L1: Introduction to Public Finance

Question 1

2 major reasons for government intervention

Answer 1

market failure

redistribution

Question 2

market failure

Answer 2

problem that causes the market economy to deliver an outcome that doesn’t maximise efficiency

Question 3

externality

Answer 3

example of a market failure

third-party affected by a transaction who isn’t part of it in the first place (positive/negative)

e.g. vaccination, pollution, etc.

Question 4

internality

Answer 4

individual failures - mistakes by individuals that cause their decisions to not reflect their true preferences

consumer sovereignty, paternalism

e.g. smoking, not saving for retirement

Question 5

how might the government intervene?

Answer 5

taxes/subsidies

quotas/mandates

public provision

public financing of private provision

Question 6

effects of interventions

Answer 6

direct
- effects that would be predicted if individuals didn’t change their behaviour in response to the intervention

indirect
- effects that arise only because individuals change their behaviour in response to interventions

Question 7

redistribution

Answer 7

shifting of resources from some groups in society to others

Question 8

key facts surrounding government

Answer 8

government is larger in developed countries

government has grown over time

government spending has grown slower in the US than other countries

in the US, state and local spending is 1/3 of total government spending

Question 9

budget surplus

Answer 9

government revenues (taxes) > spending

Question 10

budget deficit

Answer 10

spending > government revenues (taxes)