fin lit goverment roles in economy

Efficiency

Efficiency

the ability to accomplish a task or goal with the least amount of wasted resources,. It is a measure of how well a system or process converts inputs into outputs. It can be calculated by dividing the output achieved by the input used.

externality

a cost or benefit that is incurred by a third party who is not directly involved in the transaction or activity that generates the cost or benefit. It is an unintended consequence of an economic activity that affects individuals or entities outside of the market exchange. Externalities can be positive (beneficial) or negative (harmful).

Examples of negative externalities/potential solutions

negative include pollution from industrial activities, noise pollution from construction sites, and traffic congestion caused by excessive car usage. Positive externalities can include education, where an educated individual benefits society as a whole through increased productivity and innovation.

Examples of positive externalities/potential solutions

Positive-when someone plants trees in their backyard, it not only makes their property look nice but also helps clean the air for everyone in the neighborhood. To encourage more of these positive actions, some solutions could be offering incentives or rewards to people who create positive externalities, or implementing policies that promote and support these actions.

Internalizing the externality

refers to the process of incorporating the costs or benefits of an externality into the decision-making of individuals or firms. This can be achieved through various mechanisms such as taxes, subsidies, regulations, The goal is to align private incentives with social costs or benefits, thereby reducing the negative impact of externalities on society.

command and control policy

comprises of rules and legislation imposed by governments, and is often backed up by the threat of coercion, fines or state penalties.

Market-based policy

 effectively provide payments from the government to individuals or firms.

Equality/equity

Equality- equal status, rights , and opportunity.

Equity- fairness and justice

welfare

government programs and initiatives aimed at providing financial and social support to individuals and families in need.

cost of taxes to society

it provides revenue for federal, and state governments to fund essential services

benifits principal

people should have to pay taxes based on benefits they receive from government

abilty-to-pay principle

a concept in taxation that suggests individuals or entities should contribute to the funding of public goods and services based on their ability to pay. This principle implies that those with higher incomes or greater wealth should bear a larger tax burden compared to those with lower incomes or less wealth. It aims to promote fairness and equity in the distribution of tax obligations.

Vertical equity

the principle of fairness in taxation or resource allocation, where individuals or groups with higher incomes or greater abilities to pay are taxed or allocated resources at a higher rate than those with lower incomes or abilities to pay.

proportional tax

a tax system where the tax rate remains constant regardless of the taxpayer's income or wealth. In other words, everyone pays the same percentage of their income in taxes. This means that individuals with higher incomes will pay more in taxes compared to those with lower incomes, but the tax rate remains the same for all.

regressive tax

tax system where the tax rate decreases as the taxable amount increases. In other words, individuals with lower incomes pay a higher percentage of their income in taxes compared to those with higher incomes. This type of tax system tends to place a heavier burden on low-income individuals and can contribute to income inequality. An example of a regressive tax is a sales tax, where everyone pays the same percentage regardless of their income level.

History of US Tax Rates

US tax rates have a complex history. Initially, they were low and based on import tariffs. The first income tax was introduced during the Civil War but repealed quickly. The modern income tax system began in 1913 with rates as high as 7%. Tax rates changed throughout the 20th century due to economic and political factors, including a significant increase during World War II. In the 1980s, President Reagan lowered tax rates, reducing the top marginal rate from 70% to 28%. Since then, tax rates have continued to change through legislation and different administrations. Consider income level and filing status when assessing tax rates. Consult historical sources or tax policy textbooks for more information.

How does the government affect efficiency in our economy?

regulation, taxation, subsidies, public goods, antitrust policies, and monetary policy.

How does the government affect equality in our economy?

implementing progressive tax systems, providing social welfare programs, promoting equal opportunity in education and employment, enforcing anti-discrimination laws, and regulating monopolies to prevent wealth concentration. These measures aim to reduce income and wealth disparities and promote a more equitable distribution of resources.

What were the causes of the 2008 “Great Recession”? (explain Glass-Steagall Act, Gramm-Leach-Bliley Act, deregulation, subprime loans, securitization, Collateralized Debt Obligations, Credit Rating Agencies, derivatives, Credit Default Swaps, etc.)

The causes of the 2008 "Great Recession" can be attributed to several factors:

1. Glass-Steagall Act: The Glass-Steagall Act, which was repealed in 1999 by the Gramm-Leach-Bliley Act, separated commercial and investment banking. Its repeal allowed banks to engage in riskier activities.

2. Gramm-Leach-Bliley Act: This act repealed the Glass-Steagall Act and allowed for the consolidation of commercial and investment banks, leading to increased risk-taking and potential conflicts of interest.

3. Deregulation: Deregulation of the financial industry, particularly in the 1990s, reduced oversight and allowed for the proliferation of complex financial instruments.

4. Subprime loans: Lax lending standards and the issuance of subprime mortgages to borrowers with poor creditworthiness contributed to the housing bubble and subsequent collapse.

5. Securitization: Financial institutions bundled mortgages into securities and sold them to investors, spreading risk throughout the financial system.

6. Collateralized Debt Obligations (CDOs): CDOs were complex financial products created by bundling various types of debt, including subprime mortgages. Their value plummeted when the housing market collapsed.

7. Credit Rating Agencies: These agencies assigned high ratings to risky mortgage-backed securities, leading investors to underestimate the associated risks.

8. Derivatives: Complex financial instruments, such as mortgage-backed securities and CDOs, were traded in the derivatives market, amplifying the impact of the housing market collapse.

9. Credit Default Swaps (CDS): CDS are insurance-like contracts that pay out in the event of a default. Their widespread use and lack of regulation contributed to the financial contagion during the crisis.

These factors, combined with other economic and systemic issues, led to the 2008 "Great Recession."

What could the government have done differently to prevent the 2008 recession?

The government could have implemented more regulation and created a punishment for people who were insuring derivatives.