Download Unit 5 Key Ideas

UNIT
5 Microeconomics
The economic functions of government
include enforcing laws and contracts, maintaining competition, redistributing income,
providing public goods, correcting allocations for externalities and stabilizing the
economy.
Government must provide public goods
because a private market will not provide
them. Pure public goods must meet the criteria of shared consumption and nonexclusion.
Even a perfectly competitive market sometimes produces too little of some goods and
too much of others; economists call this situation a market failure.
The market overproduces goods that create
negative externalities. A negative externality
is created when part of the cost of a transaction is borne by third parties who are not
directly involved in the transaction. Negative
externalities include pollution and harmful
effects of pesticides and smoking. Negative
externalities are sometimes called spillover
costs.
The market underproduces goods that create positive externalities. A positive externality is created when benefits of a transaction
or activity are received by third parties who
are not directly involved in the transaction.
Positive externalities include education, vaccinations against diseases and flood control.
Positive externalities are sometimes called
spillover benefits.
Government tries to discourage the production of goods that involve negative externalities and encourage the production of goods
that involve positive externalities.
KEY IDEAS
Cleaning up the environment would be efficient if it were cleaned up to the point where
the marginal social benefits of the cleanup
were equal to the marginal social costs, and the
cleanup were done at the least possible cost.
Most economists believe the environment
can be cleaned up at a lower cost by substituting market incentives for command and
control policies.
Sometimes buyers and sellers do not have perfect information, so the market outcome is not
efficient. In these cases, it may be necessary for
government to intervene in the market.
The theory of public choice uses economic
analysis to evaluate government operation
and policies.
Public-choice theorists believe politicians
and government officials are as self-interested as business people. However, instead of
trying to maximize profits, “political entrepreneurs” seek to maximize power, salaries,
prestige and votes. This behavior results in
government waste and inefficiency.
Governments tax to raise revenue. Some
taxes are based on the ability-to-pay theory,
while others are based on the benefitsreceived theory.
Tax rates can be progressive, proportional or
regressive.
Government taxing and spending policies
can change a society’s distribution of
income.
The incidence of a tax can be shifted from
the person paying the government to someone else. This is accomplished through
changes in prices, income and outputs.
Advanced Placement Economics Microeconomics: Student Activities © National Council on Economic Education, New York, N.Y.
271