Lecture 24 Government Activity: Taxes and Transfers

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Lecture 24 - Government ActivityTaxes and
Transfers

• Wissinks Words

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remarks

• Activities of the government introduced.
• Lecture is chock full of interesting descriptive
  information - look it over carefully.
• Why do governments do what they do?
• Two basic rationales
• to ameliorate inefficiencies due to make failure
• rectify inequities if distribution of goods and
  services

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• Three mico questions
• What?
• How?
• For whom?
• In market economies the invisible hand of the
  price mechanism answers these questions.

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pareto efficiency (review)

• An outcome is Pareto Efficient if no one can be
  made better off without making at least one other
  person worse off.
• Three crucial ingredients for markets to be
  efficient
• price taking behavior in markets
• purely private goods markets
• full and symmetric information in markets

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but how about equity?

• Even though competitive markets produce Pareto
  Efficient outcomes, the resulting distribution of
  income (wealth, utility, whatever) is not
  necessarily equal.
• Societies that are concerned about both
  allocative efficiency (Pareto Efficiency) and
  equity (more equal distribution of income or
  wealth) often regulate the outcome of markets and
  redistribute income from wealthier to less
  wealthy persons in the society.

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efficiency and equity

• Think about the POW camp story.
• Assume things work out so that the market
  allocation is efficient.
• Is it also fair?
• How about for the poor guy from Idaho?
• Tough questions. Compelling questions.
• Can we cut the pie more evenly without the pie
  getting smaller in the process?
• Often must address the tradeoff and tension
  between efficiency and equity.