Chelsea A.

Joffrion Econ Homework 11/21/11

1. Identify and briefly describe the main economic functions of government. What function do you think is the most controversial? Explain why. One role is to provide the legal and social framework. This goes beyond the elementary policing of keeping people from assaulting and stealing from each other. Government attempts to regulate business in terms of setting standards and rules. Some examples include establishing rules regarding contract negotiations and enforcement; setting standards on safety of food, drugs and other products; educating the public about respect for private property; devising zoning laws, etc. The U.S. Economy: Private and Public Sectors 61 A second function is to promote and maintain competition. Government does this through antitrust laws to make anti-competitive behavior illegal, and by regulating monopoly power in the case of natural monopolies, where competition is not efficient, as is the case with many public utilities. Third, the government redistributes income to help alleviate poverty. This is done by progressive taxation of income, which taxes low incomes proportionately less than high incomes, and by transfer payment programs such as unemployment compensation, social security benefits and Medicare, food stamps, aid to lowincome families with dependent children, and other programs that provide support for the poor. A fourth role is the reallocation of resources. This includes the provision of public or social goods, such as education, lighthouses, streetlights, and national defense. It also includes government programs that correct misallocation of resources, which may occur when there are positive or negative externalities.

Chelsea A. Joffrion Econ Homework 11/21/11

When external costs occur, resource allocation would be more than is socially desirable, because some of the production costs have been passed on to third parties. The government designs programs to force producers to internalize these costs by regulation or specific taxes, so that the external costs are reduced or eliminated. In the case of external benefits, too few resources are allocated, because there are social gains to be gotten from production of some products, like education, but without government intervention, only those who reap direct benefits may pay. These purchasers would see no reason to support more of the product on an individual basis, so the government intervenes through subsidies or public production. Stabilization is the fifth government role. The Federal government, through fiscal policy (taxation and government spending) attempts to prevent inflation and unemployment. The governments role is to attempt to dampen or stabilize the effect of business cycles. In general I think that any function that involves resource reallocation is potentially contentious, especially if parties see themselves as losing from the reallocation, even if the net gain for society is positive. Issues of fairness are also likely to generate controversy, particularly in cases involving redistribution 2. What are the two characteristics of public goods? Explain the significance of each for public provision as opposed to private provision. What is the free-rider problem as it relates to public goods? Is the U.S. border patrol a public good or a private good? Why? How about satellite TV? Explain.

Chelsea A. Joffrion Econ Homework 11/21/11

Public goods are nonrival (one persons consumption does not prevent consumption by another) and nonexcludable (once the goods are produced nobodyincluding free riderscan be excluded from the goods benefits). If goods are nonrival, there is less incentive for private firms to produce them those purchasing the good could simply allow others the use without compensation. Similarly, if goods are nonexcludable, private firms are unlikely to produce them as the potential for profit is low. The free rider problem occurs when people benefit from the public good without contributing to the cost (tax revenue proportionate to the benefit received). The U.S. border patrol is a public good my use and benefit does not prevent yours. Satellite TV is a private good if the dish, receiver, and service go to my residence it cant go to my neighbors. The fact that I could invite my neighbor over to watch does not change its status from being a private good. 3. What do economists mean when they refer to Social Security as a pay-as-you-go-plan? What is meant by the statement is that current payments made by workers go to retirees. Any excess goes to the Treasury for whatever purposes Congress desires. There isn't any money saved up. No one is entitled to a future benefit. Should the Congress cancel all payments tomorrow, it could. Likewise, if it simply did not authorize money to be paid, that would be the same as a cancellation of all benefits. If it wanted to keep collecting the tax, it could. A savings plan, like an annuity, is paid up prior to use and then is converted to a stream of payments. Congress has been collecting excess payments for decades

Chelsea A. Joffrion Econ Homework 11/21/11

and using it on defense, personal pet projects and so forth. Now the system is about to run short on funds, what Congress decides to do is yet to be seen. 4. Why do economists include only final goods and services in measuring GDP for a particular year? Why dont they include the value of the stocks and bonds bought and Sold? Why dont they include the value of the used furniture bought and sold? The dollar value of final goods includes the dollar value of intermediate goods. If intermediate goods were counted, then multiple counting would occur. The value of steel (intermediate good) used in autos is included in the price of the auto (the final product). This value is not included in GDP because such sales and purchases simply transfer the ownership of existing assets; such sales and purchases are not themselves (economic) investment and thus should not be counted as production of final goods and services. Used furniture was produced in some previous year; it was counted as GDP then. Its resale does not measure new production. 5. Define net export. Explain how U.S. exports and imports each affect domestic production. Suppose foreigners spend $7 billion on U.S. exports in a specific year and Americans spend $5 billion on imports from abroad in the same year. What is the amount of the United States new exports? Explain how net exports might be a negative amount. Net exports are the value of a nations exports minus the value of its imports.

Chelsea A. Joffrion Econ Homework 11/21/11

The United States' exports are as much a part of the nation's production as are the expenditures of its own consumers on goods and services made in the United States. Therefore, the United States exports must be counted as part of GDP. On the other hand, imports, being produced in foreign countries, are part of those countries' GDPs. When Americans buy imports, these expenditures must be subtracted from the United States' GDP, for these expenditures are not made on the United States' production. If foreigners spend $7 billion on U.S. exports and Americans spend $5 billion on foreign imports in a given year, net exports would be positive $2 billion. If imports exceed exports, the net exports are negative. For example, if foreigners spend $7 billion on U.S. exports and Americans spend $10 billion on foreign imports in a given year, net exports would be negative $3 billion (-$3 billion). Having that negative component will then cause the nations output (GDP) to decrease. The economy's output is also its income because all these components in this equation is what composes a nations economy. Factors affecting net exports include prosperity abroad, tariffs and exchange rates.