Transcript Government

Chapter 6
Government
These slides supplement the
textbook, but should not
replace reading the textbook
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What is market failure?
A condition that arises
when unrestrained
operation of markets
yields socially
undesirable results
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How does the
government establish
and enforce
rules of the game?
It safeguards private
property and
enforces contracts
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What is the role of
government?
The government ...
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OVERVIEW OF CHAPTER
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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 a
private good?
A good that has
substitutes and does
not have to be shared
with others.
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What is a
public 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 a
merit 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 a
social 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 a
flat rate tax system?
Most everyone pays
the same rate
regardless of income.
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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 Orwell’s 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 the
Progressive 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 difference
part 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
between
Medicare 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 an
unfunded liability?
Government commits
itself to spending money
on programs but does
not provide adequate
funding.
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What is a
Flat Tax?
A proportional tax is a
tax whereby everyone
pays the same rate
regardless of income.
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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.
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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.
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What is
marginal 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 a
Alternative 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 a
regressive 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 a
natural 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 a
monetary policy?
Regulation of the
money supply in order
to influence aggregate
economic activity
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END
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