FILE: 251N03.HTML

CLASS NOTES FOR ECONOMICS 251/ FALL 2005

DR. WILLIAM SHINGLETON

THESE NOTES ARE FOR SEPTEMBER 6-8

ROLE OF GOVERNMENT AND TAXES CH 4

REVIEW QUIZ

IT'S AS EASY AS A, B, C

NECESSARY CONDITIONS TO JUSTIFY A GOVERNMENT'S ATTEMPTS TO USE ITS ECONOMIC POLICY TOOLS

THERE MUST BE A PRIVATE SECTOR PROBLEM.

GOVERNMENT MUST HAVE ABILITY TO ALLEVIATE THE PROBLEM

UNLESS BOTH CONDITIONS ARE SATISFIED,

THERE IS NO ECONOMIC REASON FOR GOVERNMENT ACTION

POLITICAL/SOCIAL ROLES STILL POSSIBLE

POLICY TOOLS

REGULATION

GOVERNMENT SPENDING VS GOVERNMENT FINANCING

/2.3TRILLION/AUG2004/OMB

TAXES

/1.9 TRILLION/AUG2004/OMB

DEFICIT

/455B/AUG2004/OMB

ECONOMIC ROLES OF GOVERNMENT, EACH SUBJECT TO QUESTION

LEGAL/SOCIAL/POLITICAL ENVIRONMENT

CORRECTION OF MARKET FAILURE

PROVIDE FOR PUBLIC GOODS

EXCLUSION PRINCIPLE

PROVIDE FOR, NOT PRODUCE

RADIO

EXTERNALITIES (SPILLOVER COSTS)

A SWEET EXAMPLE

JERSEY SKY

INDUSTRIAL CONCENTRATION/MAINTAIN COMPETITION

DISTRIBUTION(REDISTRIBUTION) OF INCOME

ALLOCATION OF RESOURCES

STABILIZATION OF THE ECONOMY (MACRO ECONOMICS)

PRICE CONTROLS (FROM CHAPTER 3)

FLOOR/MINIMUM PRICES

EXAMPLE: MINIMUM WAGES $5.15/SEPT 2005

EFFECTIVE ONLY WHEN ABOVE EQUILIBRIUM

COMPARE Q TO FREE MARKET

IDENTIFY WINNERS AND LOSERS

UNEMPLOYMENT PROBLEM

DISCRIMINATION

FRIEDMAN ON BLACK TEENAGE UNEMPLOYMENT

DOES SOCIETY GAIN?

CEILING/MAXIMUM PRICES

EXAMPLE: WHOLESALE GAS PRICE IN HAWAII

EFFECTIVE ONLY WHEN BELOW EQUILIBRIUM

COMPARE Q TO FREE MARKET

IDENTIFY WINNERS AND LOSERS

POLITICAL IMPLICATIONS

BLACK MARKETS

DOES SOCIETY GAIN?

COMPARE MINIMUM PRICE AND MAXIMUM PRICE OUTCOMES

BOTH REDUCE THE Q THAT IS ACTUALLY BOUGHT AND SOLD

Q IS ALWAYS THE SMALLER OF Q_d OR Q_s

PUBLIC GOODS: DEFINITION

NOT NECESSARILY PRODUCED BY THE GOVERNMENT

DEPLETABILITY

RIVAL VS NON-RIVAL CONSUMPTION

EXCLUSIVE VS NON-EXCLUSIVE GOODS

EXAMPLE: RADIO

OPTIMAL PRIVATE VS OPTIMAL Q OF PUBLIC GOODS

UNDERPRODUCED IN MARKET

HORIZONTAL VS VERTICAL DEMAND

PROBLEM: FREE RIDERS

GOAL: OPTIMAL Q OF PUBLIC GOODS

EXAMPLE: ADAM SMITH'S LIGHTHOUSE THEN AND NOW

GOVERNMENT FINANCING REVIEW

NOT JUST GARBAGE

ROLE OF PRICE COMPETITION

EXTERNALITIES

PROBLEM: SPILLOVER COSTS

GOAL: INCORPORATION OF ALL COSTS

(MARGINAL SOCIAL COST)

EXAMPLE: LIVING NEAR BURNS HARBOR

MARKET POWER

PROBLEM: INDUSTRIAL CONCENTRATION

GOAL: TO MAINTAIN COMPETITION

EXAMPLE: MICROSOFT

DISTRIBUTION(REDISTRIBUTION) OF INCOME

PROBLEM: WHAT IS FAIR VS WHAT IS EFFICIENT?

GOAL: ACHIEVE THE CORRECT BALANCE

EXAMPLE: HEALTH CARE

ALLOCATION OF RESOURCES

PROBLEM: SOME RESOURCES UNDERDIRECTED

GOAL: ACHIEVE THE CORRECT BALANCE

EXAMPLE: EDUCATION

TAXES

AVERAGE TAX RATE

MARGINAL TAX RATE

PROGRESSIVE

PROPORTIONAL

REGRESSIVE

TAXES AS A COST

TAX AND SUPPLY

TAX AND EQUILIBRIUM

EFFECT ON

PRICE

QUANTITY

PUBLIC CHOICE

SELF INTERESTED DECISIONS

BUCHANAN VS DOWNS

THE BUDGET IS ALWAYS TOO BIG BECAUSE...

THE BUDGET IS ALWAYS TOO SMALL BECAUSE...

MARKET EXAMPLES, AS TIME PERMITS

NEXT WEEK

DEMAND AND ELASTICITY CH 20+APPNDX