Term
| Units of private goods and services are forgone by individuals so that |
|
Definition
| government can provide goods and services. |
|
|
Term
| 4 Characteristics of a mixed economy |
|
Definition
1. Government supplies many goods and services
2. Government regulates private economic activity
3. Government expenditures equal ¼ to ½ of GDP
4. Government participates in markets as a buyer of goods and services |
|
|
Term
| What are government purchases? |
|
Definition
| Government purchases divert productive resources from private use |
|
|
Term
| What are government transfer payments? |
|
Definition
| Government transfer payments redistribute purchasing power among citizens (Social Security, Medicare) |
|
|
Term
| 4 functions of government |
|
Definition
1. Provide items we cannot easily make available for ourselves or purchase from others in markets
(Law enforcement and courts)
2. Redistribute income and economic opportunity
(Income support for elderly, unemployed, poor)
3. Stabilize economic fluctuations
(Inflation)
4. Regulate production and consumption
(For improved health, elimination of excessive monopolistic control over prices)
|
|
|
Term
|
Definition
| the field of economicsthat studies government activities and the alternative means of financing government expenditures |
|
|
Term
| what is the diff btwn private and government goods and services |
|
Definition
| former is usually available for sale in markets, latter is not |
|
|
Term
|
Definition
| gov't goods and svcs are not made available to persons according to their willingness to pay and their use is not rationed by prices |
|
|
Term
|
Definition
| all goods and services are supplied by private firms for profit and all exchanges of goods and services are done in markets, prices determined by free interplay of supply and demand |
|
|
Term
| 4 characteristics of positive economics |
|
Definition
- Scientific approach to analysis that establishes cause-and-effect relationships among economic variables
- Attempts to be objective
- Formulates “If…then” hypotheses that can be checked against facts
- Useful to the normative approach in that it cannot make recommendations to achieve certain outcomes without an underlying theory of human behavior
|
|
|
Term
| 4 characteristics of normative economics |
|
Definition
- Designed to formulate recommendations as to what should be accomplished
- Not objective
- Begins with predetermined criteria and is used to prescribe policies that best achieve those criteria
- Useful to the positive approach in that it defines relevant issues
|
|
|
Term
|
Definition
- Normative criterion for evaluating effects of resource use on individual well-being
- Satisfied when resources are used in such a way as to make it impossible to increase the well-being of any one person without reducing the well-being of another
- Often referred to as the criterion of Pareto optimality
|
|
|
Term
| any given quantity of an economic good available in a given time period will povide satisfaction to those who consume it |
|
Definition
|
|
Term
| the extra benefit by making one more unit of that good available in a given time period |
|
Definition
|
|
Term
| the value of all resources necessary to make a given amount of the good available |
|
Definition
|
|
Term
| minimum sum required to compensate the owners of inputs used for making an extra unit of the good available |
|
Definition
|
|
Term
| 4 marginal conditions for efficiency |
|
Definition
1. total social benefit
2. marginal social benefit
3. total social cost
4. marginal social cost |
|
|
Term
| a perfectly competitive market has 5 conditions: |
|
Definition
1. all productive resources are privately owned.
2. all transactions take place in markets, in which competing sellers offer a standardized product to many buyers.
3. economic power is dispersed in that no single buyer or seller can influence prices.
4. all relevant information is available to buyers and sellers.
