Chap 4

Question 1

Optimal mix of output

Answer 1

most desirable combination of output attainable with existing resources, technology, and social values

Question 2

Market Mechanism

Answer 2

use of market prices and sales to signl desired outputs

Question 3

Market Failure

Answer 3

term used to refer to situations where the market generates imperfect (suboptimal) outcomes
- market failure implies that the forces of supply and demand havent led us to the bes tpoint on the production possibilities curve

Question 4

What are the 4 sources of market failure

Answer 4

• public goods
• externalities
• market power
• inequity

Question 5

Private Good

Answer 5

a good or service whose conumsption by one person excludes consumption by others
- think doughnut example, you alone get satisfaction form eating the doughnut, no one else does

Question 6

Public good

Answer 6

a good or service whose consumption by one person does not exclude consumption by others

• missle shield example
• flood control damn

Question 7

free ride

Answer 7

an individual who reaps direct benefits from soneone else’s purchase (consumption) of a good)
- if you purchase a defense mechanism and I get to be protected without paying for it

Question 8

Externalities

Answer 8

refers to all costs or benefits of a market activity borne by a third party, someone other than the immediate producer or consumer

• such as second hand smoke
• costs the other person negatively even though they arent smoking

Question 9

Social Demand

Answer 9

Market Demand + or - Externalities

Question 10

Explain social demand

Answer 10

social demand curve tells us is how much society woul dbe willing and able to pay for cigarettes if the prefences of both smokers and nonsmokers were taken into account
- opinions of non smokers would bring down the demand

Question 11

how are externalities positive?

Answer 11

• externalitie could be pollution of a power plant ruining local forests which hurts community
• externalities can be positive
• if a person gets immunizations against a disease, they benefit as well as the people they come into contact with who wont get the disease from him

Question 12

how does the market fail?

Answer 12

• Overproducig goods that have external costs
• underproducing goods that have external benefits
• to get optimal mix we need government intervention

Question 13

Market Power

Answer 13

ability to alter the market price of a good or service

Question 14

Antitrust

Answer 14

government intervention to alter market structure or prevent abuse of market power

Question 15

Natural Monopoly

Answer 15

an industry in hich one firm an achieve eonomics of scale over the entire range of market supply
- such as local telephone service, subway systems, and cable

Question 16

Transfer Payments

Answer 16

income payments for which no goods or services are exchagned

• such as welfare
• used to bolster the incomes of those whom the market iself provides too little

Question 17

merit goods

Answer 17

good or service society deems everyone is entitled to some minimal quantity of

Question 18

what happens when people don’t get merit goods?

Answer 18

when the market doesnt help these people out the govt step in in the form of in-kind transfers (food stamps, housing vouchers, medicaid) rather than cash transfers ex welfare chcks and social security ebenfits

Question 19

what is Macro instability

Answer 19

• micro failures of the marketplace imply taht were at the wrong point on the production possibilities curve or inequitably disturbing the output produced

Question 20

Unemployment?

Answer 20

• inability of labor force participants to find jobs

Question 21

inflation

Answer 21

situation in which the average price level of goods and services is increasing

Question 22

opportunity costs:

Answer 22

most desired goods or services that are forgone in order to obtain something else

Question 23

income tax?

Answer 23

individual income tax has become the largest source of govenrment revenue

Question 24

progressive tax?

Answer 24

take a arger fraction of high incomes than of low incomes. tax system in which tax rates rise as income rises
- people with high incomes not only ay more taxes but also pay a larger fraction of their income taxes

Question 25

social security tax?

Answer 25

second major source of federal revenue

• transfer part of their earnings to retired workers by making “contributions” to social security
• not a proportional tex but a regressive tax

Question 26

proportional tax

Answer 26

tax that takes the same fraction of every taxpayers income

- high salary earns pay little social security tax where as minimum wage people do

Question 27

Regressive tax?

Answer 27

tax system in which tax rates fall as incomes rise

Question 28

corporate taxes

Answer 28

taxes received from coprorations

Question 29

Excise taxes?

Answer 29

• taxes imposed on specific goods and services

- taxes liquor, gasoline, cigarettes, air fares, firearms, gambling

Question 30

government failure and when is it desirable?

Answer 30

when the government intervention fails to move us closer to our economic goal
- government intervention is desirable only to the extent that it improves market outcomes

Question 31

What are the two subjects government failure encompasses?

Answer 31

efficiency and opportunity cost

Question 32

what is the question about government failure regarding efficiency

Answer 32

Are we getting as much service as we could form the resources we allocate to government?

Question 33

what is the question about government failure regarding opportunity cost

Answer 33

Are we giving up too many private sector goods in order to get those services?

Question 34

bond referenda?

Answer 34

direct requests by government unit for voter approval for specific public spending projects

Question 35

Public choice

Answer 35

theory of public sector behavior emphasizing rational self-interest of decision makers and voters
- essentially extends analysis of marke tbehavior to political behavior