15.1 The Role of Government in a Market Economy
Learning Objectives
- Discuss and illustrate government responses to the market failures
of public goods, external costs and benefits, and imperfect competition
and how these responses have the potential to reduce deadweight loss.
- Define behavioral economics and explain how findings in this area of economics may be used to design government policy.
- Discuss ways in which governments redistribute income.
What do
we want from our government? One answer is that we want a great deal
more than we did several decades ago. The role of government has
expanded dramatically in the last 80+ years. In 1929 (the year the
Commerce Department began keeping annual data on macroeconomic
performance in the United States), government expenditures at all levels
(state, local, and federal) were less than 10% of the nation’s total
output, which is called gross domestic product (GDP). In the current
century, that share has more than tripled.
shows total government expenditures and revenues as a percentage of GDP
from 1929 to 2010. All levels of government are included. Government expendituresAll spending by government agencies. include all spending by government agencies. Government revenuesAll funds received by government agencies.
include all funds received by government agencies. The primary
component of government revenues is taxes; revenue also includes
miscellaneous receipts from fees, fines, and other sources. We will look
at types of government revenues and expenditures later in this chapter.
also shows government purchases as a percentage of GDP. Government purchasesGoods or services purchased by a government agency.
happen when a government agency purchases or produces a good or a
service. We measure government purchases to suggest the opportunity cost
of government. Whether a government agency purchases a good or service
or produces it, factors of production are being used for public sector,
rather than private sector, activities. A city police department’s
purchase of new cars is an example of a government purchase. Spending
for public education is another example.
Government
expenditures and purchases are not equal because much government
spending is not for the purchase of goods and services. The primary
source of the gap is transfer paymentsPayments made by government agencies to individuals in the form of grants rather than in return for labor or other services.,
payments made by government agencies to individuals in the form of
grants rather than in return for labor or other services. Transfer
payments represent government expenditures but not government purchases.
Governments engage in transfer payments in order to redistribute income
from one group to another. The various welfare programs for low-income
people are examples of transfer payments. Social Security is the largest
transfer payment program in the United States. This program transfers
income from people who are working (by taxing their pay) to people who
have retired. Interest payments on government debt, which are also a
form of expenditure, are another example of an expenditure that is not
counted as a government purchase.
Several points about
bear special attention. Note first the path of government purchases.
Government purchases relative to GDP rose dramatically during World War
II, then dropped back to about their prewar level almost immediately
afterward. Government purchases rose again, though less sharply, during
the Korean War. This time, however, they did not drop back very far
after the war. It was during this period that military spending rose to
meet the challenge posed by the former Soviet Union and other communist
states—the “Cold War.” Government purchases have ranged between 17 and
23% of GDP ever since. The Vietnam War, the Persian Gulf War, and the
wars in Afghanistan and Iraq did not have the impact on purchases that
characterized World War II or even the Korean War. A second development,
the widening gap between expenditures and purchases, has occurred since
the 1960s. This reflects the growth of federal transfer programs,
principally Social Security, programs to help people pay for health-care
costs, and aid to low-income people. We will discuss these programs
later in this chapter.
Finally,
note the relationship between expenditures and receipts. When a
government’s revenues equal its expenditures for a particular period, it
has a balanced budgetSituation that occurs when a government’s revenues equal its expenditures for a particular period.. A budget surplusSituation that occurs when a government’s revenues exceed its expenditures. occurs if a government’s revenues exceed its expenditures, while a budget deficitSituation that occurs when government expenditures exceed revenues. exists if government expenditures exceed revenues.
Prior to
1980, revenues roughly matched expenditures for the public sector as a
whole, except during World War II. But expenditures remained
consistently higher than revenues between 1980 and 1996. The federal
government generated very large deficits during this period, deficits
that exceeded surpluses that typically occur at the state and local
levels of government. The largest increases in spending came from Social
Security and increased health-care spending at the federal level.
Efforts by the federal government to reduce and ultimately eliminate its
deficit, together with surpluses among state and local governments, put
the combined budget for the public sector in surplus beginning in 1997.
As of 1999, the Congressional Budget Office was predicting that
increased federal revenues produced by a growing economy would continue
to produce budget surpluses well into the twenty-first century.