5. resources are mobile and may be freely employed in any enterprise. |
|
|
Term
| 3 inefficiencies in competitive markets |
|
Definition
1. prices don't always fully reflect marginal social benefits/costs of output
2. means other than markets needed to make social benefits of certain goods available
3. failure of markets to make available certain goods (nat'l defense, enviro protection) gives rise to demand for government production & regulation |
|
|
Term
| how would normative economists attain efficiency when monopolistic powers are causing inefficiency? |
|
Definition
| prescribe government intervention to increase output |
|
|
Term
| when does loss of efficiency due to monopolistic powers occur? |
|
Definition
| when a firm influences the price of a product by reducing output to a level at which the price it sets exceeds marginal cost of production |
|
|
Term
| what does loss of efficiency cause? |
|
Definition
| failure of markets to result in inefficient levels of output |
|
|
Term
| 5 reasons for gov't intervention in markets |
|
Definition
1. exercise of monopoly power in markets
2. effects of market transactions on third parties
3. lack of a market for a good with a marginal social benefit that exceeds its marginal social cost
4. incomplete information
5. economic stabilization |
|
|
Term
| analysts usually try to determine the effects of gov't actions on both resource allocation and _____ |
|
Definition
|
|
Term
| critics of the market system argue that many participants cannot satisfy basic needs because... |
|
Definition
| they cannot pay for goods and services |
|
|
Term
| critics of the market system argue that the poor should receive transfers financed by |
|
Definition
| taxes on the more fortunate |
|
|
Term
| taxes used to alter the distribution of income do this |
|
Definition
| distort incentives to produce, preventing achievement of efficiency |
|
|
Term
| improvements in efficiency are often opposed by |
|
Definition
| special-interest groups that would suffer losses by the improvements |
|
|
Term
| utility possibility curve |
|
Definition
| illustrates efficient combinations of well-being between two individuals |
|
|
Term
|
Definition
| costs or benefits of market transactions not reflected in prices. A third party is affected by production or consumption. Benefits or costs to the third party are not considered by buyers or sellers |
|
|
Term
|
Definition
| measure the value of the gains to gainers in dollar terms and compare these with the dollar value of losses to losers |
|
|
Term
|
Definition
| Effects of increases or decreases in the price of a good on existing customers as a result of changes in the demand or supply of a good |
|
|
Term
| positive v negative externalities |
|
Definition
| negative are costs to third parties not reflected in market price, positive are benefits |
|
|
Term
|
Definition
| Extra cost to third parties resulting from production of another unit of a good or service |
|
|
Term
|
Definition
1. part of the marginal social cost of making a good available
2. not reflected in price of good
3. producers base decisions on marginal private cost (MPC) |
|
|
Term
| Marginal External Benefit |
|
Definition
| benefit of additional output accruing to parties other than buyers and sellers of the good |
|
|
Term
| internalization of an externality |
|
Definition
| marginal private benefit or cost is adjusted so that users consider the actual marginal social benefit or cost |
|
|
Term
|
Definition
| designed to adjust MPC of a good or service in such a way as to internalize the externality; must equal MEC per unit. |
|
|
Term
| General theory of second best |
|
Definition
States that when two opposing factors contribute to efficiency losses, they can offset one another’s distortions
Economists treat each problem on an ad hoc basis to determine if there are any “second best” problems present |
|
|
Term
|
Definition
| payment made by government to either buyers or sellers so that the price paid by consumers is reduced |
|
|
Term
|
Definition
| Are goods with benefits that cannot be withheld from those who do not pay and are shared by large groups of consumers |
|
|
Term
|
Definition
| a given quantity of a public good can be enjoyed by more than one consumer without decreasing the amounts enjoyed by rival consumers |
|
|
Term
|
Definition
| too costly to exclude those who refuse to pay from enjoying the benefits |
|
|
Term
|
Definition
| nonrival in consumption for an entire population of consumers, nonexclusive |
|
|
Term
|
Definition
| provides benefits only to the person who acquires the good, not anyone else; is rival in consumption |
|
|
Term
|
Definition
| goods for which crowding or congestion reduces the benefits to existing consumers when more consumers are accomodated |
|
|
Term
| price-excludable public goods |
|
Definition
| can be individually consumed and are subject to exclusion, but their production and consumption is likely to generate externalities |
|
|
Term
|
Definition
Exist in a continuum ranging from pure private goods to pure public goods
Goods are categorized according to the degree of rivalry in consumption and the degree of excludability |
|
|
Term
| education as a public good |
|
Definition
Has characteristics of a public good in that it creates positive externalities
Price to families set at zero; funding by government tax revenues
The idea that some citizens would purchase less than the efficient amount of education for their children if it were provided in a competitive market is behind the principle of free and compulsory public education
However, has characteristics of a public good in that government cannot guarantee that all children receive an equal amount of education |
|
|
Term
|
Definition
