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Monetary Policy
Controls the money supply.
Fiscal Policy
Uses government spending, taxation, and legislation to influence the economy.
Arguments For Government Intervention
Enforce property rights, provide a legal system, standardize weights and measures, ensure a stable money supply, enforce patents and copyrights.
Arguments Against Government Intervention
Benefits special interest groups, poor service due to lack of competition, slow legislative changes.
Examples of Government Intervention
Free public education, safety regulations, sin taxes, mandatory social security contributions.
Market Failure
When the free market fails to allocate resources efficiently, leading to government intervention.
Positive Externalities
Encouraged by government, examples include health care, education, and research & development.
Negative Externalities
Discouraged by government, examples include pollution and cigarette smoke.
Command-and-Control Policies
Regulations requiring or forbidding behaviors, such as mandatory immunizations.
Market-Based Policies
Uses taxes and subsidies to balance the economy, example: tax on sugary beverages.
Pigovian Tax
Tax to correct negative externalities, such as pollution taxes.
Tradable Pollution Permits
Companies can buy/sell pollution rights.
Private Goods
Excludable and rival, such as food.
Natural Monopolies
Excludable and non-rival, such as utilities.
Public Goods
Non-excludable and non-rival, such as national defense.
Common Resources
Non-excludable and rival, such as fisheries.
Cost-Benefit Analysis
Difficult to assign value to social benefits, life, time, and aesthetics.
Tragedy of the Commons
Overuse of common resources leading to depletion.
Price Ceiling
A maximum price that causes shortages, example: rent control.
Price Floor
A minimum price that causes surplus, example: minimum wage.
Tax Collection
Federal government collects 60%, state/local governments collect 40%.
Major Tax Types
Income tax, payroll tax, excise tax.
Proportional Tax
Everyone pays the same percentage.
Regressive Tax
Low-income earners pay a higher percentage.
Progressive Tax
High-income earners pay a higher percentage.
National Debt
Total government debt.
Budget Surplus
More taxes collected than spent.
Budget Deficit
More money spent than collected.
Subsidies
Financial aid from the government to support businesses or individuals.
