Public finance & taxes

review graphs and annual budget cycle

market failure

market failure

a problem that causes the market economy to deliver an outcome that does not maximize efficiency

redistribution

the shifting of resources from some groups in society to other

price mechanism

changing the price of a good to encourage or discourage use

public provision

the government provides the good directly

public financing of private provision

the government pays and companies produce

political economy

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

centralization

the extent to ehich spending is concentrated at higher (federal) levels or lower (state and local) levels

budget surplus

when revenues exceed spendings

budget deficit

when revenues fall short of spendings

debt

measures the accumulation of past deficits over time

public goods

goods for which the investment of any one individual benefits everyone in a larger group

social insurance programs

government provision of insurance against adverse events to address failures in the private insurance market

individual income tax

a tax lieved on the income

corporate tax revenues

the funds raised by taxing the incomes of businesses

payroll tax

the taxes on worker earnings that fund social insurance programes

theoretical tools

the set of tools designed to understand the mechanics behind economic decision making

empirical tools

the set of tools designed to analyze data and answer questions raised by theoretical analysis

utility function

a mathematical function representing an individual’s set of preferences, helps determine choice

constrained utility maximization

the process of maximizing the well-being (utility) of an individual, subject to their resources (budget constraint)

models

mathematical or graphical represtentations of reality

indifference curve

a graphical representation of all bundles of goods that make an individual equally well off

marginal utility

the additional increment to unitlity obtained by consuming an additional unit of good

diminishing marginal utility

the consumption of each additional unit of good makes the individual less happy than the consumption of the previous one

marginal rate of substitution

the rate at which a consumer is willing to trade one good for another

budget constraint

a mathematical representation of all the combination of goods an individual can afford to buy if they spend their entire income

opportunity cost

the cost of any purchase is the next best alternative use of that money, or the forgone oportunity

substituation effect

holdinh utiliyu constant, a relative rise in the price of good will always cause an individual to choose less of that good

income effect

a rise in the price of a good will typically cause an individal to choose less of that good because their income can purchase less than before

normal goods

goods for which demand increases as income rises

inferior goods

goods for which demand decreases as income rises

market

the arena in which demanders and suppliers interact

market equilibrium

the combination of price and quantity that satisfies both demand and supply

welfare economics

the study of the determinants of well-being, or welfare in society

demand curve

a curve showing the quantity of a good demanded by individuals at each price

elasticity of demand

the percantage change in the quantity demanded of a good caused by each 1% change in the price of that good

supply curve

a curve showing the quantity of a good that firms are willing to produce at each price

marginal productivity

the impact of a unit change in any input, holding other inputs constant, on the firm’s output

marginal cost

the incremantal cost to a firm of producing one more unit of a good

entitlement spending

mandatory funds for programs for which funding levels are autmatically set by the nmber of eligible recipients

discretionry spending

optional spending set by appropriation levels each year at Congress’s discretion

balanced budget rquirement

a law forcing a given government to balance its budget each year (spending=revenue)

ex post bbr

a law forcing a given government to balance its budget by the end of each fiscal year

ex ante bbr

a law forcing either the governor to submit a balanced budget or the legistrature to pass a balanced budget at the start of each fiscal year, or both

real prices

prices stated in some constant year’s dollars

nominal prices

prices stated in today’s dollars

consumer price index

an index that captures the change over time in the cost of purchasing a “typical” bundle of goods

automatic stabilizers

automatic reductions in revenues and increases in outlays when the economy shrinks relative to its potential

cyclically adjusted budget deficit

a measure of the government’s fiscal position if the economy were operating at full potential GDP

cash accounting

a method of measuring the government’s fiscal position as the difference between current spending and current revenues

capital accounting

a method of measuring the government’s fiscal postion that accounts for changes in the value of the government’s net asset holdings

static scoring

a method used by budget modelers that assumes that government policy changes only the distribution of total resources, not the amount of total resources

dynamic scoring

a method used by budget modelers that attempts to model the effect of government policy on both the distribution of total resources and the amount of total resources

implicit obligation

financial obligations that the government has in the future that are not recognized in the annual budgetary process

present discounted value

the value of each period’s dollar amount in today’s terms

short-rn stabilization issues

the role of the government in combating the peaks and troughs of the business cycle

automatic stabilization

policis that automatically alter taxes or spending in response to economic fluctuations in order to offset changes in household consumption levles

discretionary stablilization

policy actions taken by the government in response to particular instances of an underperforming or overperforming economi

integrational equity

the treatment of future generations relative to current generation