| States that the voluntary contribution per unit of the public good of each member of the community equals his or her marginal benefit of the public good at the efficient level of output |
|
|
Term
| 3 conditions met by lindahl equilibrium |
|
Definition
1. Amount contributed per unit of public good by each person must be adjusted so that each individual desires the identical amount of the public good
2. Sum of amounts contributed by each member of the community per unit must equal the marginal social cost of producing the public good
3. All individuals must agree voluntarily, with no coercion, on the cost-sharing arrangement and the quantity of the good |
|
|
Term
|
Definition
| a person who seeks to enjoy the benefits of a public good without contributing anything to the cost of financing the amount made available |
|
|
Term
|
Definition
| one made through political interaction of many people according to established rules |
|
|
Term
|
Definition
| an agreement on the level of production of one or more public goods, given the specified rule for making the collective choice and the distribution of tax shares among individuals |
|
|
Term
|
Definition
| preannounced levies assigned to citizens; equal to a portion of the unit cost of a good proposed to be provided by government |
|
|
Term
| how does economic analysis assume people will evaluate government goods and vote? |
|
Definition
| Economic analysis assumes that people evaluate government goods in the same way as market goods and vote in favor of a proposal only if they will be made better off by its passage |
|
|
Term
| the most-preferred political outcome |
|
Definition
| the quantity of the government-supplied good corresponding to the point at which the person’s tax share is exactly equal to the marginal benefit of the good |
|
|
Term
| 4 reasons people don't vote |
|
Definition
1. The cost of time and effort to vote outweighs the perceived benefit
2. They believe that their votes do not make any difference
3. They may see little or no difference between the alternatives considered in the election
4. They have scanty information |
|
|
Term
| lack of information about public issues that results because the marginal cost of obtaining the information exceeds the apparent marginal benefits of doing so is called... |
|
Definition
|
|
Term
| 5 determinants of political equilibrium |
|
Definition
1. Public choice rule; the proportion of yes votes in relation to the number of votes required for approval of the issue
2. Average and marginal costs of the public good
3. Information available to voters on the cost and benefit associated with the issue
4. Distribution of tax shares among voters and the way in which extra taxes vary with extra output of the good provided
5. Distribution of benefits among voters |
|
|
Term
|
Definition
| rule under which a proposal is approved if it receives more than half the votes cast in an election |
|
|
Term
| when do political externalities occur? |
|
Definition
| when voters do not obtain their most-preferred outcomes, given their tax shares |
|
|
Term
|
Definition
| the voter whose most-preferred outcome is the median of the most preferred outcomes of all those votine |
|
|
Term
| political transactions costs |
|
Definition
| measures of the value of time, effort, and other resources expended to reach and enforce a collective agreement |
|
|
Term
| characteristics of pair-wise elections |
|
Definition
1. held between any two alternatives when three or more alternatives are possible
2. each loser can become a winner when paired with another alternative
3. depending on the order in which elections are held, any alternative can emerge as the winner under simple majority rule; this is called cycling
4. in pair-wise elections, no political equilibrium exists |
|
|
Term
| 3 conditions for collective rationality |
|
Definition
1. all voters must have free choices among alternatives, and public choices cannot be made by any one individual
2. a unique political equilibrium must be attained no matter what the preferences of individuals comprising the electorate
3. if all voters change their rankings of a particular alternative, the public choice that emerges must not move in the opposite direction |
|
|
Term
| 3 more conditions for collective rationality! |
|
Definition
4. public choices and political equilibrium must not be influenced by the order in which alternatives are presented to voters
5. public choices must not be affected by the elimination or addition of an alternative.
6. public choices should be transitive. |
|
|
Term
| single-peaked preferences |
|
Definition
| imply that individuals behave as if a unique optimal outcome exists for them. the further away from their optima, either in the positive or negative direction, the worse things are. |
|
|
Term
| multiple-peaked preferences |
|
Definition
| imply that people who move away from their most-preferred alternative become worse off at first but eventually become better off as the movement continues in the same direction. |
|
|
Term
| what is the risk of minority rule? |
|
Definition
| imposing decisions that do not satisfy a majority of the community |
|
|
Term
|
Definition
| political equilibrium is the median most-preferred outcome of all voters when collective choices are made under majority rule and all voters have single-peaked preferences |
|
|
Term
| unanimous consent (characteristics and concerns) |
|
Definition
- Allows only Pareto-efficient changes to be approved
- Will block those changes that involve redistribution of either property rights to ownership or wealth, or income
- Could result in high transactions costs
- May encourage strategic behavior on the part of voters
- Concern for minority rights has led to discussion of “relative unanimity,” such as a seven-eighths majority |
|
|
Term
|
Definition
a commonly use collective decision-making rule when at least three alternatives are on the ballot.
