Microeconomics Unit 5 — Government in the Economy

Key Concepts and Questions:

* What roles should the government play in a free market economy?

* In what situations should the government intervene in an otherwise competitive market?

* How do markets fail?

* The government can use its ability to tax, subsidize, regulate, and provide to correct market failures.

* What makes taxes fair?

* How do the government's tax and transfer policies influence the distribution of income and economic efficiency?

Terms and Topics:

Ø Private sector

Ø Public sector

Ø Property rights

Ø Roles of government in economy

1. Provide a social and legal environment

2. Maintaining competition

3. Income redistribution

4. Stabilizing the economy

5. Reallocation of resources

Ø Public goods

Ø Quasi-public goods

Ø Private goods

Ø Rival

Ø Non-rival

Ø Private property

Ø Exclusive

Ø Non-exclusive

Ø Divisible

Ø Indivisible

Ø Market failures

Ø Externalities on graphs

Ø Positive externalities

Ø Negative externalities

Ø Corrective policies (for externalities)

Ø Under/over-allocation of resources

Ø Subsidize

Ø Socially optimum output

Ø Tradable permits

Ø Pollution and economics

Ø Effluent tax

Ø Coase theorem

Ø Cost-benefit analysis

Ø MB=MC

Ø Limitations of cost-benefit analysis

Ø Taxes and resource allocation

Ø Progressive

Ø Regressive

Ø Proportional

Ø Effective tax rate

Ø Tax rate

Ø Tax base

Ø Marginal tax rate

Ø Are taxes fair?

Ø Benefits received

Ø Ability to pay

Ø How do taxes affect the market?

Ø Government expenditures

Ø Government revenue

Ø Government purchases

Ø Excise tax

Ø Transfer payments

Ø Personal income tax

Ø Sin tax

Ø Tariff

Ø Bonds

Ø Payroll taxes

Ø Elasticity of demand and tax revenues

Ø Public / Federal Debt

Ø Budget Deficit