Chapter 17 Summary

Chapter 17 Summary - Chapter 17 Summary: The Role of...

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Chapter 17 Summary : The Role of Government The government has several important roles: To provide for national defense, to maintain justice; to engage in certain public works (like highways, sewage systems, etc); to maintain competition; and to break up monopoly power. The government can use its taxing power to provide a good that otherwise would not be provided. Like a public good. If the cost of a particular good is > its per capita benefit, that good will not be provided by a market…. Even if the total benefit is > the total cost. Markets do not always achieve the efficient and equitable outcomes we have studied much of this semester. There are instances when costs of production are in fact imposed upon others to their detriment (who have no say in the matter). In these cases government does need to step in. They are called externalities. Externalities: can interfere with market efficiency. They exist whenever the market does not recognize all of the costs or benefits of production or consumption. That is to say, an externality is created when individuals impose costs onto others, but they do not take this into account in their pricing signal. They might be termed ‘side-effects’ of business action. Pollution is a negative externality. It is a side-effect of a production decision that historically was not often taken into account in the decision to produce. There are negative externalities. Positive externalities exist when one production process provides an external benefit to another process or individual. Benefits that individuals confer onto others without receiving compensation. Price includes Explicit costs (for the factors of production) + Implicit costs (the opportunity cost of time and foregone alternatives). These are the internal costs and are used to determine the selling price. When a paper mill emits foul odors, it is imposing a cost on the people in nearby communities… yet without government intervention – these people are not compensated. Also, the firm’s
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This note was uploaded on 01/23/2012 for the course ECON 202 taught by Professor Hammond during the Fall '11 term at Boise State.

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Chapter 17 Summary - Chapter 17 Summary: The Role of...

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