Chapter 6 Government These slides supplement the textbook, but should not replace reading the textbook
What is market failure? A condition that arises when unrestrained operation of markets yields socially undesirable results
How does the government establish and enforce rules of the game? It safeguards private property and enforces contracts
What is the role of government? The government ...
OVERVIEW OF CHAPTER Weights and measures. Strong national defense. Public goods. Protects us against social costs. Encourages merit goods. Helps poor and disadvantaged people. Taxes Establishes & enforces rules of the game Promotes competition Regulates natural monopolies Promotes a more equal distribution of income Strives for full employment and price stability
What is a private good? A good that has substitutes and does not have to be shared with others.
What is a public good? A good that is available for all to consume, regardless of who pays and who does not
What are some examples of public goods? public education national defense roads
What is a merit good? Merit goods satisfy a want or a need like public education, safe food, helmets, and reliable brakes.
How does the government promote merit goods? Subsidies and regulations.
What are examples of first and third party laws? Wearing helmets is a first party law Good breaks is a third party law
What is a social cost? Costs of production which businesses bear no responsibility
What are examples of social cost, financial and otherwise? pollution unsafe working conditions depletion of resources
What is an externality? A cost or a benefit that falls on third parties and is therefore ignored by the two parties to the market transaction
What is a negative externality? The undesirable byproduct of the industrial process.
How does the government deal with externalities? It employs taxes, subsidies, and regulations to discourage negative externalities and to encourage positive externalities
What is the conflict? States versus the federal government, science versus politics, social needs versus growth, and favoritism (rent seeking).
What is the problem with lengthy and detailed laws? Complications and enforceability – tie versus beautiful tie analogy.
What is the purpose of our present federal income tax system? Politics!
What is the point of George Orwell’s book Animal Farm? Centralized power leads to favoritism whereby “all animals are equal, but some animals are more equal than others.”
What is the Progressive Movement? Advocates wealth distribution to end conflict between the rich and the poor, limit big business.
Would progressives be Austrians or Keynesians?
Why is Social Security a Ponzi Scheme? Participants receive returns on their contributions from the latest contributors.
How does this differ from private insurance? Typically insurance companies pay claims from the return on principle, not from the principle itself.
Why are unemployment benefits a good idea economically as well as socially? Unemployment benefits supports spending during hard times.
What is Medicare? Provides health insurance to people 65 years and older and some disabled people.
What is the difference part A and part B? Part A is hospital insurance and Part B is medical insurance.
What is Medicaid? Provides medical care for the poor.
What is difference between Medicare and Medicaid? Medicare is insurance and Medicaid is an equity loan.
What is ObamaCare? Requires citizens to have qualifying health coverage and expands Medicaid. People without coverage will pay a tax.
What is an unfunded liability? Government commits itself to spending money on programs but does not provide adequate funding.
What is a Flat Tax? A proportional tax is a tax whereby everyone pays the same rate regardless of income.
What is a Value Added Tax? A VAT tax is a tax on the purchase price of a good representing the value added along the supply chain.
What is a Progressive Income Tax? A graduated income tax is a tax whereby tax payers pay in accordance to their tax bracket after exemptions and deductions.
What is marginal tax rate? The percentage of each additional dollar of income that goes to taxes
How does our federal income tax work? Exemptions Deductions Standard deduction http://www.usdebtclock.org/
What is a Alternative Minimum Tax? An AMT tax is a parallel tax system aimed at wealthy individuals limited deductions.
What is tax incidence? The distribution of tax burden among tax payers
What is the ability to pay principle of taxation? Those with a greater ability to pay should pay more tax
What is the benefits received principle of taxation? Those who receive more benefits from government programs funded by a tax should pay more tax
What is a regressive tax? The tax as a percentage of income decreases as income increases
What is a monopoly? The sole producer of a product for which there are no good substitutes
How does the government promote competition? Antitrust laws try to promote competition by prohibiting collusion and other anticompetitive practices
What is a natural monopoly? One firm that can serve the entire market at a lower per-unit cost than can two or more firms
Can a natural monopoly take advantage of its exclusive market? No, it is regulated by the government
How does the government promote full employment, price stability, & growth? By using monetary and fiscal policies
What is a fiscal policy? The use of government to influence aggregate economic activity through taxing and spending
What is a monetary policy? Regulation of the money supply in order to influence aggregate economic activity
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