That
rather rosy forecast was set aside after September 11, 2001. Terrorist
attacks on the United States and later on several other countries led to
sharp and sustained increases in federal spending for wars in
Afghanistan and Iraq, as well as expenditures for Homeland Security. The
administration of George W. Bush proposed, and Congress approved, a tax
cut. The combination of increased spending on the aforementioned items
and others, as well as tax cuts, produced substantial deficits. The
deficit grew markedly wider following the recession that began in
December 2007. As incomes fell, tax receipts fell. Expenditures grew due
to increased spending associated with the American Recovery and
Reinvestment Act of 2009 designed to stimulate the economy. It included
such things as extended unemployment compensation, increased assistance
for the poor, and increased infrastructure spending.
The evidence presented in
does not fully capture the rise in demand for public sector services.
In addition to governments that spend more, people in the United States
have clearly chosen governments that do more. The scope of regulatory
activity conducted by governments at all levels, for example, has risen
sharply in the last several decades. Regulations designed to prevent
discrimination, to protect consumers, and to protect the environment are
all part of the response to a rising demand for public services, as are
federal programs in health care and education.
summarizes the main revenue sources and types of expenditures for the
U.S. federal government and for the European Union. In the United
States, most revenues came from personal income taxes and from payroll
taxes. Most expenditures were for transfer payments to individuals.
Federal purchases were primarily for national defense; the “other
purchases” category includes things such as spending for transportation
projects and for the space program. Interest payments on the national
debt and grants by the federal government to state and local governments
were the other major expenditures. The situation in the European Union
differs primarily by the fact that a greater share of revenue comes from
taxes on production and imports and substantially less is spent on
defense.
To
understand the role of government, it will be useful to distinguish four
broad types of government involvement in the economy. First, the
government attempts to respond to market failures to allocate resources
efficiently. In a particular market, efficiency means that the quantity
produced is determined by the intersection of a demand curve that
reflects all the benefits of consuming a particular good or service and a
supply curve that reflects the opportunity costs of producing it.
Second, government agencies act to encourage or discourage the
consumption of certain goods and services. The prohibition of drugs such
as heroin and cocaine is an example of government seeking to discourage
consumption of these drugs. Third, the government redistributes income
through programs such as welfare and Social Security. Fourth, the
government can use its spending and tax policies to influence the level
of economic activity and the price level.
We will
examine the first three of these aspects of government involvement in
the economy in this chapter. The fourth, efforts to influence the level
of economic activity and the price level, fall within the province of
macroeconomics.
Responding to Market Failure
In
an earlier chapter on markets and efficiency, we learned that a market
maximizes net benefit by achieving a level of output at which marginal
benefit equals marginal cost. That is the efficient solution. In most
cases, we expect that markets will come close to achieving this
result—that is the important lesson of Adam Smith’s idea of the market
as an invisible hand, guiding the economy’s scarce factors of production
to their best uses. That is not always the case, however.
We
have studied several situations in which markets are unlikely to
achieve efficient solutions. In an earlier chapter, we saw that private
markets are likely to produce less than the efficient quantities of
public goods such as national defense. They may produce too much of
goods that generate external costs and too little of goods that generate
external benefits. In cases of imperfect competition, we have seen that
the market’s output of goods and services is likely to fall short of
the efficient level. In all these cases, it is possible that government
intervention will move production levels closer to their efficient
quantities. In the next three sections, we shall review how a government
could improve efficiency in the cases of public goods, external costs
and benefits, and imperfect competition.
Public Goods
A
public good is a good or service for which exclusion is prohibitively
costly and for which the marginal cost of adding another consumer is
zero. National defense, law enforcement, and generally available
knowledge are examples of public goods.
The
difficulty posed by a public good is that, once it is produced, it is
freely available to everyone. No consumer can be excluded from
consumption of the good on grounds that he or she has not paid for it.
Consequently, each consumer has an incentive to be a free rider in
consuming the good, and the firms providing a public good do not get a
signal from consumers that reflects their benefit of consuming the good.
Certainly
we can expect some benefits of a public good to be revealed in the
market. If the government did not provide national defense, for example,
we would expect some defense to be produced, and some people would
contribute to its production. But because free-riding behavior will be
common, the market’s production of public goods will fall short of the
efficient level.
The
theory of public goods is an important argument for government
involvement in the economy. Government agencies may either produce
public goods themselves, as do local police departments, or pay private
firms to produce them, as is the case with many government-sponsored
research efforts. An important debate in the provision of public
education revolves around the question of whether education should be
produced by the government, as is the case with traditional public
schools, or purchased by the government, as is done in charter schools.