- disadvantage of simple majority rule in this case is that when more than two alternatives are on the agenda, no single one may receive a simple majority
- often allows a minority to decide
- can result in cycling |
|
|
Term
|
Definition
system where each voter is assigned a number of points they may allocate in any way they wish among the possible alternatives.
- affords opportunity for greater revelation of preferences
- may protect rights of minority voters with strong feelings on particular issues
-increases possibility of strategic behavior |
|
|
Term
|
Definition
| groups trade votes for those issues of great interest to them, when intensities of preference differ on issues |
|
|
Term
|
Definition
| happens when political interests succeed in pairing two or more issues of strong interest to divergent groups on the same ballot or the same bill. |
|
|
Term
| individuals with similar ideas on the role of government and other issues who group together |
|
Definition
|
|
Term
|
Definition
| a scheme that makes it more likely that a winning candidate receives a simple majority rather than a plurality |
|
|
Term
|
Definition
| organizations that seek to increase government expenditures that benefit their constituents |
|
|
Term
| how do special interest groups differ from political parties? why do they exist? size? |
|
Definition
1. their leaders do not run for political office
2. to promote policies favorable to workers, regions, minorities, environmental preservation and taxpayers in general.
3. small! |
|
|
Term
| these people often have monopolistic power, specialized information not available elsewhere, and can seek to convince governing authorities that their output needs to be increased |
|
Definition
|
|
Term
| what can the method of finance proposed for a community or actually used affect? |
|
Definition
1. political equilibrium
2. overall market equilibrium and efficiency with which resources are employed in private use
3. the distribution of income |
|
|
Term
| a tax that only taxes certain portions of the base, or allows exemptions and deductions from general tax base |
|
Definition
|
|
Term
|
Definition
| tax on manufacture or sale of particular good or service |
|
|
Term
| taxes on all components of the economic bases; no exclusions, exemptions, or deductions from the base |
|
Definition
|
|
Term
|
Definition
| item or economic activity on which the tax is levied |
|
|
Term
|
Definition
1. provide funds to purchase inputs necessary to produce government-supplies goods and services or to redistribute purchasing power among citizens
2. reallocate reources from private to government use in two steps. |
|
|
Term
|
Definition
| additional tax collected on additional dollar value of tax as tax base increases |
|
|
Term
|
Definition
| total dollar amount of taxes collected divided by dollar value of taxable base |
|
|
Term
| the relationship between tax collected during a given accounting period and the tax base |
|
Definition
|
|
Term
| the idea that means of financing gov't-supplied goods and services should be linked to the benefits citizens receive from gov't |
|
Definition
|
|
Term
| if benefit principle is successfully implemented, it links _______ and _______ |
|
Definition
| links cost per unit of gov't provided services with marginal benefits of those services |
|
|
Term
|
Definition
| principle that taxes should be distributed according to capacity of taxpayers to pay them (Citizens w/greater ability to earn income are taxed more heavily than those with less capacity to earn) |
|
|
Term
| this is achieved when ppl of same economic capacity pay same amount of taxes per year |
|
Definition
|
|
Term
| this is achieved when ppl of differing economic capacity pay annual tax bills that differ according to some collectively chosen notion of fairness |
|
Definition
|
|
Term
| a system of gov't finance makes trade-offs among 3 criteria - name and describe them |
|
Definition
1. equity - should coincide w/commonly held notions of fairness and ability to pay
2. efficiency - should raise revenues with minimal loss in efficiency in private sector
3. administrative ease - should be relatively easy to administer in consistent manner without excessive costs to collect, enforce, comply with taxes and tax laws |
|
|
Term
| why must gov't finance reduce private consumption and investment? |
|
Definition
| b/c its main function is to reallocate resources from private to gov't use |
|
|
Term
| noncompliance w/tax laws by failing to pay taxes due |
|
Definition
|
|
Term
|
Definition
| a change in behavior to reduce tax liability |
|
|
Term
|
Definition
| prices determined through political rather than market interaction |
|
|
Term
|
Definition
| special taxes designed to finance specific government-supplied services - similar to user charges (e.g. gas tax) |
