1.

What are the differing views concerning the economic role

ofgovernment? How have they changed over the years and what
has given rise to those changes?

Mechantilism(18th ) – Gold, colonism, government promotes trade and industry.

Classical(1776-1929)- no regulation

Marksizm- in hearts

Neolibertian- 1971-2008

2. Discuss the possible factors that may cause government

interventions to fail.

Government's limited information

Limited control over private responses to its actions

its limited control over the bureaucracy

the limitations imposed by political processes

Externalities and moral hazard

3. What are the main sources of disagreements among economists towards the
government’s role in the economy.

Differences in views on how the economy behaves( Clasical, Maksist, Keynessians and etc.)

Disagreement over values( differences in experiments, values, beliefs, ethic, education and etc.)

4. Indicate and explain the stages to analyze public sector policies.

 5. Discuss achieving the balance between public and private sectors in mixed
economies.

A mixed economic system is an economic system that features characteristics of

both capitalism and socialism. A mixed economic system protects private property
and allows a level of economic freedom in the use of capital, but also allows for
governments to interfere in economic activities in order to achieve social aims.
According to neoclassical theory, mixed economies are less efficient than pure
free markets, but proponents of government interventions argue that the base
conditions such as equal information and rational market participants cannot be
achieved in practical application.

Most modern economies feature a synthesis of two or more economic systems,

with economies falling at some point along a continuum. The public sector works
alongside the private sector, but may compete for the same limited resources.
Mixed economic systems do not block the private sector from profit-seeking, but
do monitor profit levels and may nationalize companies that are deemed
impediments to the public good. The United States is mostly a free market
economy, but it incorporates elements such as protection for agriculture and
manufacturing by through trade restrictions and subsidies. This makes the United
States a mixed economy by definition.

Governments may seek to redistribute wealth by taxing the private sector, and
using funds from taxes to promote social objectives. Trade protection, subsidies,
targeted tax credits, fiscal stimulus and public-private partnerships are common
examples of government intervention in mixed economies.

THE PUBLIC SECTOR IN A MIXED ECONOMY

• All of us pay taxes to the government

• Significant amount of population employed by the government
• In many areas of production profits and employment opportunities are greatly
affected by whether the government allows foreign competitors to sell goods in
our country without a tariff or quota.
• We travel on public roads and publicly subsidized railroads. In most communities
garbage is collected and our sewage is disposed of by a public agency;
• Legal structure provides a framework within which individuals and
firms can sign contracts with one another. In case of a dispute between two
individuals, courts are the to solve the dispute.

Without or poor government environmental regulations, cities would be choked

with pollution, the water of lakes and rivers would be undrinkable
 6. What do economists mean when they say the economy is
efficient?.

Resource allocations that have the property that no one can be made better off without someone
being made worse off are said to be Pareto efficient, or Pareto optimal. Pareto efficiency is what
economists normally mean when they talk about efficiency

• Assume, for instance, that the government is contemplating building a bridge. Those who
wish to use the bridge are willing to pay more than enough in tolls to cover the costs of
construction and maintenance. The construction of this bridge is likely to be a Pareto
improvement, that is, a change which makes some individuals better off without making
anyone worse off. We use the term "likely" because there are always others who might be
adversely affected by the construction of the bridge.

• For example, if the bridge changes the traffic flow, some stores might find that their
business is decreased, and they are worse off. Or an entire neighborhood may be affected
by the noise of bridge traffic and the shadows cast by the bridge superstructure.

• Economists are always on the lookout for Pareto improvements. The belief that any such
improvements should be instituted is referred to as the Pareto principle.

• Packages of changes together may constitute a Pareto improvement,

when each change alone might not.

• Thus, while reducing the tariff on steel would not be a Pareto improvement (since steel
producers would be worse off), it might be possible to reduce the tariff on steel, increase
income taxes slightly, and use the proceeds to finance a subsidy to the steel industry; such
a combination of changes might make everyone in the country better off (and make those
abroad, the foreign exporters of steel, also better off).

