Chapter 6
Government
These slides supplement the
textbook, but should not
replace reading the textbook
1
What is market failure?
A condition that arises
when unrestrained
operation of markets
yields socially
undesirable results
2
How does the
government establish
and enforce
rules of the game?
It safeguards private
property and
enforces contracts
3
What is the role of
government?
The government ...
4
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
5
What is a
private good?
A good that has
substitutes and does
not have to be shared
with others.
6
What is a
public good?
A good that is available
for all to consume,
regardless of who pays
and who does not
7
What are some
examples of
public goods?
 public education
 national defense
 roads
8
What is a
merit good?
Merit goods satisfy a
want or a need like
public education, safe
food, helmets, and
reliable brakes.
9
How does the
government promote
merit goods?
Subsidies and regulations.
10
What are examples of first
and third party laws?
Wearing helmets is a
first party law
Good breaks is a third
party law
11
What is a
social cost?
Costs of production
which businesses bear
no responsibility
12
What are examples of
social cost, financial
and otherwise?
 pollution
 unsafe working conditions
 depletion of resources
13
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
14
What is a negative
externality?
The undesirable byproduct
of the industrial process.
15
How does the
government deal
with externalities?
It employs taxes,
subsidies, and
regulations to discourage
negative externalities
and to encourage
positive externalities
16
What is the conflict?
States versus the federal
government, science
versus politics, social
needs versus growth, and
favoritism (rent seeking).
17
What is the problem
with lengthy and
detailed laws?
Complications and
enforceability – tie versus
beautiful tie analogy.
18
What is a
flat rate tax system?
Most everyone pays
the same rate
regardless of income.
19
What is the purpose of
our present federal
income tax system?
Politics!
20
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.”
21
What is the
Progressive Movement?
Advocates wealth
distribution to end conflict
between the rich and the
poor, limit big business,
and segregate races.
22
Would progressives
be Austrians or
Keynesians?
Keynesians
23
Why is Social Security
a Ponzi Scheme?
Participants receive
returns on their
contributions from the
latest contributors.
24
How does this differ
from private
insurance?
Typically insurance
companies pay claims
from the return on
principle, not from the
principle itself.
25
Why are
unemployment
benefits a good idea
economically as well
as socially?
Unemployment benefits
supports spending
during hard times.
26
What is Medicare?
Provides health
insurance to people 65
years and older and
some disabled people.
27
What is the difference
part A and part B?
Part A is hospital
insurance and Part B
is medical insurance.
28
What is Medicaid?
Provides medical
care for the poor.
29
What is difference
between
Medicare and Medicaid?
Medicare is insurance
and Medicaid is an
equity loan.
30
What is ObamaCare?
Requires citizens to have
qualifying health
coverage and expands
Medicaid. People without
coverage will pay a tax.
31
What is an
unfunded liability?
Government commits
itself to spending money
on programs but does
not provide adequate
funding.
32
What is a
Flat Tax?
A proportional tax is a
tax whereby everyone
pays the same rate
regardless of income.
33
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.
34
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.
35
What is
marginal tax rate?
The percentage of each
additional dollar of income
that goes to taxes
36
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
41
What is a
regressive tax?
The tax as a percentage
of income decreases
as income increases
42
What is a monopoly?
The sole producer of a
product for which there
are no good substitutes
43
How does the
government promote
competition?
Antitrust laws try to promote
competition by prohibiting
collusion and other
anticompetitive practices
44
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
45
Can a natural monopoly
take advantage of its
exclusive market?
No, it is regulated by
the government
46
How does the
government promote
full employment, price
stability, & growth?
By using monetary
and fiscal policies
47
What is a fiscal policy?
The use of government to
influence aggregate
economic activity through
taxing and spending
48
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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