Governments and Economics

These flashcards cover key vocabulary and concepts related to the role of government in economics, market structures, and various economic systems.

Market

A fundamental economic system element involving the voluntary interaction between buyers (demand side) and sellers (supply side) to exchange goods, services, or resources, typically determining prices through competition.

Externalities

Uncompensated spillover effects on third parties not directly involved in a transaction. They can be positive (e.g., vaccination benefits society) or negative (e.g., pollution), leading to market inefficiency as the price does not reflect the true social cost or benefit.

Monopoly

A market structure characterized by a single firm dominating the entire market for a particular product or service, giving it significant control over prices and output due to the absence of competition.

Public Goods

Goods that are both non-excludable (it is difficult or impossible to prevent individuals from using them even if they don't pay) and non-rivalrous (one person's use does not diminish another person's use). Because of these characteristics, they are often underprovided by purely private markets.

Common Goods

Resources that are rivalrous (one person's consumption reduces availability for others) but non-excludable (it is difficult to prevent access to those who haven't paid). This often leads to the 'tragedy of the commons,' where individuals deplete the shared resource due to self-interest.

Capitalism

An economic system primarily characterized by private ownership of the means of production, free enterprise, competition, profit motive, and minimal government intervention in economic decisions, relying on market forces to allocate resources.

Centrally Planned Economy

An economic system (also known as a command economy) in which the government or a central authority makes all major economic decisions regarding production, distribution, and pricing of goods and services, often in pursuit of specific social or political objectives rather than relying on market demand.

Social Market Economy

An economic model (prominent in Germany and Sweden) that combines a capitalist market structure with strong social policies, aiming for economic efficiency alongside social justice. The state actively intervenes to ensure fair competition, provide comprehensive social safety nets (e.g., healthcare, education, social security), and reduce inequality, while still upholding private property and market mechanisms.

Liberal Market Economy (LME)

An economic system (prevalent in the US and UK) characterized by a strong emphasis on free markets, private enterprise, and minimal government intervention. The state's role is primarily to set and enforce market rules and secure property rights, with less focus on comprehensive social welfare provision and more reliance on market forces and hierarchical relations within firms for coordination.

Taxation

The compulsory financial charge or other levy imposed on a taxpayer by a governmental organization to fund public expenditures, which can include public services, infrastructure, social welfare programs, and economic stabilization efforts.

Economic Nationalism

An economic policy ideology that prioritizes domestic control of the economy, labor, and capital formation, often through protectionist measures like tariffs, import quotas, subsidies for domestic industries, and restrictions on foreign investment, to reduce reliance on international trade and protect national interests.

What are the main causes of market failures?

The primary causes include externalities (unpriced side effects), monopolies (lack of competition), public goods (underprovision by markets), common goods (overuse and depletion), and information asymmetry (unequal access to crucial information).

What is a key role of the state in many economies?

The state often plays a crucial role in correcting market failures, providing essential public goods, regulating monopolies to prevent exploitation, redistributing income to reduce inequality, stabilizing the economy during cycles (e.g., recession, inflation), and setting legal and institutional frameworks for markets.

What are Private Goods?

Goods that are both excludable (it's possible to prevent people from consuming them if they don't pay) and rivalrous (one person's consumption prevents or diminishes another's). Examples include a slice of pizza or a specific pair of shoes.

What are Club Goods?

Goods that are excludable (access can be restricted) but non-rivalrous (one person's enjoyment does not diminish another's, at least up to a certain point). They are often provided by natural monopolies, like cable TV subscriptions, a private park with limited membership, or a cinema showing.

Give an example of a predominantly capitalist economy.

The United States, characterized by extensive private ownership, competitive markets, and largely limited government intervention compared to other systems.

Give an example of a historically centrally planned economy.

The former Soviet Union or present-day North Korea, where the state maintains strict control over economic production and distribution.

Give an example of a Social Market Economy.

Germany or Sweden, renowned for combining robust market competition with comprehensive social welfare provisions and significant state regulation to ensure social equity.

What is Laissez-faire Capitalism?

An extreme form of capitalism advocating for absolute minimal government intervention in economic affairs, believing that markets function most efficiently when left entirely unregulated, allowing competition and supply and demand to guide the economy.

What is Welfare Capitalism?

A capitalist system where the state takes on a significant and proactive role in mitigating market inequalities and providing a social safety net, including social security, unemployment benefits, and public healthcare, while still preserving private ownership and market mechanisms.

What is a primary reason for a state to implement a centrally planned economy?

To achieve specific social or political goals such as rapid industrialization, ensure equitable distribution of essential resources, or exert total control over production and pricing, often from a top-down authoritarian approach, rather than market forces.