7. What conditions have to be satisfied if markets are to be efficient

Exchange efficiency: Marginal rate of substitution between any two goods must be the
same for all individuals.

Production efficiency: Marginal rate of technical substitution between any two inputs must
be the same for all firms.

Product mix efficiency: Marginal rate of transformation must equal marginal rate of
substitution.

Competitive economies satisfy all three conditions.

 8. Discuss the fundamental theorems of welfare economics

Every competitive economy is Pareto efficient.

Every Pareto efficient resource allocation can be attained through a

competitive market mechanism, with the appropriate initial redistributions.

9. Discuss the exchange efficiency.

To develop a deeper analysis that goes beyond the basic supply and demand framework
just presented, economists consider three aspects of efficiency, all of which are required for
Pareto efficiency. First, the economy must achieve exchange efficiency, that is, whatever
goods are produced have to go to the individuals who value them most.

• Exchange efficiency concerns the distribution of goods. Given a particular set of

available goods, exchange efficiency provides that those goods are distributed so no one
can be made better off without someone else being made worse off. Exchange efficiency
thus requires that there is no scope for trades, or exchanges that would make both parties
better off.

• Assume that Robinson is willing to give up one apple in exchange for

one orange, or to get one apple in exchange for giving up one orange. As-
sume that Friday, on the other hand, is willing to give up three apples if he
can get one more orange. At the margin, Friday values oranges more highly
than does Robinson. Clearly, there is room for a deal: if Robinson gives Fri-
day one of his oranges, and Friday gives Robinson two of his apples, both
are better off. Robinson would have required only one apple to make him
just as well off, but he gets two in exchange for his orange. Friday would have been
willing to give up three apples; he only gave up two, so he is
clearly better off.
 So long as Robinson and Friday's marginal rates of substitution
differ, there will be room for a deal. Thus, exchange efficiency requires that
all individuals have the same marginal rate of substitution

10. Discuss the production efficiency.

If an economy is not productively efficient, it can produce more of one good without
reducing production of other goods. Along the production possibilities frontier in the
economy cannot produce more of one good without giving up some of another good, given
a fixed set of resources

• Isoquants trace out the different combinations of inputs—in this case, land and labor—
that produce the same quantities of outputs.

• Thus, isoquants are to the analysis of production what indifference curves are to the
analysis of consumption. Economists call the slope of an isoquant the marginal rate of
technical substitution.

• In Figure 3.7, the marginal rate of technical substitution is the amount of land required to
compensate for a decrease in the input of labor by one unit.
 • Just as exchange efficiency required that the marginal rate of substitution between any
pair of commodities be the same for all individuals,

Production efficiency requires that the marginal rate of technical substitution be the same
for all firms

11. What are the principal reasons why markets fail to produce efficient
outcomes

imperfect competition, public goods, externalities, incomplete markets, and imperfect

information

12. Discuss the market failure cases and government’s role to deal
with these situations

Policies to overcome market failure

Taxes on negative externalities

Subsidies on positive externalities

Laws and Regulations

Electronic Road Pricing – a specific tax related to congestion

Pollution Permits – giving firms the ability to trade pollution permits.

Advertising: Government campaigns to change people’s preferences.

Nudges – use of behavioural economics

Buffer stock schemes – Government price control to try to stabilise prices.

Changes in Property Rights – Coase theorem

Policies to overcome poverty/inequality – inequality can be seen as type of market

failure

Policies to reduce unemployment – policies to overcome market failures, such as

geographical and occupational immobilities.

13. Why might the government intervene in the market's allocation of

resources, even when it is Pareto efficient? What are merit goods? What
is government's role in redistribution

It may be essential to protect property rights and protect law and paretto efficiency may fail
when a firm in a unregulated competitive market gains extreme power( monopoly) and
sometimes market for certain commodities may not emerge

Merit goods- Goods or services (such as education and vaccination) provided free for the
benefit of the entire society by a government, because they would be under-provided if left to
the market forces or private enterprise.

Governments Redistrubition- Taxes, Social programs zad. Prezdə marasqız yazılıb