Chapter 1: Introduction to Public Economics

Question 1

This is concerned with understanding the economic rationale for government
involvement in the market and how public sector decisions affect overall economic performance and equity.

Answer 1

The field of public economics

Question 2

Public economics developed out of the original _______ of Mill
and Ricardo, through the public finance tradition of tax analysis into public economics and has now returned
to its roots with the development of the new political economy.

Answer 2

political economy

Question 3

studies the government and how its policies affect the
economy. I

Answer 3

public economics

Question 4

It considers how the choices of the government are made and how they can improve or hinder
economic efficiency.

Answer 4

public economics

Question 5

Public economics builds on the theory of _______and is ultimately used as a tool to improve social
welfare.

Answer 5

welfare economics

Question 6

This provides a framework for thinking about whether or not the government should
participate in economic markets and if so to what extent it should do so.

Answer 6

Public economics

Question 7

Public economics involves the study of government policy through the lens of ____ and ____

Answer 7

economic efficiency and equity.

Question 8

The two fundamental principles guide government interventions in markets, influencing tax policies, public
spending, and regulations.

Answer 8

Economic Efficiency and Equity

Question 9

focuses on maximizing economic output with available
resources

Answer 9

efficiency

Question 10

concerns the fair distribution of wealth and opportunities.

Answer 10

equity

Question 11

The purpose of ________is achieving the optimal allocation of resources where no individual can be made better off without
making someone else worse off (Pareto Efficiency)

Answer 11

economic
efficiency

Question 12

seeks fairness or justice in the
distribution of economic resources and wealth.

Answer 12

economic equity

Question 13

When determining economic policy, governments are faced with two conflicting aims. They are all concerned
with organizing economic activity so that the best use is made of economic resources. This is the _______
side of policy design.

Answer 13

efficiency

Question 14

To varying degrees, governments are also concerned to see that the benefits of
economic activity are distributed fairly. This is the________aspect of policy design.

Answer 14

equity

Question 15

attempts to understand both how the government makes decisions and what decisions it
should make.

Answer 15

Public economics

Question 16

This is a broad range of strategies employed by governments to
influence the economy and optimize economic performance.

Answer 16

economic policy

Question 17

These are typically implemented and
administered by the government.

Answer 17

Economic policies

Question 18

There are two major components of economic policy:

Answer 18

fiscal policy and monetary policy.

Question 19

Government policies related to
taxation and public spending to
influence economic activity.

Answer 19

Fiscal Policy

Question 20

Policies controlled by the central
bank to regulate money supply,
interest rates, and credit
conditions.

Answer 20

Monetary Policy

Question 21

Fiscal policy is controlled by

Answer 21

Government (Ministry of
Finance, Treasury, or
Congress/Parliament).

Question 22

Monetary Policy is controlled by

Answer 22

Central Bank (e.g., Federal
Reserve, European Central
Bank, Bank of England).

Question 23

Tools used: Taxation (income tax, corporate
tax, VAT) Government spending
(infrastructure, social welfare,
public services)

Answer 23

Fiscal Policy

Question 24

Tools used: Interest rates (increasing or
decreasing borrowing costs) Open market operations
(buying/selling government
bonds)

Answer 24

Monetary Policy

Question 25

Primary Objective of fiscal policy

Answer 25

Stimulate economic growth during recessions. Reduce inflation or slow an overheated economy. Reduce income inequality through redistribution.

Question 26

Primary Objective of Moentary Policy

Answer 26

Control inflation and stabilize prices. Influence credit availability and economic activity. Maintain financial stability.

Question 27

T or F in terms of speed of implementation fiscal policy is much faster than monetary policy

Answer 27

False

Question 28

Can lead to increased public debt if government spending exceeds revenue.

Answer 28

Fiscal Policy

Question 29

Can affect investment and exchange rate.

Answer 29

Monetary Policy

Question 30

A system that combines elements of both market economies (where private individuals and businesses make economic decisions) and command economies (where the government has significant control over economic activities).

Answer 30

mixed economy

Question 31

where private individuals and businesses make economic decisions

Answer 31

market economies

Question 32

where the government has significant control over economic activities

Answer 32

command economies

Question 33

This balance allows the economy to benefit from the efficiency and innovation of the private sector while ensuring stability and equity through government intervention.

Answer 33

mixed economy

Question 34

characterizes a mixed economy

Answer 34

1. Coexistence of Private and Public Sectors 2. Government Regulation and Intervention. 3. Public Services and Welfare Programs 4. Market Freedom with Social Welfare Considerations. 5. Flexibility and Adaptability. 6. Foreign Trade and Investment. 7. Promotion of Economic Growth. T

Question 35

encouraged the government to actively participate in trade and industry.

Answer 35

mercantilism

Question 36

Adam Smith pushed for the limited role of the government, arguing that competition and profit motive of individuals would eventually lead to serving the public interest, as if led by an

Answer 36

invisible hand.

