Econ 130 – Chapter 5: Public Spending & Public Choice – Flashcards
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Ⓐ Allows all resources to move from lower-valued uses to higher-valued uses via voluntary exchange. Ⓑ Customers are sovereign; customers have the individual freedom to decide what they wish to purchase. Customers ultimately decide what is produced. Ⓒ Creates competition among sellers and competition among buyers.
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Advantages of a price system
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A situation in which the market economy leads to too few or too many resources going to a specific economic activity.
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Market failure
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A consequence of an economic activity that spills over to affect third parties. (Example: pollution)
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Externality
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When taken into account, these externalities decrease market price and market quantity.
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Positive externalities
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When taken into account, these externalities decrease market price and increase market quantity.
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Negative externalities
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Parties who are not directly involved in a given activity or transaction.
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Third parties
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The rights of an owner to use and to exchange property.
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Property right
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Cause the market to over-allocate resources to the production of the good or service.
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External costs
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Cause the market to under-allocate resources to the production of the good or service.
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External benefits
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ⒶSpecial taxes (pollution tax) Ⓑ Regulations
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Correcting negative externalities
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A charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution.
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Effluent fee / pollution tax
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A set amount allowed by the government.
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Regulation
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Ⓐ Government financing and production. Ⓑ Regulation Ⓒ Subsidies (negative tax)
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Correcting positive externalities
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Ⓐ Correcting externalities Ⓑ Providing a legal system Ⓒ Promoting competition Ⓓ Providing public goods Ⓔ Ensuring economic stability
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Economic functions of government
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Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices.
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Antitrust legislation
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A firm that can determine the market price of a good.
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Monopoly
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Goods that can be consumed by only one individual at a time and are subject to the principle of rival consumption.
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Private goods
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The recognition that individuals are rivals in consuming private goods because one person's consumption reduces the amount available for for others to consume.
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The principle of rival consumption
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Goods that can be jointly consumed by many individuals simultaneously at no additional cost and with no reduction in quantity or quality.
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Public goods
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A situation in which some individuals (free-riders) presume that others will pay for public goods so that, individually, they can escape paying for their portion without causing a reduction in production.
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Free-rider problem
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A good that has been deemed socially desirable through the political process; a government-sponsored good.
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Merit good
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A good that has been deemed socially undesirable through the political process; a government-inhibited good.
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Demerit good
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Ⓐ Transfer payments Ⓑ Transfers in kind
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Income redistribution
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Money payments made by governments to individuals for which no services or goods are rendered in return.
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Transfer payments
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Payments made by governments to individuals in the form of actual goods and services, such as food-stamps, subsidized housing, and medical care for which no services or goods are rendered in return.
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Transfers in kind
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How voters, politicians, and other interested parties act and how these actions influence non-market decisions.
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Collective decision making
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The study of collective decision making; assumption that individuals will act within the political process to maximize their individual (not collective) well-being.
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Theory of public choice
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Ⓐ Opportunity cost Ⓑ Competition Ⓒ Incentive structure
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Similarities in private and public sector decision making
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Ⓐ Government goods and services at zero-price. Ⓑ Government use of force Ⓒ Government--voting : Market--spending
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Differences in private and public sector decision making
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The system of rewards and punishments individuals face with respect to their own actions.
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Incentive structures
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Goods and services provided by the public sector; can be either public or private goods.
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Government goods
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Ⓐ Each dollar a person spends counts separately. Ⓑ Proportional rule Ⓒ The spending of dollars can indicate the intensity of want.
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Market system rules
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Ⓐ Each person gets one vote. Ⓑ Majority rule Ⓒ Every vote is equal in value.
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Political system rules
