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Public Econ Exam 1
Terms in this set (29)
Four Questions of Public Econ
When should the government intervene in the economy?
How might the government intervene?
What are the effects of government intervention?
Why do governments do what they do?
The benefit that consumers derive from consuming a good, above and beyond the price they paid for the good
The benefit that producers derive from selling a good, above and beyond the cost of producing that good
A rise in the price of a good will typically cause an individual to choose less of all goods because her income can purchase less than before
Holding utility constant, a relative rise in the price of a good will always cause an individual to choose less of that good
When the price of one good increases relative to another, you choose less of that good for two reasons:
because it is relatively more expensive (substitution effect) and because you are effectively poorer (income effect)
A graphical representation of all bundles of goods that make an individual equally well off. Because these bundles have equal utility, an individual is indifferent as to which bundle he consumes
Suppose we LOWER the income tax rate. Will people work more or less?
●The substitution effect says people will work ___________.
●The income effect says people will work ____________.
● The substitution effect says people will work MORE (leisure is now more expensive).
● The income effect says people will work LESS (people are richer, buy more leisure).
An activity of one party that affects (positively or negatively) the welfare of another party, but the first party bears neither the costs nor benefits because activity is outside of the market mechanism.
Coase Theorem Part I:
With well-defined property rights and costless bargaining, the efficient equilibrium can be obtained in the face of externalities.
Coase Theorem Part II:
The efficient solution to an externality does not depend on which party is assigned property rights.
A good is non-rival if
one person's consumption does not interfere with another person's consumption of that good
A good is non-excludable if
there is no way for a producer to deny the ability to consume the good
Private good, How to add up individual demand curves?
Everyone must pay the same price, sum quantities (horizontally) to get social marginal benefit
Public good, How to add up individual demand curves?
Everyone must consume the same quantity, sum price (vertically) to get social marginal benefit
As the government provides more of a good, the private sector will provide less of it
An Approach to financing the public goods in which individuals honestly reveal their willingness to pay, and the government charges them that amount to finance the public good
Arrow's impossibility theorem
There is no way to convert individual preferences into a consistent aggregate decision without either A) restricting the type of preferences or B) imposing a dictatorship... In other words, to get a consistent outcome, we have to have a certain kind of preferences
Median Voter Theorem
Majority voting will yield the outcome preferred by the median voter if preferences are single-peaked
The trading of votes to obtain passage of a package of legislative proposals
Time Series Analysis
only works if we assume that other things didn't change at the same time.
Time series documents the correlation among variables over time (or BEFORE and AFTER some treatment)
Examples: Measure the civic engagement of a person before and then after she buys a home. Measure weight before and after someone drank diet soda
Cross Sectional Analysis
describes relationships between variables at a single point in time.
Only works if we assume that nothing else is
different between the two groups.
Ex: look at the relationship between weight and diet soda consumption in 2014. Look at homeowners' versus renters' voting rates
Diff in Diff Analysis
a combination of time series and cross sectional anlysis
Addresses limitations of both cross sectional and time series studies
Idea : look at treatment and control groups, before and after the policy
Assumption is that the trend would be the same in both samples
are payments above the amount necessary to obtain the resources.
Rents are transfers from one entity (government) to another (worker) and are not costs to society.
ties funds transferred to amount it spends
Example: fed govt gives local govt $1 for every $1 they spend on education
Effectively lowers the price of spending on that good
Unambiguously increases spending on public good. Income and substitution effects in same direction.
With a block grant...
one higher level of government simply gives some amount G to a lower level.
Block grant will not increase spending as much as matching grant as block grant only has income effect and no substitution effect.
However, block grant gives recipient town higher utility than matching grant.
Conditional block grant:
a grant of some fixed amount mandated to be spent in a certain way.
Conditional block grant only increases spending on the public good more than unconditional grant if the recipient town was spending less than grant amount before receiving grant.
Tiebout Model assumptions
Enough selection to match tastes
Financing: lump sum taxes (zoning restrictions)
Tiebout model implies goods should be provided at local level if:
Tax-benefit linkages: Can people SEE the benefit of what they pay for?
No externalities: Does what one town does affect another town?
Not large economies of scale: Is it feasible for each town to provide each good?
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