External Costs and Benefits
External costs are imposed when an action by one person or firm harms another, outside of any market exchange. The social costThe private cost of producing a good or service plus the external cost of producing it.
of producing a good or service equals the private cost plus the
external cost of producing it. In the case of external costs, private
costs are less than social costs.
Similarly,
external benefits are created when an action by one person or firm
benefits another, outside of any market exchange. The social benefitThe private benefit of a good revealed in the market plus external benefits.
of an activity equals the private benefit revealed in the market plus
external benefits. When an activity creates external benefits, its
social benefit will be greater than its private benefit.
The
lack of a market transaction means that the person or firm responsible
for the external cost or benefit does not face the full cost or benefit
of the choice involved. We expect markets to produce more than the
efficient quantity of goods or services that generate external costs and
less than the efficient quantity of goods or services that generate
external benefits.
Consider
the case of firms that produce memory chips for computers. The
production of these chips generates water pollution. The cost of this
pollution is an external cost; the firms that generate it do not face
it. These firms thus face some, but not all, of the costs of their
production choices. We can expect the market price of chips to be lower,
and the quantity produced greater, than the efficient level.
Inoculations
against infectious diseases create external benefits. A person getting a
flu shot, for example, receives private benefits; he or she is less
likely to get the flu. But there will be external benefits as well:
Other people will also be less likely to get the flu because the person
getting the shot is less likely to have the flu. Because this latter
benefit is external, the social benefit of flu shots exceeds the private
benefit, and the market is likely to produce less than the efficient
quantity of flu shots. Public, private, and charter schools often
require such inoculations in an effort to get around the problem of
external benefits.
Imperfect Competition
In
a perfectly competitive market, price equals marginal cost. If
competition is imperfect, however, individual firms face
downward-sloping demand curves and will charge prices greater than
marginal cost. Consumers in such markets will be faced by prices that
exceed marginal cost, and the allocation of resources will be
inefficient.
An
imperfectly competitive private market will produce less of a good than
is efficient. As we saw in the chapter on monopoly, government agencies
seek to prohibit monopoly in most markets and to regulate the prices
charged by those monopolies that are permitted. Government policy toward
monopoly is discussed more fully in a later chapter.
Assessing Government Responses to Market Failure
In
each of the models of market failure we have reviewed here—public
goods, external costs and benefits, and imperfect competition—the market
may fail to achieve the efficient result. There is a potential for
government intervention to move inefficient markets closer to the
efficient solution.
reviews the potential gain from government intervention in cases of
market failure. In each case, the potential gain is the deadweight loss
resulting from market failure; government intervention may prevent or
limit this deadweight loss. In each panel, the deadweight loss resulting
from market failure is shown as a shaded triangle.
Panel (a) of illustrates the case of a public good. The market will produce some of the public good; suppose it produces the quantity Qm. But the demand curve that reflects the social benefits of the public good, D1, intersects the supply curve at Qe;
that is the efficient quantity of the good. Public sector provision of a
public good may move the quantity closer to the efficient level.
Panel
(b) shows a good that generates external costs. Absent government
intervention, these costs will not be reflected in the market solution.
The supply curve, S1, will be based only on the private costs associated with the good. The market will produce Qm units of the good at a price P1.
If the government were to confront producers with the external cost of
the good, perhaps with a tax on the activity that creates the cost, the
supply curve would shift to S2 and reflect the social cost of the good. The quantity would fall to the efficient level, Qe, and the price would rise to P2.
Panel (c) gives the case of a good that generates external benefits. The demand curve revealed in the market, D1, reflects only the private benefits of the good. Incorporating the external benefits of the good gives us the demand curve D2 that reflects the social benefit of the good. The market’s output of Qm units of the good falls short of the efficient level Qe.
The government may seek to move the market solution toward the
efficient level through subsidies or other measures to encourage the
activity that creates the external benefit.
Finally, Panel (d) shows the case of imperfect competition. A firm facing a downward-sloping demand curve such as D1 will select the output Qm at which the marginal cost curve MC1 intersects the marginal revenue curve MR1.
The government may seek to move the solution closer to the efficient
level, defined by the intersection of the marginal cost and demand
curves.
While
it is important to recognize the potential gains from government
intervention to correct market failure, we must recognize the
difficulties inherent in such efforts. Government officials may lack the
information they need to select the efficient solution. Even if they
have the information, they may have goals other than the efficient
allocation of resources. Each instance of government intervention
involves an interaction with utility-maximizing consumers and
profit-maximizing firms, none of whom can be assumed to be passive
participants in the process. So, while the potential exists for improved
resource allocation in cases of market failure, government intervention
may not always achieve it.
