Economics Key Concepts: Growth, Policies, and Income Inequality

Economic Growth

The increase in the market value of the goods and services produced by an economy

Low inflation

Prices for goods and services are rising slowly and slightly over time

Full employment

Almost everyone who wants a job and can work can find one

Positive balance of trade

A country exports more goods than it imports

Classical model

In economics, it's the idea that markets naturally balance themselves without much government help

Laissez-faire

The government should stay out of the economy as much as possible

Gross domestic product (GDP)

The total value of all goods and services produced in a country over a specific period of time

Keynesianism

An economic theory that says the government should step in to help the economy during slow times by increasing spending or cutting taxes

New Deal

A set of government programs and policies created by President FDR in the 1930s to help the U.S. recover from the Great Depression

Works Progress Administration

A New Deal program that created millions of jobs during the Great Depression by funding public works projects like roads, schools, bridges, and parks

Fiscal policy

How the government uses spending and taxes to influence the economy

Monetary policy

How the Federal Reserve controls the money supply and interest rates to influence the economy

Regulation

Rules set by the government to control or guide how businesses and industries operate

Federal Reserve Board

The main governing body of the U.S. central bank (the Federal Reserve) that helps set monetary policy

Progressive taxation

A tax system where people who earn more money pay a higher percentage in taxes than people who earn less

Flat tax

A tax system where everyone pays the same percentage of their income in taxes, no matter how much they earn

Regressive taxation

A tax system where lower-income people pay a higher percentage of their income in taxes than higher-income people

Tax incidence

Refers to who actually bears the burden of a tax-the buyer or the seller- regardless of who the government officially charges the tax to

Price setting

The process of deciding how much to charge for a good or service

Entry restrictions

Rules or barriers that limit who can enter an industry or market

Barrier to entry

Anything that makes it difficult for new businesses to enter a market

Supply-side

Focuses on boosting production and business growth to strengthen the economy

Trickle-down economics

The idea that cutting taxes for businesses and wealthy individuals will lead to more investment, job creation, and economic growth that benefits everyone

Laffer Curve

A theory that shows the relationship between tax rates and government tax revenue. It suggests that there is an ideal tax rate that maximizes revenue- too high or too low reduces how much the government collects

Tax deductions

Expenses you can subtract from your taxable income to lower the amount of tax you owe

Tax expenditures

Government benefits given through the tax system instead of direct spending, such as credits, deductions, or exemptions

Unemployment

When people who are able and willing to work cannot find a job

Veil of ignorance

The ideal of making decisions about society without knowing your own position in it (your wealth, race, gender, or class)

Income inequality

When money is unevenly distributed among people in a society

Redistribution

When the government takes money through taxes and gives it back through benefits to reduce inequality

Cash transfer

Direct money given by the government to individuals or families

Social security

A government program that provides income to retired, disabled workers and their families

Social insurance

Government programs that people pay into and later receive benefits from

Redistributive

A policy that shifts wealth from one group to another, usually to reduce inequality

Means-tested

A program where only people below a certain income level qualify

Block grant

Federal money given to states with broad freedom on how to spend it

Categorical grant

Federal money given to states for a specific, limited purpose

Earned income tax credit

A tax credit for low- and middle-income working people, especially those with children

Minimum Wage

The lowest hourly pay that employers are legally allowed to give workers

Recession

A period when the economy is doing poorly, with less spending, rising unemployment, and slower business activity

Saving

Individuals save for future risks.

Income Inequality Problem

Market outcomes produce large income gaps.

Ultimatum Game

Shows people care about fairness, not just self-interest.

Dictator Game

Demonstrates willingness to share even without pressure.

Unemployment Insurance

Temporary income for laid-off workers.

Temporary Assistance for Needy Families (TANF)

Means-tested welfare program.

Earned Income Tax Credit (EITC)

Refundable tax credit for low-income workers.

Food Security

SNAP (food stamps).

Housing Security

Public housing and housing vouchers.

Individual Preferences on Taxes and Redistribution

Preferences depend on income level, job security, and ideology.

Economic policy

Balances efficiency, growth, and equity.

