Government and the Economy Chapter 12

Roles of Government Arbiter, Manager, Participant Establish/enforce private property rights (A) Deal w/external costs/benefits (A) Externalities=costs of decisions paid by the public Ensure market competition (A) Protect consumers (A)

Roles of Government Arbiter, Manager, Participant Stabilize the economy (M) Monetary and fiscal policies Promote economic security (M) Provide public goods/services Once provided, available to all

How does the Govt spend Direct benefit payments National defense Social security, medicare, etc. National defense Net interest Grants to States and localities

Why does the Govt tax? Pay the cost of government Protect selected industries Discourage activities Sin tax Encourage certain activities Alter the level of economic activity Tax policy

Who should pay taxes? Tax incidence Two theories Who ultimately bears the burden Two theories Benefits received Toll roads Ability-to-pay

Types of Taxes Proportional tax (flat tax) Progressive tax Takes the same percentage of all incomes Progressive tax Larger percentage of higher income, smaller percentage of lower income Regressive tax Higher percentage of gross income from lower income, lower percentage of gross from higher income Sales Tax

Debt and Defecit Debt Deficit Go to the U. S. Debt Clock: Cumulative sum of all borrowing to finance Deficit When expenses exceed income Go to the U. S. Debt Clock: http://www.usdebtclock.org/