ECON 546 Public Sector Economics I Flashcards

Flashcards on Public Sector Economics

Public Economics

The study of the role of government in the economy, analyzing government taxation and spending activities.

Practical Relevance of Public Economics

Improving economic welfare through government policies such as taxes, subsidies, social insurance, public goods, and regulations.

Pareto Optimality

An allocation is Pareto Optimal if there is no alternative allocation that can make someone better off without making anyone worse off.

Market Failure

Situations in which the allocation of resources does not achieve the best possible outcome for society, justifying government intervention.

Redistribution

Shifting resources from some groups of society to others, addressing income distribution considered unfair by the society.

Political Economy

The theory of how the political process produces decisions that affect individuals and the economy.

Allocation Function

The government's role in correcting market failures by allocating resources efficiently.

Distribution Function

The government's role in ensuring desired or equitable distribution in the economy.

Stabilization Function

The government's role in employing policies to attain price stability and full employment.

Public Revenue

Government income obtained from taxes and non-tax sources such as fees and penalties.

Public Expenditure

Government spending on various activities and its impact on economic growth and income distribution.

Public Debt

Government borrowing to finance budget deficits and its various perspectives.

Financial Administration

Mechanisms that help government efficiently mobilize revenue, make expenditures, and issue bonds.

Economic Stabilization

Policies and actions of government needed to establish stability and economic growth in the economy.

Pareto Improvement

A reallocation of resources that makes one person better off without making anyone else worse off.

Contract Curve

The locus of all Pareto efficient points, representing an allocation where indifference curves of two consumers are barely touching.

Input (Production) Efficiency

The economic concept where an allocation of inputs is production efficient if the only way to increase the output of one commodity is to decrease the output of another commodity.

Exchange (Consumption) Efficiency

The economic concept where an allocation of commodities is consumption efficient if the only way to make one person better off is to make another person worse off.

Product-Mix (Substitution) Efficiency

The economic concept of efficienty that is attainted when the marginal rate of technical substitution (MRTS) between inputs equalizes the marginal rate of commodity substitution (MRCS) between commodities among the two individuals.

Walras’s Law

The economic concept that budget constraints imply that the values of excess demand (or excess market supply) must sum to zero regardless of whether the prices are general equilibrium prices.

Economic Surplus

Represents the net gains to society from all trades that are made in a particular market, and it consists of two components: consumer and producer surpluses.

Consumer surplus

The benefit that consumers derive from consuming a good, above and beyond the price they paid for the good - It is the area below demand curve and above market price.

producer surplus

The benefit producers derive from selling a good, above and beyond the cost of producing that good - It is the area above supply curve and below market price.

total social surplus

Also called social efficiency, is the total surplus received by consumers and producers in a market; that is, the sum of consumer surplus and producer surplus. It is the area above the supply curve and below demand curve.

First Fundamental Theorem of Welfare Economics

A Pareto efficient allocation of resources emerges, the competitive equilibrium, where supply equals demand, maximizes social efficiency.

Second Fundamental Theorem of Welfare Economics

Society can attain any Pareto efficient allocation of resources by making a suitable assignment of initial endowments and then letting people freely trade with each other. In other words, society can attain any efficient outcome by a suitable redistribution of resources and free trade.

General Theory of Second Best

If there is introduced into a general equilibrium system a constraint which prevents the attainment of one of the Paretian conditions, the other Paretian conditions, although still attainable, are, in general, no longer desirable.

Public Goods

Non-excludable and non-rivalry in consumption, making it different to collect revenue from consumers to cover the cost of producing the public good.

Externalities

The effects of actions or activities of one economic agent on others that are not transmitted through market forces, leading to inefficient market outcomes.

Market Imperfections

Conditions where firms, such as monopolies, are price-setters, leading to inefficient allocation of resources.

Incomplete/Missing Markets

Absence of markets for certain goods or services, leading to inefficient allocation of resources.

Risk and Uncertainty

Situations where few resources are channeled into sectors with high risk and uncertainty, leading to market failure. Government uses incentives and subsidies to fix this.

Income distribution

An unequal distribution of income and wealth may result in an unsatisfactory allocation of resources. The free market channels insufficient amounts of essential goods to lower income groups who do not have the ability to pay for the goods.

Information Asymmetry

Situations where one party to a transaction knows more than the other, leading to problems like adverse selection and moral hazard.

Tax distortion

Market distortions are often a byproduct of government policies that aim to protect and raise the general well-being of all market participants

Increasing Returns to Scale

Production situations with large fixed costs where the average cost of production decreases as the scale of production increases, giving the one or few firms a great deal of market power

Government Failure

A situation where government intervention does not lead to Pareto efficient allocation of resources.

Corruption

Government officials sale public properties including government land without due process for personal or group gain (kickbacks).

Allocation Function

The government should intervene to perform the function of allocating resources in order to correct the market failure.

Distribution Function

The government needs to intervene to bring income distribution to be in line with that which is considered fair and just.

Stabilization Function

The budgetary policy can be used to maintain high employment, stable price level and acceptable rate of economic growth and effects on trade and balance of payment.

Regulatory function

The government puts in place laws of contract and makes sure that they are enforced. This ensures that market trades and private exchanges take place smoothly.

Income re-distribution

Occurs when the government redistributes income to achieve a more equitable distribution of resources.

Firm surplus

The benefit that firms derive from selling a good, above and beyond the cost of producing that good.

Total social surplus

The sum of consumer and firm surplus.

Contract curve

The allocation where indifference curves of two consumers are barely touching.

Edgeworth box

The curve of Pareto efficient points in the commodity space.

Pure public goods

Goods that are non-excludable and non-rivalrous in consumption.

Goods with externalities

Goods that generate spillover benefits or costs to third parties.

Rival goods

Goods for which consumption by one person reduces the amount available for others.

Non-excludable goods

Goods for which it is difficult or impossible to prevent consumption by those who do not pay.

Externality

A type of market failure in which the price of a market trade does not fully capture all of the costs and benefits of that trade.

Asymmetric information

A situation in which one party to a transaction has more information than the other party.

Moral hazard

The problem that arises when one party in a transaction takes on more risk than the other party.

Adverse selection

the tendency for those with dangerous habits or high-risk lifestyles to get life insurance

Price controls

Occurs when the government intervenes in markets to set prices above or below the equilibrium level.

Import quotas

Occurs when the government places a quota on the quantity of a good that can be imported.

Tariffs

Arises when the government imposes a tariff on imported goods.

Fiscal policy

The government's use of spending and taxation to influence the economy.

Monetary policy

The central bank's use of interest rates and the money supply to influence the economy.

Free market economy

The concept of an economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's individual citizens and businesses.

Externalities in Consumption

Market exchanges that impact bystanders

External costs

Change in social welfare from an externality.

Command and Control Regulation

Policy that makes it illegal to undertake certain activities

Corrective Subsidies

Offer firms a credit for each unit of pollution they reduce below a certain level

Legalized and Regulated Markets

A previously uncontrolled market is made legal, but some regulations are imposed

Corrective Taxes

A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

Government failure

Government failure arises when a government intervention causes a more inefficient allocation of resources than would occur without the intervention

Occurs when government actions hinder rather than help efficient market outcomes