Question 37

John Stuart Mill and Nassau Senior formulated the principle known as

Answer 37

laissez faire

Question 38

Economic Roles of the Government

Answer 38

1. Allocative role. 2. Distributive Role. 3. Stabilization role. 4. Regulatory role.

Question 39

This involves the government's role in deciding how resources should be allocated within the economy. This includes decisions on public spending, such as funding for healthcare, education, and infrastructure projects. Government investments in public goods like roads, schools, and national parks are examples of allocative decisions. These investments aim to ensure that essential services are available to all citizens.

Answer 39

Allocative role.

Question 40

This role focuses on redistributing income or wealth within society. This is typically achieved through taxation policies where higher-income individuals or corporations pay more taxes compared to lower-income groups. Progressive taxation systems where higher earners pay a larger percentage of their income compared to lower earners is a common distributive role example.

Answer 40

Distributive Role.

Question 41

The goal is to maintain economic stability by controlling inflation and unemployment rates. Governments use monetary policies (e.g., adjusting interest rates) and fiscal policies (e.g., increasing government spending) to achieve this goal. Central banks lowering interest rates during economic downturns to stimulate borrowing and spending is an example of stabilization policy.

Answer 41

Stabilization role.

Question 42

This role ensures fair competition and consumer protection. Governments establish laws that protect intellectual property rights, ensure product safety standards are met, prevent monopolies from forming by enforcing antitrust laws, and regulate environmental impacts. Examples include consumer protection agencies monitoring product quality or antitrust commissions blocking mergers that could lead to monopolies.

Answer 42

Regulatory role.

Question 43

Government Functions in the Economy

Answer 43

1. Provide public goods. 2. Maintain competition. 3. Correct externalities. 4. Stabilize the economy. 5. Redistribute income.

Question 44

Fundamental Economic Questions:

Answer 44

1. What is to be produced? 2. How is it to be produced? 3. For whom is it to be produced? 4. How are these decisions made?

Question 45

This answers how much of our resources should be devoted to the production of public goods, such as defense and highways, or how much of our resources should be utilized for the production of private goods.

Answer 45

What is to be produced?

Question 46

This involves decisions such as whether to produce privately or publicly, to use more capital and less labor or vice versa, or to employ energy-efficient technologies. Government policy affects how firms produce the goods they produce: environmental protection legislation restricts pollution by firms; pay- roll taxes that firms must pay on the workers they employ may make labor more expensive and thus discourage firms from using production techniques that require much labor.

Answer 46

How is it to be produced?

Question 47

Government decisions about taxation or welfare programs affect how much income different individuals have to spend. Similarly, the government must decide what public goods to produce. Some groups will benefit from the production of one public good, others from another.

Answer 47

For whom is it to be produced?

Question 48

In the public sector, choices are made collectively. Collective choices are the choices that a society must make together, for instance, choices concerning its legal structure, the size of its military establishment, its expenditures on other public goods, and so on.

Answer 48

How are these decisions made? I

Question 49

Analyzing the Public Sector four general stages of analysis to address the fundamental economic questions.

Answer 49

1. Knowing what activities the public sector engages in and how they are organized 2. Understanding and anticipating the full consequences of these government activities 3. Evaluating alternative policies 4. Interpreting the political process

Question 50

These are simplified representations of economic processes that help economists analyze government policies and predict their outcomes. In the context of public economics, these models are commonly used:

Answer 50

Economic models

Question 51

These models use mathematical equations and logical reasoning to describe economic behavior and government policy outcomes. ▪ One example is the General Equilibrium Model that analyzes how government policies affect markets and resource allocation.

Answer 51

Theoretical Model

Question 52

These models rely on real-world data to test economic theories and measure policy impact. ▪ Regression Analysis is used to study the effect of taxation on economic growth

Answer 52

Empirical Model

Question 53

These models incorporate insights from psychology and behavioral economics to study how individuals and businesses respond to government policies. ▪ Prospect Theory explains why people may not react rationally to tax incentives or social programs.

Answer 53

Behavioral Model

Question 54

Used to analyze strategic interactions between different economic agents, such as governments, businesses, and consumers. ▪ Public Goods Game model explains how individuals contribute (or free ride) to government provided services.

Answer 54

Game Theory Model

Question 55

These are complex models that simulate the entire economy to analyze policy changes. ▪ CGE models are used to assess the effects of trade policies or tax reforms on GDP and employment.

Answer 55

Computable General Equilibrium (CGE) Model

Question 56

This attempts to describe how the economy and economic policies work without resorting to value judgments about which results are best.

Answer 56

Positive economics.

Question 57

It looks at the scope of government activities and the consequences of the various government policies, to put simply, it is concerned with “what is”.

Answer 57

Positive economics.

Question 58

This involves the use of value judgments or policy recommendations to assess the performance of the economy and economic policies.

Answer 58

Normative economics.

Question 59

refer to the outcomes of government policies that were not anticipated or planned by policymakers.

Answer 59

Unintended consequences