Ch.03 Economic Role of Government - Part 1.pdf - ECONOMIC...

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ECONOMIC ROLE OF GOVERNMENT Econ 353: Taxation Policy and Structure Chapter 3 – Economic Role of Government
Review of Government Functions * Such a correction can be done through a direct involvement (good provision) or indirect involvement (price regulation or subsidy provision) Fiscal federalism function is a derivative of the three function here as it attempts to define co- existence of the government levels
Nature of Markets Market Power: Natural monopoly : AC is decreasing only and MC<AC, e.g. water, electricity and television companies Monopoly denotes the monopoly equilibrium with high price and low quantity Alternative denotes the best alternative sustainable equilibrium given by D=AC with lower price and higher quantity (NOTE: perfect competitive equilibrium given by D=MC would inflict economic losses on this company) To reach the alternative equilibrium the government can either regulate it or own it
Adverse Selection/Moral Hazard: (1) Adverse Selection – a situation when one of the parties to a transaction is lacking relevant knowledge about the other and is taken advantage of by the other party hidden information problem examples: health insurance, vehicle insurance, student loans etc. solution: government involvement The government can either require insurance or provide the service itself

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