Microeconomic Analysis Week 3 Lecture 1
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Questions and Answers

How does the principle of opportunity cost apply to public production?

The principle of opportunity cost in public production implies that the resources used for public services could have been allocated elsewhere, resulting in a trade-off.

What is the role of government in relation to market failures?

The government allocates resources to correct market failures to ensure efficient outcomes and improve social welfare.

Differentiate between positive and normative economics.

Positive economics focuses on objective analysis of economic behavior, while normative economics involves subjective judgments about what the economy should be like.

Why should social marginal benefit equal social marginal cost in maximizing social welfare?

<p>Equating social marginal benefit with social marginal cost ensures that resources are allocated efficiently, maximizing overall welfare without waste.</p> Signup and view all the answers

Explain the relationship between demand, supply, and government actions.

<p>Government actions can influence demand and supply by setting regulations and policies, which in turn affect market outcomes and social welfare.</p> Signup and view all the answers

What is the main perspective of Social Democrats on market efficiency?

<p>Social Democrats recognize that markets are productive but believe they fail to allocate resources efficiently, resulting in unequal distribution.</p> Signup and view all the answers

Identify and briefly describe the three weaknesses of markets that justify government intervention.

<p>The three weaknesses are market failure, uneven income distribution, and macroeconomic instability.</p> Signup and view all the answers

List the three potential economic functions of the government.

<p>The three potential functions are allocative function, redistributive function, and stabilization function.</p> Signup and view all the answers

What is the allocative function of the government?

<p>The allocative function involves providing public goods, regulating externalities, promoting competitive markets, and protecting individuals from information failures.</p> Signup and view all the answers

How does the redistributive function of government aim to address economic issues?

<p>The redistributive function aims to alleviate poverty and reduce income inequality.</p> Signup and view all the answers

What is the purpose of the stabilization function of government?

<p>The stabilization function manages aggregate demand to achieve price stability and high employment, while reducing output fluctuations.</p> Signup and view all the answers

What are the four public policy questions that need to be answered?

<p>The four questions are: What are the objectives? What are the options? What are the implications of each option? Which is the preferred option?</p> Signup and view all the answers

How does globalization affect government control over the economy?

<p>Globalization tends to reduce the capacity of governments to control their economies.</p> Signup and view all the answers

What is the primary objective of Public Economics?

<p>Maximizing public welfare.</p> Signup and view all the answers

What two main historical views define the nature of the state?

<p>The organic view and the mechanistic view.</p> Signup and view all the answers

What do Libertarians advocate regarding the role of government?

<p>They advocate limited government control and strongly support private property.</p> Signup and view all the answers

How do Socialists view the distribution of rewards in market systems?

<p>They view it as highly unequal and believe the government should provide full equity.</p> Signup and view all the answers

What role do Conservatives believe government can play effectively?

<p>They believe government can perform some functions more effectively than the private sector.</p> Signup and view all the answers

What are the fundamental questions related to government intervention in the economy?

<p>Objectives of government and the roles it should play.</p> Signup and view all the answers

What is the defining attribute of government as discussed in the lecture?

<p>Power.</p> Signup and view all the answers

What is Welfare Economics?

<p>It's another term for Public Economics, focused on maximizing public welfare.</p> Signup and view all the answers

Study Notes

Microeconomic Analysis - Week 3, Lecture 1

  • Overview: Public economics aims to maximize public welfare. It incorporates the government's role in achieving this goal. The overview also includes: Foundations of Public Economics, General Functions of Government, Economic Functions of Government, Public Policy and Principles of Economic Analysis, and Positive and Normative Economics.

Defining the Field of Study

  • Public Economics: Concerned with maximizing public welfare, often called Welfare Economics, and incorporates government's role in maximizing public welfare.

Introduction to Issues

  • Government's Role: The defining attribute of government is power. The government's role is essential in a mixed economy, raising questions about when and how it should intervene.

General Functions of Government

  • Views on Functions: Views on government functions critically depend on:
    • The relationship between individuals and the state.
    • The perceived effectiveness of markets and government.
  • Historical Views: Two main views exist:
    • Organic View: Society's goals are set by the government itself, which has intrinsic value.
    • Mechanistic View: Society sets the goals, and the government acts as a tool to achieve them.

Alternate Views on the Role of Government

  • Mechanistic View Subdivisions: The mechanistic view is further categorized into four perspectives:
    • Libertarians: Strongly support private property, efficient markets, and limited government intervention in private exchanges.
    • Socialists: Support a command economy with government control to ensure equitable distribution of rewards, recognizing market systems' unequal distribution.
    • Conservatives: Similar to libertarians in questioning government intervention, but recognize government's effectiveness in some areas compared to the private sector.
    • Social Democrats: Acknowledge market productivity but believe they inadequately distribute resources. They emphasize government intervention for redistribution.

Summary of Views on Government Role

  • (Note: This section was presented in table format, but bullet points provide the summary):*

  • Libertarians: Very Limited government role; prioritize freedom over government intervention. Markets are highly efficient.

  • Conservatives: Moderate government involvement; accept some government actions superior to private sector.

  • Social Democrats: Moderate/considerable government role focused on ensuring minimum welfare, income redistribution and resolving market failures.

  • Socialists: Very high government involvement; full equity through government control.

Economic Functions of Government

  • Establishing Ground Rules: Governments establish institutions and rules to enable functioning markets and secure property rights.
  • Addressing Market Weaknesses: Governments focus on resolving market imperfections; addressing public goods, externalities, imperfect competition and information failures.
  • Uneven Income Redistribution: Governments aim to reduce wealth disparity.
  • Macroeconomic Instability: Governments strive to manage economic fluctuations towards stability and employment.

Three Potential Government Functions

  • Allocative Function: Providing public goods; regulating externalities; promoting and protecting competitive markets from information failures.
  • Redistributive Function: Alleviating poverty and reducing income inequities.
  • Stabilisation Function: Maintaining price stability, high employment and reducing economic cycles.

Three Potential Government Functions - Continued

  • Factors Impacting Government Role: The extent of government involvement depends on market weaknesses and the government's ability to deliver positive outcomes. Globalization may impact a government's ability to control its economy.

Public Policy and Principles of Economic Analysis

  • Essential Policy Questions: What are the objectives? What are the options? What are the implications of each option? Which is the preferred option?

Seven Economic Principles and the Public Sector

  • Economic Principles Applicability: Scarcity, choice, opportunity costs, trade, incentives, price theory, efficient production, powerful demand/supply forces, and maximizing social welfare apply to both public and private sectors.

Positive and Normative Economics

  • Positive Economics: Aims to estimate how government policy affects individuals.
  • Normative Economics: Provides basis for policy decisions to maximize public welfare.

Summary

  • Key Government Attribute: Power
  • Government Reach: All services financed by the budget, including Public and Private entities (PTES).
  • Dominant View: Mechanistic and Individualistic
  • Fundamental Role: Establishing institutions and rules that enable market functions.
  • Other Important Economic Functions: Allocating resources effectively in market failure cases, determining acceptable distribution of income, and managing macroeconomic situations.
  • Economic Analysis: Incorporates both normative and positive approaches.
  • Basic Principles: Principles are equally applicable to the public as well as the private sector.

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This quiz covers the key concepts from the first lecture of Week 3 in Microeconomic Analysis, focusing on Public Economics. It explores the government's role in maximizing public welfare, the foundations of public economics, and the general functions of government in a mixed economy.

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