American Economy Final

What is Pareto Efficiency?

An allocation of resources where no one can be made better off without making someone else worse off.

What is the relevance of Pareto Efficiency?

It serves as a benchmark for economic efficiency.

How do markets achieve Pareto Efficiency?

In perfect competition, markets achieve Pareto efficiency.

Who uses the concept of Pareto Efficiency?

Policymakers and economists.

When is Pareto Efficiency used?

To judge market outcomes and resource allocation.

Why is Pareto Efficiency important?

To ensure resources are used optimally.

What conditions must be met for Pareto Efficiency to occur?

Markets must have perfect information, perfect competition, and no externalities.

What is an example of Pareto Efficiency?

A perfectly competitive market is Pareto efficient.

What is the definition of the government's role?

The government's role is to set rules, protect property rights, and fix market failures.

What justifies welfare, taxes, public goods, and market regulation?

The role of the state.

When does the state intervene in the market?

The state intervenes when markets fail or when public goods are under-supplied.

Which government agencies are involved in the role of the state?

Agencies like the EPA, CBO, and Federal Reserve.

When do government interventions typically occur?

During market failures, such as the 2008 financial crisis.

Why does the state intervene in the market?

To ensure efficiency, equity, and public welfare.

How does the state achieve social goals?

By using laws, regulations, and taxes.

What is an example of state intervention in reducing pollution?

EPA regulations that reduce pollution and address externalities.

What is the Efficiency-Equity Tradeoff?

The idea that improving fairness (equity) reduces economic efficiency.

What justifies welfare programs and progressive taxation?

The Efficiency-Equity Tradeoff.

How does redistribution affect economic efficiency?

Redistribution (like welfare) reduces efficiency by introducing deadweight loss.

Who debates the Efficiency-Equity Tradeoff?

Policymakers debate tradeoffs when designing tax systems.

When is the Efficiency-Equity Tradeoff used?

It is used to analyze programs like welfare and unemployment benefits.

Why is the Efficiency-Equity Tradeoff important in policy?

To balance fairness (equity) with efficiency in policy.

How do governments improve fairness according to the Efficiency-Equity Tradeoff?

Governments impose progressive taxes to improve fairness.

What is an example of the Efficiency-Equity Tradeoff?

Minimum wage laws improve fairness but reduce efficiency by increasing costs for firms.

What is Rawls' Veil of Ignorance?

A concept where decision-makers create fair rules as if they didn't know their social position.

Who developed the concept of the Veil of Ignorance?

John Rawls

What is the relevance of Rawls' Veil of Ignorance?

It justifies welfare programs and redistribution to protect the vulnerable.

How does the Veil of Ignorance work?

By imagining themselves as the 'worst-off,' decision-makers create rules that maximize fairness.

When is the Veil of Ignorance used?

It is used to support welfare policies.

Why is the Veil of Ignorance important?

To ensure fairness and redistributive justice.

How does the Veil of Ignorance encourage policy?

It encourages progressive tax policies and universal healthcare.

Give an example of a program justified by the Veil of Ignorance.

Universal healthcare and programs like food stamps (SNAP).

Rawls' Maxi-Min Principle

Definition: Maximize the welfare of the least-advantaged members of society.

Relevance: Supports policies that reduce inequality.

Example: Progressive taxation benefits low-income households.

Nozick's Libertarian Principle

Definition: Emphasizes minimal government intervention and protection of property rights.

Relevance: Opposes redistributive taxation and supports a "minimal state."

Example: Opposition to welfare and support for low taxes.

What is the definition of inequality in the U.S.?

The unequal distribution of income, wealth, and opportunity.

Example: The top 1% controls 40% of wealth in the U.S.

What is one method to measure inequality?

Gini Coefficient

What is another method to measure inequality?

Quintiles/Deciles

What does income/wealth disparity refer to?

The difference in income and wealth distribution among individuals or groups.

What is the target of measures for inequality?

Labor Income and Capital Income.

What is the formula for total income?

Income = Labor Income + Capital Income

What is labor income?

Labor income includes wages, salaries, and employment-related earnings.

What is capital income?

Capital income is income from ownership of assets like dividends, interest, capital gains, and rents.

How does the split between labor income and capital income affect society?

It determines income inequality and wealth inequality.

How is labor income earned?

Labor income is earned through work.

How is capital income generated?

Capital income comes from returns on investments.

Who typically receives labor income?

Workers receive labor income.

Who typically receives capital income?

Investors receive capital income.

When does capital income become more relevant?

Capital income becomes more relevant as wealth accumulates.

Why do high-income individuals rely more on capital income?

High-income individuals receive most of their income from capital.

What type of income do low-income individuals typically rely on?

Low-income individuals typically rely on labor income.

How can policies affect income inequality?

Policies like taxes on capital gains can affect income inequality.

Give an example of labor income.

Wages earned from a 9-5 job.

Give an example of capital income.

