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lectur6-page47 - economically justified The first type of...

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47 47 The Limited Role of Government u Raise funds through taxation and other means (BORROW) for public goods such as national defense. u Therefore, government is essential to the existence of a pure capitalist economic system . In pure capitalism, government has a plenty to do and is essential to the existence of the economy. What is a public good ? The example used above was national defense. Basically, the provision of a public good is a government response to “market failure.” A market failure occurs when capitalism (1) produces the wrong amounts of certain commodities, or (2) fails to allocate any resources whatsoever to the production of certain commodities whose output is
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Unformatted text preview: economically justified. The first type of failure results from spillover costs and spillover benefits (externalities). Spillover costs (negative externalities) can be remedied by government through legislation or specific taxes. Spillover benefits (positive externalities) can be remedied by government through specific subsidies to consumers or producers, or through the production of quasi-public goods . The second type of failure strictly involves government production of public goods. (McConnel and Brue, Economics: Principles, Problems and Policies, 14th edition, Irwin McGraw-Hill, Inc., 1999, ISBN 0-07-047094-4)...
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