Chapter 6 Government

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Chapter 6 Government
These slides supplement the textbook, but should
not replace reading the textbook
2
What is market failure?

• A condition that arises when unrestrained
  operation of markets yields socially undesirable
  results

3
How does the government establish and
enforcerules of the game?

• It safeguards private property and enforces
  contracts

4
What is the role of government?
The government ...
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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

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What is aprivate good?

• A good that has substitutes and does not have to
  be shared with others.

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What is apublic good?

• A good that is available for all to consume,
  regardless of who pays and who does not

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What are some examples of public goods?

• public education
• national defense
• roads

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What is amerit good?

• Merit goods satisfy a want or a need like public
  education, safe food, helmets, and reliable
  brakes.

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How does the government promote merit goods?

• Subsidies and regulations.

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What are examples of first and third party laws?

• Wearing helmets is a first party law
• Good breaks is a third party law

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What is asocial cost?

• Costs of production which businesses bear no
  responsibility

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What are examples of social cost, financial and
otherwise?

• pollution
• unsafe working conditions
• depletion of resources

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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

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What is a negative externality?

• The undesirable byproduct of the industrial
  process.

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How does the government deal with externalities?

• It employs taxes, subsidies, and regulations to
  discourage negative externalities and to
  encourage positive externalities

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What is the conflict?

• States versus the federal government, science
  versus politics, social needs versus growth, and
  favoritism (rent seeking).

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What is the problem with lengthy and detailed
laws?

• Complications and enforceability tie versus
  beautiful tie analogy.

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What is the purpose of our present federal income
tax system?

• Politics!

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What is the point of George Orwells book Animal
Farm?

• Centralized power leads to favoritism whereby
  all animals are equal, but some animals are more
  equal than others.

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What is theProgressive Movement?

• Advocates wealth distribution to end conflict
  between the rich and the poor, limit big
  business, and segregate races.

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Would progressives be Austrians or Keynesians?

• Keynesians

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Why is Social Security a Ponzi Scheme?

• Participants receive returns on their
  contributions from the latest contributors.

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How does this differ from private insurance?

• Typically insurance companies pay claims from the
  return on principle, not from the principle
  itself.

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Why are unemployment benefits a good idea
economically as well as socially?

• Unemployment benefits supports spending during
  hard times.

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What is Medicare?

• Provides health insurance to people 65 years and
  older and some disabled people.

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What is the differencepart A and part B?

• Part A is hospital insurance and Part B is
  medical insurance.

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What is Medicaid?

• Provides medical care for the poor.

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What is difference betweenMedicare and Medicaid?

• Medicare is insurance and Medicaid is an equity
  loan.

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What is ObamaCare?

• Requires citizens to have qualifying health
  coverage and expands Medicaid. People without
  coverage will pay a tax.

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What is anunfunded liability?

• Government commits itself to spending money on
  programs but does not provide adequate funding.

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What is aFlat Tax?

• A proportional tax is a tax whereby everyone pays
  the same rate regardless of income.

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What is aValue Added Tax?

• A VAT tax is a tax on the purchase price of a
  good representing the value added along the
  supply chain.

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What is aProgressive Income Tax?

• A graduated income tax is a tax whereby tax
  payers pay in accordance to their tax bracket
  after exemptions and deductions.

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What ismarginal tax rate?

• The percentage of each additional dollar of
  income that goes to taxes

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How does our federal income tax work?

• Exemptions
• Deductions
• Standard deduction
• http//www.usdebtclock.org/

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What is aAlternative Minimum Tax?

• An AMT tax is a parallel tax system aimed at
  wealthy individuals limited deductions.

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What is tax incidence?

• The distribution of tax burden among tax payers

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What is the ability to pay principle of taxation?

• Those with a greater ability to pay should pay
  more tax

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What is the benefits received principle of
taxation?

• Those who receive more benefits from government
  programs funded by a tax should pay more tax

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What is aregressive tax?

• The tax as a percentage of income decreases as
  income increases

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What is a monopoly?

• The sole producer of a product for which there
  are no good substitutes

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How does the government promote competition?

• Antitrust laws try to promote competition by
  prohibiting collusion and other anticompetitive
  practices

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What is anatural monopoly?

• One firm that can serve the entire market at a
  lower per-unit cost than can two or more firms

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Can a natural monopoly take advantage of its
exclusive market?

• No, it is regulated by the government

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How does the government promote full employment,
price stability, growth?

• By using monetary and fiscal policies

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What is a fiscal policy?

• The use of government to influence aggregate
  economic activity through taxing and spending

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What is amonetary policy?

• Regulation of the money supply in order to
  influence aggregate economic activity

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END