[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Review and Practice
SUMMARY
1. Government plays a pervasive role in the economy,
influencing the economy through taxes, expenditures,
and myriad regulations that affect every aspect of
economic life.
2. In the United States, federal government spending over
the past fifty years has shifted away from defense and
toward Social Security, health care, and welfare. These
areas accounted for 57 percent of expenditures in 2000.
3. There are three basic reasons why the government
intervenes in the economy: (1) to improve economic
efficiency by correcting market failures, (2) to pursue
social values of fairness by altering market outcomes,
and (3) to pursue other social values by mandating the
consumption of merit goods (such as education) and
outlawing the consumption of merit bads (such as
illicit drugs).
4. Sometimes government faces a trade-off between
improving the efficiency of the economy and promoting
equity. The U.S. income tax illustrates this trade-off. In
the interest of equity, the system requires the wealthy to
pay a greater share of the tax than the poor. On the
other hand, the progressive income tax discourages
from work those who are the most productive.
5. A tax system can be judged by five criteria: fairness,
efficiency, administrative simplicity, flexibility, and
transparency.
6. Government transfer programs alter the income distribution
by transferring resources from those who are relatively
wealthy to those who are relatively poor. In the
United States, there are five major transfer programs:
welfare, Medicaid, food stamps, supplemental security
income, and housing assistance.
7. Just as markets may fail, attempts by the government to
intervene in the economy may also fail. Four major factors
underlie systematic government failure: incentive
problems, budgeting problems, information problems,
and the nature of political decision making.
8. Some of the most important areas of public policy
debate regarding the economic role of government
relate to the federal budget deficit, reform of the
Social Security system, and reform of the U.S. health
care system.
KEY TERMS
transfer programs
merit goods
consumer sovereignty
progressive tax system
regressive tax system
marginal tax rate
horizontal equity
vertical equity
individual income taxes
corporation income taxes
property taxes
gift and estate taxes
payroll tax
excise taxes
sin taxes
benefit taxes
luxury taxes
sales tax
average tax rate
earned-income tax credit
tax subsidies
tax expenditure
matching programs
block grants
entitlement programs
voting paradox
pay-as-you-go program
fully funded program
REVIEW QUESTIONS
1. Name some of the ways that government touches the
lives of all citizens, both in and out of the economic sphere.
2. Explain the rationale for government intervention in the
economy in connection with economic efficiency, equity,
and the role of merit goods.
3. What are the five characteristics of a good tax system?
How well does the U.S. tax system fare in terms of these
criteria? What is the difference between horizontal
equity and vertical equity? What is the difference
between a progressive and a regressive tax?
REVIEW AND PRACTICE ∂ 401