|
|
Term
| normative approach argues that output of public enterprise must be priced how? |
|
Definition
| at its marginal cost to achieve efficiency |
|
|
Term
| what do governments do to reduce reliance on taxes? |
|
Definition
| they often sell private goods and services to raise revenues (e.g. state lotteries, retail services like liquor stores) |
|
|
Term
|
Definition
| excess of government outlays over receipts taken in taxes, fees, and charges levied by government authorities |
|
|
Term
|
Definition
| excess of government receipts over outlays |
|
|
Term
| what is an alternative to funding government expenditures, aside from taxation? |
|
Definition
|
|
Term
| has the federal budget balance as a percentage of GDP been in surplus or deficit since 1962? |
|
Definition
|
|
Term
| high-employment deficit or surplus - what is it? |
|
Definition
| a calculation that estimates the budget deficit or surplus that would prevail at a certain designated level of unemployment in the economy. (gov't expenditures rise as unemployment rates go up, tax revenues increase with increase in employment) |
|
|
Term
|
Definition
| the difference between all federal government expenditures and revenues, "on budget" or "off budget" (main off budget are ss, usps) |
|
|
Term
|
Definition
| official measure of federal deficit in the National Income and Product Accounts (doesn't include transactions that finance preexisting debts, such as outlays for deposit insurance) |
|
|
Term
|
Definition
| a measure of change in federal debt after adjustment for effects of inflation and changing interest rates on the real market value of the outstanding net debt |
|
|
Term
| how does borrowing affect voters' willingness to vote for increased spending? |
|
Definition
| it increases it, because it is an alternative to taxation |
|
|
Term
| what kind of investments are often financed via borrowing and why? |
|
Definition
| investments that will provide a stream of future developments (military technology, etc), because it postpones the burden of taxation |
|
|
Term
| how does deficit affect interest rates, traditionally? |
|
Definition
| it contributes to their rise |
|
|
Term
| how does deficit contribute to private investment? |
|
Definition
| can "choke" it, slowing rate of economic growth |
|
|
Term
|
Definition
| when an increase in government borrowing to finance deficit causes increase in private saving that keeps level of interest rates fixed |
|
|
Term
| 2 effects of higher interest rates |
|
Definition
1. higher rate of saving
2. decrease of private consumption |
|
|
Term
| balanced budget/surplus implies that market demand for credit is equal to ______ |
|
Definition
| private demand for credit |
|
|
Term
| if surplus is used to reduce taxes, who are the funds made available for? |
|
Definition
|
|
Term
| how does our savings rate now affect future rate of output? |
|
Definition
| greater saving, greater future rate of growth output. less saving, smaller future potential to grow |
|
|
Term
|
Definition
| sum of personal saving by households, business saving, and saving by the gov't |
|
|
Term
| reduced supply of savings can contribute to higher _________ and lower _________ |
|
Definition
| higher real interest rates and lower economic growth |
|
|
Term
|
Definition
| that portion of the debt of the federal government held by the general public, excluding holdings of U.S. gov't agencies, trust funds, fed reserve banks |
|
|
Term
|
Definition
| portion of a government's indebtedness owed to its citizens |
|
|
Term
|
Definition
| portion of a government's debt borrowed from abroad |
|
|
Term
| holdings of state and local debt are likely to be ________ |
|
Definition
| external, held by those not residing in that jurisdiction (undue reliance on debt finance can redistribute future income away from residents, as tax revenues used to pay creditors in other jurisdictions) |
|
|
Term
| two broad types of securities used to cover debt |
|
Definition
1. general obligation bonds (backed by taxing power of gov't issuing securities)
2. revenue bonds (backed by promise of revenue to be earned on the facility being financed by the bonds) |
|
|
Term
| debt financing - how does it affect current generation compared to tax financing? |
|
Definition
| it allows them greater private consumption over their lifetime |
|
|
Term
| how does gov't pay interest and return principal on debt? |
|
Definition
|
|
Term
| when gov't increases taxes to pay debt, who suffers? |
|
Definition
| current generation via higher taxes, future generations if interest rates rise and private investment rates decrease |
|
|
Term
| how can burden of debt be offset? |
|
Definition
| if revenue obtained from public debt is used to finance projects that yield future benefits |
|
|
