Ch. 5 publix finance and public choice- Public finance- study of govt expenditure and tax policy and of their impact on the economy- Government expenditures- all spending by government agencies- Government revenues- funds received by govt agencies- Govt purchases- goods or services purchased by a govt agency- Transfer payments- payments made by govt agencies to individuals in the form of grants rather than in return for labor or other services- Balanced budget- situation that occurs when a govt’s revenues equal its expenditures for a particular period- Budget surplus- situation that occurs when a govt’s revenues exceed its expenditures- Budget deficit- situation that occurs when govt expenditures exceed revenues. Deficits contribute to national debt- Public good- good or service for which exclusion is prohibitevly costly and for which the marginalcost of adding another consumer is zero- External costs- imposed when an action by one person or firm harms another, outside of any market exchangeo Social cost- private cost of producing a good or service plus the external cost of producing it- External benefits- created when an action by one person or firm benefits another, outside of anymarket exchangeo Social benefit- private benefit of a good revealed in the market plus external benefits- Imperfect competition- individual firms face downward-sloping demand curves and will charge prices greater than marginal costo Consumers in such markets will be faced by prices that exceed marginal cost, and the allocation of resources will be inefficient- Assessing market responses to government failure- there is a potential for govt intervention to move inefficient markets closer to the efficient solution, but theres no guarantee of that- Behavioral economics- an area of economics that draws on psychology and neuroscience to understand how and why individuals make decisions.o Has led to consideration of new areas for govt policy- Using experiments and surveys, behavioral economists have found that people’s decisions are subject to cognitive limitations and biases, as well as to emotions, resulting in seemingly irrational choices- Thus, govts may seek to alter the provision of certain goods and services or the amounts consumed based on the notion that consumers will otherwise consume to much or too little of the goods- Programs to redistribute income can be divided into two categorieso Means tested transfer payments- are transfer payments for which the recipient qualifies on the basis of incomeo Non means tested transfer payments- transfer payments for which income is not a qualifying factor- User fees- fees levied on consumers of govt-provided services- Ability to pay principle- principle that holds that people with more income should pay more taxes- Regressive tax- tax that takes a higher percentage of income as income falls- Proportional tax- tax that takes a fixed percentage of income, no matter what the level of income- Progressive tax- tax that taeks a higher percentage of income as income rises- Benefits received principle- principle that holds that a tax should be based on the benefits received from the govt services funded by the tax- Income taxes- taxes imposed on the income earned by a person or firm- Property taxes- taxes imposed on assets- Sales tax- tax imposed on the value of goods sold- Excise taxes- imposed on specific goods or services- Taxable income- amount of income that is actually subject to any tax- Marginal tax rate- tax rate that would apply to an additional 1$ of taxable income earned\- Tax incidence analysis- type of economic analysis that seeks to determine where the actual burden of a tax rests- Public interest theory- theory that assumes that the goal of govt is to seek an efficient allocationof resources- Public choice theory- body of economic thought based on the assumption that individuals involved in public sector choices make those choices to maximize their own utility- Rent seeking behavior- effort to influence public choices to advance one’s own self interest- Cost benefit analysis- type of economic analysis that seeks to quantify the costs and benefits of an activityo Public officials can use cost-benefit analysis to try to locate the efficient solutiono In general, the efficient solution occurs where the net benefit of the activity is maximized- Economics and voting- public choice theory argues that individuals do not leave their self-interests behind when they enter the voting bootho Rational abstention- decision not to vote because the marginal costs outweigh the marginal benefits- Public choice theory suggests that politicians seeking reelection will try to appeal to coalitions ofspecial-interest groups to enhance their chances of reelection- Two proposals to counter the perceived growing power of special-interest groups are term limits and federally funded campaigns. Both proposals have their pros and
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