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Chapter Review Chapter 17: The Public Sector

  1. Government plays a pervasive role in the economy, influencing the economy through taxes, expenditures, and myriad regulations that affect every aspect of economic life.
  2. In the United States, federal government spending over the past fifty years has shifted away from defense and toward Social Security, health care, and welfare. These areas accounted for 57 percent of expenditures in 2000.
  3. There are three basic reasons why the government intervenes in the economy: (1) to improve economic efficiency by correcting market failures, (2) to pursue social values of fairness by altering market outcomes, and (3) to pursue other social values by mandating the consumption of merit goods (such as education) and outlawing the consumption of merit bads (such as illicit drugs).
  4. Sometimes government faces a trade-off between improving the efficiency of the economy and promoting equity. The U.S. income tax illustrates this trade-off. In the interest of equity, the system requires the wealthy to pay a greater share of the tax than the poor. On the other hand, the progressive income tax discourages from work those who are the most productive.
  5. A tax system can be judged by five criteria: fairness, efficiency, administrative simplicity, flexibility, and transparency.
  6. Government transfer programs alter the income distribution by transferring resources from those who are relatively wealthy to those who are relatively poor. In the United States, there are five major transfer programs: welfare, Medicaid, food stamps, supplemental security income, and housing assistance.
  7. Just as markets may fail, attempts by the government to intervene in the economy may also fail. Four major factors underlie systematic government failure: incentive problems, budgeting problems, information problems, and the nature of political decision making.
  8. Some of the most important areas of public policy debate regarding the economic role of government relate to the federal budget deficit, reform of the Social Security system, and reform of the U.S. health care system.
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