodity, such as public goods and externalities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Implications of the 2 characteristics of public goods

A

1) Non-excludability: can’t be provided by private sector mechanism, i.e. in exchange for payment
2) Non-rivalry: exclusion is inefficient, even if practicable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Externalities - definition

A

When the utility of an individual or the production function of a firm is directly affected by the decisions of another agent, without the former’s consent.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Coase Theorem

A

Sometimes, individuals may be able to bargain with polluters and this may correct externalities without the need for public intervention

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Why might people care about equity (3)

A

1) Moral values: a sense of fairness
2) Social cohesion: ensuring that everyone feels they have a stake in society
3) Safety net: anyone could find one day they are poor, sick, old etc. and need help

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Limitations of government (4)

A

1) Informational: doing better than the market may require unrealistic information
2) Decision making: the outcome of majority voting will not please everyone and some might have preferred the non-gov outcome
3) Implementations: voters may not be able to ensure that the gov does what they want (P-A problem from Asymm Info)
4) Financial: distortionary cost of taxes <=> collateral damage (estimated 20-30cts per $)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Baumol’s law (4pts)

A
  • > Public s. prod is labour intensive rel. to private sector
  • > wage rates must be similar in the two sectors
  • > increasing use of capital-intensive tech in private sector means higher Pty of labour and thus higher wages
  • > HENCE, maintaining constant level of public sector output requires higher (wage) costs
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Ratchet effect

A
  • > Re-election constraint limits politicians’ ability to increase spending (by taxes)
  • > Citizens consent to higher spending in wartime or other major crises (‘slacker’ constraint)
  • > Expenditure does not fall back after the crisis
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Why doesn’t expenditure fall back (ratchet effect) (4)?

A

1) Citizens become accustomed to it
2) Cutting spending is much harder than increasing it
3) Borrowing means higher debt service costs (spending)
4) Promises of a better world

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Niskanen model of bureaucracy (3 pts)

A
  • > Bureaucrats want to maximise their agency’s budget
  • > Monitoring failure (P-A problem) means they can request more funds than they really need (others can’t know their true costs and judge efficiency)
  • > Absence of competitive pressures mean they don’t go out of business
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

4 conditions for 1FT of Welfare Economics to hold

A

1) Complete set of markets w/ well-defined and costlessly-enforced property rights
2) producers and consumers maximise their benefits and minimise their costs
3) all markets are perfectly-competitive and prices known by all
4) zero transactions costs