Roles of Government

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Definitions and Basics

    Public Goods and Externalities, from the Concise Encyclopedia of Economics
    Most economic arguments for government intervention are based on the idea that the marketplace cannot provide public goods or handle externalities. Public health and welfare programs, education, roads, research and development, national and domestic security, and a clean environment all have been labeled public goods.

    Public goods have two distinct aspects—"nonexcludability" and "nonrivalrous consumption." Nonexcludability means that nonpayers cannot be excluded from the benefits of the good or service. If an entrepreneur stages a fireworks show, for example, people can watch the show from their windows or backyards. Because the entrepreneur cannot charge a fee for consumption, the fireworks show may go unproduced, even if demand for the show is strong....
    Government Spending, from the Concise Encyclopedia of Economics
    In the past, government spending increased during wars and then typically took some time to fall back to its previous level. Because the effects of World War I were not totally gone by 1929, the line for the United States from 1790 to 1929 has a very slight upward slant. But in the second quarter of the twentieth century, government spending began a rapid and steady increase. While economists and political scientists have offered many theories about what determines the level of government spending, there really is no known explanation for either part of this historical record....
    Distribution of Income, from the Concise Encyclopedia of Economics
    The distribution of income is central to one of the most enduring issues in political economics. On one extreme are those who argue that all incomes should be the same, or as nearly so as possible, and that a principal function of government should be to redistribute income from the haves to the have-nots. On the other extreme are those who argue that any income redistribution by government is bad....
    Federal Budget, from the Concise Encyclopedia of Economics
    Deficit spending has been a way of life for the federal government for most years since World War II. A whole generation of elected federal officials has come and gone without ever balancing the budget. The last time that federal budget expenditures were brought into balance with revenues was in 1969, and prior to that the last time was in 1960....
    Taxation, A Preface, from the Concise Encyclopedia of Economics
    Economists specializing in public finance have long enumerated four objectives of tax policy: simplicity, efficiency, fairness, and revenue sufficiency. While these objectives are widely accepted, they often conflict, and different economists have different views of the appropriate balance among them....

In the News and Examples

    Should government help people make better choices? Richard Thaler on Libertarian Paternalism. Podcast on EconTalk
    Richard Thaler of the University of Chicago Graduate School of Business defends the idea of libertarian paternalism--how government might use the insights of behavioral economics to help citizens make better choices. Host Russ Roberts accepts the premise that individuals make imperfect choices but challenges Thaler on the likelihood that government, in practice, will improve matters. Along the way they discuss the design of Sweden's social security system, organ donations and whether professors at Cornell University are more or less like you and me....
    Can taxes correct externalities? Greg Mankiw on Gasoline Taxes, Keynes and Macroeconomics. Podcast on EconTalk
    Greg Mankiw of Harvard University and Greg Mankiw's Blog talks about the state of modern macroeconomics and Keynes vs. the Chicago School. He defends his proposal to raise gasoline taxes and discusses the politics of tax policy....
    Public Schools, from the Concise Encyclopedia of Economics
    By most accounts America's schools are not performing very well. The average combined (verbal and mathematics) score on the Scholastic Aptitude Test was seventy-five points higher in 1963 than it was in 1990. A high school senior ranked at the 50th percentile on the SAT in 1990 would have ranked around the 33rd percentile in 1963. American students trail most of their international counterparts in mathematics and science achievement. Recent comparisons of industrialized countries place the United States between tenth and fifteenth in these economically vital fields. And excellence is not all that is missing. Performance among schools is quite inconsistent. Blacks score nearly two hundred points below whites on the SAT. Urban high schools, which serve disproportionately large numbers of poor families, fail to graduate nearly half of their students; high schools nationwide graduate about four-fifths of theirs....
    Electric Utility Regulation, from the Concise Encyclopedia of Economics
    Two characteristics of electric power make utilities different from most other industries. First, both high-voltage transmission and low-voltage distribution are most economically performed by a single line or a single network of lines. Because a single high-capacity line minimizes both capital costs and losses to electrical resistance per unit of power carried, transmission and distribution are natural monopolies....
    Social Security, from the Concise Encyclopedia of Economics
    The Social Security system, including old-age and survivors insurance, disability insurance, and hospital insurance (Medicare), poses a staggering liability in the years ahead. Benefits in the year 2025, when the retirement of the baby-boom generation is in full swing, are projected to cost 23 percent of taxable payroll in the economy, up from 14 percent today....

A Little History: Primary Sources and References

What is a flat tax? What are the economic implications? Rabushka on the Flat Tax. Podcast on EconTalk
Alvin Rabushka of Stanford University's Hoover Institution lays out the case for the flat tax, a reform of the current system that would replace the 66,000 page U.S. tax code with a single rate and no deductions other than personal exemptions. An individual tax return would fit on a simple postcard. Rabushka discusses the economic changes that would come with such a reform and the adoption of the flat tax around the world since Rabushka and Robert Hall proposed the idea in 1981....

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