1. Government and the Economy
Chapter 12

2. 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)

3. 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

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

5. 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

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

7. 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

8. 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: