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.