MACROECONOMICS

1. What is the difference between private and social costs?

Private cost refers to the cost of production incurred and provided for by an
individual firm engaged in the production of a commodity; and this cost does not
deal with the society.
In the contrary, social cost refers to the cost of producing a commodity to the
society as a whole. It takes into consideration all those costs, which are borne by
the society directly or indirectly. Social cost is not borne by the firm. It is rather
passed on to persons not involved in the activity in the direct way. Social cost is a
much broader concept.

2. How can the government intervene to force consumers to internalize

external costs associated with:
a. Negative externalities?
In order to internalize negative externalities, the government could alter
incentives so that people take account of the external effects of their actions. By
doing so, the government could achieve the socially optimal output by imposing
a tax on the producer to reduce the equilibrium quantity to the socially desirable
quantity.

b. Positive externalities?
In order to internalize positive externalities, the government could intervene
in the economy by promoting technology-enhancing industries. The
government could also improve health provision and health care in order to
reduce absenteeism and creates a better quality of life and higher living
standards. In addition, the government could invest in improving the
education and the training of the labour force in order to increase efficiency
and produce other important social benefits.

3. Differentiate between public good and common resources.

A public good is neither rival nor excludable. A public good is not rival because
everyone can consume the good simultaneously. It is not excludable because
once the good is produced; it is prohibitively costly to exclude anyone from
consuming the good. On the other hand, a common resource is a rival good that is
not excludable. That means that the consumption of a good by one person
precludes its consumption by another person and non-paying consumers cannot
be prevented from accessing it.

4. Would a tax on prescriptions drugs be more likely to be progressive or

regressive? Why?
A tax on prescriptions drugs would most likely be regressive. Prescription
medication is essentially a necessity. The dollar amount of the taxes would not
vary between households based on income. However, the same dollar amount
would represent a smaller percentage of the income for a high-income household
while representing a larger percentage of the income of a low-income household.

5. What are the advantages of a flat tax system?

The advantages of the flat tax are that all of the traditional exemptions, like
entertainment deductions, mortgage interest deductions, business travel
expenses, and charitable contribution deductions, would be removed, along
with the possibilities of abuses and misrepresentations that go with tax
deductions. Taxpayers could fill out tax returns in a space about the size of a
postcard. Advocates argue that the government could collect the same
amount of tax revenues, but the tax would be much more efficient.