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Economies of Public Policies, Market, state and basic principles of…
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Market, state and basic principles of economics
People face tradeoffs
Efficiency (when society gets the most from its scarce resources) vs. Equality (when prosperity is distributed uniformly among society's members)
Tradeoff : To achieve greater equality,
could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.”
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Government Finance
Govt. does not earn like a firm ➡️ Govt. needs to raise funds to finance their expenses ➡️ therefore the Govt. uses taxes
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Distribution of Income : alternative financing methods can reduce income that people have to depend on private goods and services
Alternative financing schemes can influence prices and amounts of private goods exchanged in markets
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Tax finance : resources released and made available to Govt. do not always correspond to resources required to produce the politically chosen govt. provided goods and services
Govt. demands on resources with reduction in private demands due to taxes ➡️ Relative prices of certain inputs change
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Tax rate structure : the relationship between tax collected during a given accounting period and the tax base
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Govt. activity requires reallocation of resources from private sector to Govt. ➡️ Individuals must let Govt.to take individual's right to command, so that the Govt. can provide goods and services
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Method of finance ➡️ can distort the prices of goods and services in ways that prevent competitive markets from achieving efficiency
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Basic Preliminaries
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Positive Economics : Scientific approach to analysis that establishes cause-and-effect relationships among economic variables
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Useful to the normative approach in that it cannot make recommendations to achieve certain outcomes without an underlying theory of human behavior
Traditional Economic System : relies heavily on habit, custom or ritual to answer 3 basic economic questions
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Government : Organisations formed to exercise authority over the actions of people who live together in a society and to provide and finance essential services
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Political Institutions : The extent to which individuals have the right to participate in decisions that determine what governments do varies from society to society.
Constitute the rules and generally accepted procedures that evolve in a community for determining what government does and how government outlays are financed
The efficiency criterion / Pareto optimality : Normative criterion for evaluating effects of resource use on individual well-being
Individual, Market & Govt.
Role of Govt : Govt. has gotten big and getting bigger ➡️ Citizens are giving up substantial amounts of their income as taxes to finance Govt. expenditure
Rise in Govt. role in economy (Ex: economic crisis) ➡️ Increasing ageing population changes policy and expenditure
If there's no Govt. : Judicial system, National defence and homeland security, Social security, Unemployment insurance ➡️ won't be there or disorganized
Microeconomics & Govt. : the role of markets as means of establishing prices that influence individual choices to use resources
Most efficient form of resource allocation ➡️ Has the invisible hand to operate the market ➡️ Assumes that markets are always clear and stable
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Govt. services & market goods : Govt. resources are used to provide citizens with goods and services ➡️ Govt. goods and services shared by all
Govt. goods and services are distributed through non-market rationing ➡️ Govt. goods and services are not made available to people according to their willingness to pay and their use is not rationed by price. (Ex : National defence)
Pure Markets : Virtually all goods and services would be supplied by private firms for profits and all exchanges of goods and services would take place through markets with prices determined by free interplay of supply and demand.
Individuals would be able to purchase goods and services freely, according to their tastes and economic capacity, given that the market determines prices
All productive resources are privately owned by individuals who decide how to use these resources ➡️ These decisions are influenced by market prices for goods and services
Private business firms are organised to hire resources in input markets to produce goods and services desired by household members
Mixed Economies : Provision of a significant amount of goods and services takes place through political institutions
This involves interactions among all individuals of the community rather than just buyers and sellers ➡️ Market goods, buyers are not compelled to purchase something they do not want ➡️ Political decisions often compel citizens to finance Govt. services
The Govt. participates in market as buyers of goods and services ➡️ Govt. use purchased inputs from households and acquire ownership rights of such productive resources as land and capital
Govt. and Taxes : The Govt. requires businesses and households to pay taxes, charges and fees
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Externalities
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Examples : Smoking on non-smokers, Pollution, Traffic congestion, COVID19
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Market failure ➡️ Insufficient resource allocation, Lost societal benefits, Under production of public goods (those that have a high societal value)