TP

Gov. Intervention

Key Economic Policies

Monetary Policy

  • Controls the money supply.

Fiscal Policy

  • Uses government spending, taxation, and legislation to influence the economy.

Arguments For and Against Government Intervention

Arguments For:

  • Enforce property rights.

  • Provide a legal system and contract enforcement.

  • Standardize weights and measures.

  • Ensure a stable money supply.

  • Enforce patents and copyrights to encourage innovation.

Arguments Against:

  • Benefits special interest groups at the expense of society.

  • Poor service due to lack of competition.

  • Slow changes due to the legislative process.

Examples of Government Intervention

  • Free public education.

  • Safety regulations (e.g., car features, warning labels on medicine).

  • Sin taxes on cigarettes and alcohol.

  • Mandatory social security contributions.

Market Failures & Externalities

Market Failure

  • When the free market fails to allocate resources efficiently, leading to government intervention.

Externalities

  • Positive Externalities (Encouraged by Government)

    • Health care

    • Education

    • Research & development

  • Negative Externalities (Discouraged by Government)

    • Pollution

    • Cigarette smoke

    • Loud music in dorms

Government Policies for Externalities

  1. Command-and-Control Policies

    • Regulations requiring or forbidding behaviors.

    • Example: Mandatory student immunizations, EPA emission limits.

  2. Market-Based Policies

    • Uses taxes and subsidies to balance the economy.

    • Example: Tax on sugary beverages to discourage consumption.

Key Economic Terms

  • Pigovian Tax: Tax to correct negative externalities (e.g., pollution taxes).

  • Tradable Pollution Permits: Companies can buy/sell pollution rights.

Types of Goods

  1. Private Goods: Excludable & rival (e.g., food).

  2. Natural Monopolies: Excludable & non-rival (e.g., utilities).

  3. Public Goods: Non-excludable & non-rival (e.g., national defense).

  4. Common Resources: Non-excludable & rival (e.g., fisheries).

Economic Challenges

Cost-Benefit Analysis

  • Difficult to assign value to social benefits, life, time, and aesthetics.

Tragedy of the Commons

  • Overuse of common resources leads to depletion.

    • Examples: Overgrazing land, Great Pacific Garbage Patch, online shopping returns.

Importance of Property Rights

  • Prevents overuse and mismanagement of resources.

Government Regulation in Markets

Price Controls

  • Price Ceiling (Maximum price, causes shortages)

    • Example: Rent control (higher demand, lower supply, black markets may arise).

  • Price Floor (Minimum price, causes surplus)

    • Example: Minimum wage (higher wages but fewer jobs, increased automation).

Taxes and Revenue

Tax Collection

  • Federal government collects 60% of taxes; state/local governments collect 40%.

  • Major Tax Types:

    • Income Tax: Tax on earnings.

    • Payroll Tax: Deducted from wages, funds Social Security/Medicare.

    • Excise Tax (Sin Tax): On goods like alcohol, tobacco, gasoline.

Tax Systems

  1. Proportional Tax: Everyone pays the same percentage.

  2. Regressive Tax: Low-income earners pay a higher percentage.

  3. Progressive Tax: High-income earners pay a higher percentage.

National Debt & Budget Deficit

  • National Debt: Total government debt.

  • Budget Surplus: More taxes collected than spent.

  • Budget Deficit: More money spent than collected (government borrows to finance).

Subsidies

  • Financial aid from the government to support businesses, industries, or individuals.