Dividends from owning stocks or rental income from property ownership.

What is the definition of inequality in the U.S.?

The growing gap between high-income and low-income individuals.

What drives debates related to inequality in the U.S.?

Progressive taxation, wealth taxes, and wage increases.

How does capital income affect inequality in the U.S.?

Increases in capital income for the wealthy drive inequality, while wages (labor income) remain stagnant.

Who receives the majority of capital income in the U.S.?

The wealthiest 1%.

When did inequality in the U.S. begin to grow significantly?

After the 1980s.

What factors contributed to the growth of inequality after the 1980s?

Lower taxes on capital gains and less unionization.

Why do the rich earn more capital income than the poor?

The rich have more investments and assets generating capital income.

How can government intervention reduce inequality?

Through progressive taxation and welfare programs.

What percentage of the nation's wealth is controlled by the top 1% of U.S. households?

40%.

What income source do most of the bottom 50% of U.S. households rely on?

Labor income.

What is the key argument of Piketty & Saez regarding low-growth economies?

In low-growth economies, returns on capital (r) exceed returns on labor (g), leading to rising inequality.

What does Piketty & Saez's argument explain about the U.S. economy?

It explains the increasing gap between capital owners and wage earners.

What happens when the rate of return on wealth (r) is greater than the economic growth rate (g)?

Wealth becomes more concentrated.

Who benefits from the economic trends described by Piketty & Saez?

Wealth holders grow richer while workers stay stagnant.

When did the trends described by Piketty & Saez begin to intensify?

Post-1980s, after tax cuts on capital gains.

Why does wealth grow faster than wages according to Piketty & Saez?

Wealth grows faster than wages, causing inequality.

How do capitalists gain wealth in the context of Piketty & Saez's argument?

Capitalists gain from returns on stocks, dividends, and rents.

Can you give an example of individuals who have benefited from the trends described by Piketty & Saez?

Billionaires like Jeff Bezos and Elon Musk grow wealthier due to returns on stock.

What is the impact on workers' wages in the context of rising wealth concentration?

Workers' wages barely increase.

What are regulations?

Rules or laws set by the government to control market activity.

What is the relevance of regulations?

They reduce market failures like monopolies and externalities.

How do governments implement regulations?

They pass laws, rules, and standards to control market behavior.

Which agencies are involved in regulations?

EPA (environmental regulations), FTC (anti-monopoly), SEC (financial regulations).

When are regulations often passed?

Often passed after crises, such as after the 2008 financial crisis.

Why are regulations created?

To protect consumers, reduce externalities, and prevent monopolies.

What is an example of a regulation?

The Clean Air Act regulates pollution to reduce environmental harm.

What is the Clean Air Act?

A law that regulates air pollution to protect environmental quality.

What is the Sherman Antitrust Act?

A law aimed at preventing monopolies and promoting competition.

Waves of Regulation (Cohen's Key Features)

Definition: Different periods of intense regulatory action in U.S. history.
Key Waves:

1. Progressive Era (1890-1920): Sherman Antitrust Act (break up monopolies).

2. New Deal (1930s): SEC created to regulate stock markets after the Great Depression.

3. Great Society (1960s): Focused on civil rights, health, and environmental issues (created the EPA).
Reagan Era (1980s):

4. Deregulation of banking, airlines, and telecom.

Relevance: Each era of regulation responded to a major crisis or need.

Example: The 2008 financial crisis led to the Dodd-Frank Act to regulate Wall Street.

What is the definition of market failure?

When the market fails to allocate resources efficiently.

What are some causes of market failure?

Monopolies, externalities, and public goods.

Why is market failure relevant to government intervention?

It justifies government intervention in the market.

How do monopolies contribute to market failure?

Monopolies increase prices.

How do externalities like pollution affect social welfare?

They reduce social welfare.

What is the definition of externalities?

Costs or benefits that affect third parties.

What is an example of a negative externality?

Pollution (cost to society).

What is an example of a positive externality?

Education (benefit to society).

How do externalities affect resource allocation?

They cause misallocation of resources, leading to market failure.

What is a common solution to negative externalities?

Taxes on negative externalities, like pollution taxes.

What is a common solution to positive externalities?

Subsidies for positive externalities, like education grants.

What is the purpose of carbon taxes?

To reduce emissions and address climate change.

What is Cap-and-Trade?

A market-based system to reduce pollution by issuing permits to polluters.

What is the relevance of Cap-and-Trade?

It limits total pollution and allows firms to trade permits, creating incentives to reduce emissions.

How do firms operate within a Cap-and-Trade system?

Firms receive permits for emissions, but they can buy or sell them based on need.

What initiative uses Cap-and-Trade in the U.S.?

The Regional Greenhouse Gas Initiative (RGGI).

When was Cap-and-Trade introduced in the U.S.?

In the 2000s to address climate change.

Why was Cap-and-Trade implemented?

To limit greenhouse gas emissions.