Week 3 - Public Choice

Question 0

Public choice theory

Answer 0

Collective decision making by govt actors Assumes that political actors maximize their self-interest rather than collective being

Question 1

Price supports

Answer 1

Govt determines a fair price Well above market clearing More production Hurts consumers Lead to direct cash payments

Question 2

Role of govt in a free society

Answer 2

Responding to externalities Providing a legal system Promoting competition Providing public goods Ensuring macroeconomic stability

Question 3

Market failure

Answer 3

When price system fails to allocate resources effectively Govt intervention

Question 4

Externality

Answer 4

Benefit or cost that spills over to third parties not directly involved in the transaction Misallocation of resources

Question 5

Negative externality (Picture)

Answer 5

Marginal social cost exceeds marginal price Pollution Cost difference bw A and E1 Producers invest too many resources

Question 6

Positive externality (Picture)

Answer 6

Inoculation Leads to too few resources allocated

Question 7

Govt correction of negative externalities

Answer 7

Special taxes Regulation Cap-and-trade - gain info about cost function

Question 8

Govt correction of positive externalities

Answer 8

Govt financing and production Subsidies Regulation

Question 9

Public goods

Answer 9

Nonrival and nonexcludeable Free riders

Question 10

Medicare

Answer 10

Americans over 65 Subsidy Led to more doctors, private suppliers, and tech Underestimated program costs

Question 11

Static tax analysis

Answer 11

Changes in tax rate have no effect on tax rate (luxury tax)

Question 12

Dynamic tax analysis (Picture)

Answer 12

Increase in tax rate is likely to decrease tax base