AP Macroeconomics

Chapter 4:

Adding the Government to the Economic Equation

5 key roles of Government

1-legal framework2-maintain competition

Monopolies vs. natural monopolies3-redistribution of income

Transfer paymentsMarket intervention taxes

4-reallocation of resources

Market failureSpillovers or externalities

CAN BE A SPILLOVER COST OR SPILLOVER BENEFIT

Spillover costsHow to fix this??

Spillover Benefits

Gov’t wants more of a good produced because it is good for society

Market demand curve understates total benefitsHow to fix this?

TYPES OF GOODS

PRIVATE Competitive market Rivalry excludability

PUBLIC No rivalry No exclusion Free rider problem

QUASI PUBLIC-could be done thru

market systemBut would be underproduced

5th-promote stability

UNEMPLOYMENT What can the gov’t

do to fix this?

Gov’t spending Taxes Central bank*

INFLATION What can the gov’t

do to fix this?

Gov’t spending Taxes *central bank

Adding Gov’t to the Circular Flow

Net Taxes=Taxes in reverse

Exhaustive vs. Non-Exhaustive Purchases

Exhaustive Directly absorb

resources thru gov’t purchase

Examples:

Non-Exhaustive Transfer payments No current use of

resources No contribution to

domestic output

Gov’t Spending vs. Revenue

Taxes

Taxes levied on taxable income after exemptions

ProgressiveMarginal tax rate

State and Local Gov’t

State Gov’t Revenue

47% sales & excise 36% income tax

Expenses 36% education 25% public welfare 8% health/hospitals

Local Gov’t Revenue

72% property taxes 17% sales & excise

Expenses 44% education 12% health/welfare

& hospitals Other—state/fed/

utilities