Chapter 1 Flashcards
What is Public Finance?
The study of the role of the government in the economy
What four questions does Public Finance attempt to answer?
1) When should the government intervene in the economy?
2) How might the government intervene?
3) What is the effect of those interventions on economic outcomes?
4) Why do governments choose to intervene in the way that they do?
What is a Market Failure?
Problem that causes the market economy to deliver an outcome that does not maximize efficiency.
Know the Measles story
ok
Redistribution
The shifting of resources from some groups in society to others
Price mechanism
Used by the government to address price failure. There are two methods through taxes or through subsidies
Price Mechanism through taxes
raise the price for private sales or purchases of goods that are overproduced
Price Mechanisms through subsidies
which lower the price for private sales or purchases of goods that are underproduced.
Three other ways government can intervene
1) Restrict or Mandate Private Sale or Purchase
2) Public Provision
3) Public Financing of Private Provision
How does “restrict or mandate private sales or purchases work?”
The government can directly restrict private sale or purchase of goods that are overproduced, or mandate private purchase of goods that are underproduced and force individuals to buy that good.
How does “Public Provision” work?
The government can provide the good directly, in order to potentially attain the level of consumption that maximizes social welfare.
How does “Public Financing of Private Provision” work?
Governments may want to influence the level of consumption but may not want to directly involve themselves in the provision of a good.
What are the direct effects of alternative interventions?
The effects of government interventions that would be predicted if individuals did not change their behavior in response to the interventions
What are the indirect effects of alternative interventions?
The effects of government interventions that arise only because individuals change their behavior in response to the interventions.
political economy
The theory of how the political process produces decisions that affect individuals and the economy.
