Module Introduction Flashcards
What is Public Economics?
The study of the role of the government in the economy.
List areas of economic life that the government is involved in. (4 examples)
1) Regulatory Structure
2) Taxes - governments in advanced economies collect 35-50% of national income in taxes.
3) Expenditures - Taxes fund public goods and welfare state
4) Macro-Economic stabilisation through the central bank, fiscal stimulus, bailout policies
Give examples of public goods
- Infrastructure
- Public Order and Safety
- Defence
Give examples of welfare state
- Education
- Retirement Benefits
- Health Care
- Income Support
Describe the economists view of individual behaviour.
What impact does this have on our understanding of public economics?
- Purely Selfish
- Economically Rational
This limits our understanding of public economics.
Explain why replacing social institutions with markets doesn’t always work. Use examples.
Education:
- Primarily government funded.
- Student loans work in theory but in practice end up being a hige lifetime burden.
- For-profit education tends to become a scam
Retirement Benefits:
- Saving for your own retirement works in theory but in practice most are unable to unless the government or their employer helps them.
Health Care:
- Relies heavily on government or community support.
- People can’t afford to shop rationally for health care.
Economists play a useful role in understanding when markets can help and how individualistic forces can undermine institutions.
When should the government intervene in the economy?
Traditional View
1) Market Failures
- Government intervention may improve the situation when the market economy fails to deliver an outcome that is efficient.
2) Redistribution
- Pooling resources through government taxes and transfers to help reduce inequality.
What are the 4 main market failures?
1) Externalities
2) Imperfect Competition
3) Imperfect or Asymmetric Information
4) Individual Failures
- People don’t behave as fully rational individuals.
Why might governments intervene when the market outcome is efficient?
Society might not be happy if the market equilibrium generates high economic disparity across individuals.
What is an issue related to redistribution?
Redistribution through taxes and transfers might reduce incentives to work (efficiency costs).
Redistribution creates an equity-efficiency trade-off.
How might the government intervene?
1) Tax or subsidise private sale or purchase
2) Restrict or mandate private sale or purchase
3) Public Provision
4) Public Financing or Private Provision
What are direct effects of alternative interventions?
The effect of government interventions that would be predicted if individuals didn’t change their behaviour in response to the interventions.
Direct effects are relatively easy to compute.
What are indirect effects of alternative interventions?
The effects of the government interventions that arise only because individuals change their behaviour in response to the interventions.
- Unintended effects
What is Political Economy?
The theory of how the political process produces decisions that affect individuals and the economy.
Give an example of political economy.
Understanding how the level of taxes and spending is set through voting and voters preferences.