Negative externalities

Costs imposed on third parties who did not choose to incur them.

Socialize

To shift private costs or benefits onto society as a whole through government action.

Inefficient outcome

A result where total social benefits could be increased without making anyone worse off.

Deadweight loss

The loss of total economic surplus that occurs when a market is distorted by taxes, regulations, or externalities.

Pigouvian tax

A tax placed on an activity equal to the external harm it causes to correct a negative externality.

Consumption tax

A tax on spending rather than income.

Positive externalities

Benefits enjoyed by third parties who did not directly pay for the activity.

Subsidies

Government payments that lower the cost of producing or consuming a good.

Output standards

Regulatory limits on the amount of pollution or output a firm is allowed to produce.

Command and control

Regulation where the government sets specific rules and penalties that firms must follow.

Saliency trap

When policymakers focus on highly visible problems while ignoring less visible but more serious issues.

Policy window

A short period when conditions allow a policy to be adopted due to political opportunity.

Stationary sources

Fixed pollution sources such as factories or power plants.

Emissions

The release of pollutants into the environment.

Point sources

Pollution from identifiable locations.

Effluent

Liquid waste released into water systems.

Non-point source pollution

Diffuse pollution with no single identifiable source.

Cradle to grave approach

Regulation of a product through its entire life cycle from production to disposal.

Risk assessment

Scientific evaluation of the likelihood and severity of harm.

Risk management

Policy decisions made to reduce or control risks.

Monetization

Converting costs and benefits into dollar values.

Uncertainty

Lack of complete knowledge about outcomes.

Risk

The probability of harm occurring.

Climate

Long-term average weather conditions.

Climate change

Long-term shifts in climate driven largely by human activity.

Greenhouse Effect

The process by which gases trap heat in Earth's atmosphere.

Greenhouse gases

Heat-trapping gases such as CO₂, methane, and nitrous oxide.

Lowest hanging fruit

The easiest and cheapest policy solutions to implement first.

Market failure

Occurs when private markets fail to allocate resources efficiently.

Command-and-control regulation

Government regulation that mandates specific limits or standards.

Pigouvian taxes

Taxes imposed to correct the negative externalities of a market.

Subsidies for clean technology

Financial assistance to promote the development of environmentally friendly technologies.

Public opinion on environmental issues

Most people support environmental protection, but it becomes a high priority only when costs are low or problems are highly visible.

Bureaucrats' role in environmental legislation

Bureaucrats write the rules, issue permits, monitor pollution, and enforce environmental laws.

Environmental program evaluation elements

Evaluated based on effectiveness, efficiency, cost, risk, and fairness.

National Environmental Policy Act (NEPA)

Required Environmental Impact Statements (EIS) for major federal projects.

Environmental Protection Agency (EPA)

Created to consolidate environmental enforcement and is the central federal agency for air, water, chemicals, and waste.

Clean Air Act Amendments

Sets national air quality standards (NAAQS) and targets stationary and mobile sources.

Resource Conservation and Recovery Act (RCRA)

Regulates hazardous waste from cradle to grave.

Safe Drinking Water Act

Sets standards for the public drinking water system and protects against contaminants.

Toxic Substances Control Act (TSCA)

Regulated industrial chemicals and gives EPA authority to require testing and restrict dangerous substances.

Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA/Superfund)

Cleans up toxic waste sites and establishes strict, retroactive liability for polluters.

Adverse Selection

Occurs when agencies cannot easily identify which firms are truly dangerous polluters.

Moral Hazard

Firms may take greater risks because the government bears cleanup costs.

Benefits of Environmental Regulation

Significant national improvements in air quality, water quality, and drinking water safety.

Costs of Regulation

Compliance costs for firms and consumers, which can increase product prices and reduce employment in some sectors.

Balancing Benefits vs. Costs

Risk assessment involves scientific evaluation of harm, while risk management involves political decisions about acceptable risk levels.

Remaining Challenges: Climate Change

Climate change is global, long-term, politically polarized, and involves greenhouse gases and international cooperation.

Externalities

Costs or benefits of an economic activity that affect people who did not choose to incur them (third parties).