ECON 369 - Public Sector Economics

In Class Exercise Two - Arguments for Government

1. Explain what "government" is.  When deciding if government should enter the picture (in any given case) what kind of considerations should an economists make?

2.  Explain what a negative externality is.  Give an example.

3.  Economists contend that in order to try to decrease negative externalities - we should set up the rules of the game such as private costs = social costs as much as is possible.  Explain what that means.

4.  Graphically show why, at least theoretically, a production process that does not include external costs would "over" produce the good.

5.  Explain why each of the following is used as a justification for government to allocate income and wealth (instead of relying solely on markets):

a.  public good:

b.  imperfect competition:

c.  distributive inequalities:

6.  Now, counter-argue each of the arguments you made in a-c above.

a.  public good:

b.  imperfect competition:

c.  distributive inequalities:

7.  Do you have any other questions over this material?