federal budget / chapter 5

Flashcards on Federal Budget, Externalities, and Public Goods.

Debt

Total accumulation of past government borrowing.

Deficit

The difference in a single year when government spending exceeds government revenue.

Debt-to-GDP Ratio

Compares national debt to total economic output (GDP) to indicate a country’s ability to repay debt.

Excessive Spending Hypothesis

The idea that too much government or consumer spending can lead to inflation or crowding out.

Paradox of Thrift

When everyone saves more during a recession, aggregate demand falls, worsening the recession.

Expansionary Fiscal Policy

Government actions, such as increased spending or tax cuts, to stimulate demand during economic downturns.

Negative Externality

A cost imposed on a third party due to the production or consumption of a good or service (e.g., pollution).

Positive Externality

A benefit conferred on a third party due to the production or consumption of a good or service (e.g., vaccination).

Socially Optimal Quantity (Negative Externality)

The quantity of a good or service produced when accounting for the external costs, resulting in lower production.

Socially Optimal Quantity (Positive Externality)

The quantity of a good or service produced when accounting for the external benefits, resulting in higher production.

Coase Theorem

If property rights are clearly defined and transaction costs are low, private parties can solve externality problems without government intervention.

Externalities

Market prices do not accurately reflect social costs/benefits.

Public Goods

Goods that are non-excludable and non-rival, leading to underproduction by private firms (e.g., national defense).

Non-excludable

It is not possible to prevent individuals from consuming the good, even if they don't pay for it.

Non-rival

One person's consumption of the good does not diminish another person's ability to consume it.

Imperfect Information

Consumers or producers make poor choices due to a lack of complete information (e.g., subprime mortgages).

Market Power

Monopolies distort prices and output levels, leading to inefficient outcomes.

Original Equilibrium

The market outcome before accounting for externalities.

Socially Optimal Equilibrium

The market outcome after accounting for all external costs and benefits.

Government Revenue

The income that a government receives from sources such as taxes and fees.