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Chapter 5 notes

by: Johann Notetaker

Chapter 5 notes econs 2001

Johann Notetaker

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About this Document

Notes are taken straight out of the book.
Robert Eisenstadt
Class Notes
25 ?




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This 5 page Class Notes was uploaded by Johann Notetaker on Tuesday September 27, 2016. The Class Notes belongs to econs 2001 at University of Louisiana at Monroe taught by Robert Eisenstadt in Fall 2016. Since its upload, it has received 3 views. For similar materials see Macroeconomics in Macro Economics at University of Louisiana at Monroe.


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Date Created: 09/27/16
Nelson1 Test 2 Chapter 5  mathematical relationship in supply and demand curve  quantity supplied  Q(s) = -25 + 3P  Quantity demanded  Q(d) = 100 – 2P  Merit good  Political process that deems goods as socially desirable  Public choice theory  The study of collective decision making, or the process through which voters, politicians and other interested parties influence nonmarket choices  Subsidy  Amount government is willing to subsidize – amount a consumer is willing to pay  Pros and cons of a price system  Price system  Allows resources to move from lower-valued uses to higher valued uses via voluntary exchange  Consumers are sovereign  Have individual freedom to decide what to purchase  Decide what is produced  Multiple consumers/producers protect from coercion  Market failures  Definition  A situation in which the market economy leads to too few or too many resources going to a specific economic activity  Prevent the price system from attaining economic efficiency and individual freedom  Externalities  Definition  Consequence of an economic activity that spills over to affect third parties.  Ex. Pollution  External costs  Affects third parties  Parties who are not directly involved in a given activity or transaction  Examples  Steel company emitting smoke into air  Steel company doesn’t pay to clean air Nelson2  People in community pay to clean corrupted air rd  3 party  Lack of clearly assigned property rights prevents market prices from reflecting all he cost associated by activities that generate spillovers onto 3 parties.  Definition  The rights of an owner to use and exchange property  External costs  Definition  Producing or consuming a product imposes a cost on a 3 party rd  Social cost will be greater than the private cost  Inoculation  definition  To safeguard/protect  To introduce an idea or an attitude  Vaccine  Typically, too many goods that produce external costs are produced  External benefits  Positive  Definition  Producing or consuming a product benefits a 3 partyd  Social benefit will be greater than the private benefit  Increase of input price  Shifts supply curve up and to the left  Typically, too few goods that produce external benefits are produced  Government interference with externalities  Two avenues (negative externalities)  Special taxes  Effluent fee  Definition  A charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution  Pollution tax  Ultimately would reduce supply of the product and raise the prices to the consumers  Legislative regulation or prohibition  Demand that the corporation use technological advances to reduce the amount of product that has a negative effect on the 3 party.  Control the negative product  Multiple avenues (positive externalities) Nelson3  Financing the production of the good  Financing the desired additional production facilities so that the “right” amount of the good is produced  Occasionally produce and operate centers where products are given at no charge  Inoculations  Subsidies  Definition  Negative tax  Per-unit payment made by either to a business or consumer when the business produces or consumer buys a good or a service  To increase the consumption of a product  Regulation  Government can require by law for someone undertake in an action  All school-age children be enrolled in public/private school  Economic Functions of Government  Providing a legal system  Judicial functions  Government serves as referee  Imposes penalties for violations of legal rules  Defines and protects property rights  When property rights are well defined owners of property have an incentive to use that property efficiently  Promoting competition  Protector of a competitive economic system  Anti-trust legislation  definition  Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices  Definition  Firms that can determine the market price of the goods they sell  Providing public goods  Private goods  Definition  product that must be purchased to be consumed, and its consumption by one individual prevents another individual from consuming it  rival in-consumption  Public goods Nelson4  Definition  a commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization  non rival  “free rider”  those who benefit from resources, goods, or services do not pay for them, which results in an under-provision of those goods or services  characteristics  Can be used by more and more people at no additional cost and without depriving others of any of the services of the goods  It is difficult to design a collection system for a public good on the basis of how much individuals use it.  Cost of exclusion is too expensive  Could only be provided by the government because of the cost  Ensuring economy-wide stability  Smoothing the ups and downs in overall business activity  Full-Employment Act  1946  Established 3 goals for government stabilization policy  Full employment  Price stability  Economic growth  Transfer payments  definition  A payment made or an income received in which no goods or services are being paid for  Political functions of government  Two functions  Governmental-sponsored and government-inhibited goods  Government sponsored good  Definition  Any good that has been deemed socially desirable through the political process.  Ex. Museums, sporting events  The government promoting the production and consumption of government-sponsored goods  Government-inhibited goods  Definition Nelson5  A good deemed socially undesirable through the political process.  Ex. Heroin, gambling  The government taxes, regulates, or prohibits the sale, manufacturing, and use of government-inhibited goods  Income redistribution  Two systems  Progressive income tax  Transfer payments  Definition  Money payments made by governments to individuals for which no services or goods are rendered in return  Ex. Social security  Transfer in kind  Definition  Payments that are in the form of actual goods and service  Ex. Food stamps  Public spending and transfer programs 


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