The
late George Stigler, winner of the Nobel Prize for economics in 1982,
once remarked that people who advocate government intervention to
correct every case of market failure reminded him of the judge at an
amateur singing contest who, upon hearing the first contestant, awarded
first prize to the second. Stigler’s point was that even though the
market is often an inefficient allocator of resources, so is the
government likely to be. Government may improve on what the market does;
it can also make it worse. The choice between the market’s allocation
and an allocation with government intervention is always a choice
between imperfect alternatives. We will examine the nature of public
sector choices later in this chapter and explore an economic explanation
of why government intervention may fail to move market solutions closer
to their efficient levels.
Irrational Behavior
The growing field of behavioral economicsAn area of economics that draws on psychology and neuroscience to understand how and why individuals make decisions.—an
area of economics that draws on psychology and neuroscience to
understand how and why individuals make decisions—has led to
consideration of new areas for government policy. Using experiments and
surveys, behavioral economists have found that people’s decisions are
subject to cognitive limitations and biases, as well as to emotions,
resulting in seemingly irrational choices.
For
example, 1955 Nobel Prize–winning economist Herbert Simon noted that
people possess neither unlimited abilities nor unlimited time for
processing information and hence may not solve all problems optimally.
Instead they may resort to rules of thumb. They are being rational but
their rationality is “bounded.” For example, a rule of thumb such as
“you get what you pay for” may lead people to pay more for something
when the cheaper version is just as good or better.
Behavioral
economics has also found that people have bounded willpower (i.e., that
they lack complete self-control and have a bias toward the present).
Surprising? Hardly. Some people may eat, drink, or spend too much or
exercise, save, or work too little. They may even be aware of their
self-control problems and try to counter them. For example, they may
choose to buy cigarettes by the pack instead of by the carton, which is
cheaper; they may make New Year’s resolutions; they may have more of
their salaries withheld than necessary in order to be sure they will get
a tax refund so they can purchase goods they do not have the willpower
to save for on their own.
Other
findings suggest overconfidence (surveys show that 90% of people think
they are among the top 50% in such areas as driving ability and health);
loss aversion (getting extreme utility loss from negative outcomes that
fall below a reference point and only mild utility increases from gains
above the reference point); and over-reaction or under-reaction to
information. Moreover, their errors persist—always thinking of
themselves as above average in various areas despite evidence to the
contrary and always putting off changes in behavior that they know would
make them better off.
How
might government policy be changed to help people make better
decisions? One concrete proposal is for government to mandate that when
employees become eligible for joining retirement plans, the default
option would be signing them up instead of the more common approach of
inviting them to do so. Though they could still opt out, studies have
shown that a switch in the default option greatly increases
participation in retirement plans. The change appears to reduce
procrastination. The policy could be improved further by taking into
account the notion of loss aversion. Building on studies that have shown
that people are overly reluctant to sell stocks that have gone down in
price because they do not want to have to admit the loss to themselves,
Richard Thaler has suggested that employers not only switch the
retirement plan default but additionally sign employees up for a plan
that automatically increases their contribution rates, timed to coincide
with any increases in salary they may be receiving. Never seeing a
reduction in take-home pay, the employee avoids facing loss aversion.
But
are people really being irrational? Perhaps an excess of optimism is
good for mental health even if it leads one to make mistakes. Focusing
on the present may beat out worrying about the future. Even if people
are at times irrational, to what extent should government get involved?
Most countries seem to have accepted that imposing speed limits and seat
belt use is appropriate. Should sugary soft drinks be banned or at
least taxed? Should government simply alert citizens to sign up for
retirement plans or mandate companies to make signing up the default
option?
To what extent should the model of homo economicus
be altered to better understand economic outcomes? Will the extra dose
of reality in looking at the way people make decisions contribute to or
detract from the ability of economists to understand or explain economic
outcomes? With the advent of new methods of testing, such as brain
studies, these questions are likely to take center stage in coming
years, both within and outside of the economics profession.
Income Redistribution
The
proposition that a private market will allocate resources efficiently
if the efficiency condition is met always comes with a qualification:
the allocation of resources will be efficient given the initial distribution of income.
If 5% of the people receive 95% of the income, it might be efficient to
allocate roughly 95% of the goods and services produced to them. But
many people (at least 95% of them!) might argue that such a distribution
of income is undesirable and that the allocation of resources that
emerges from it is undesirable as well.
There
are several reasons to believe that the distribution of income
generated by a private economy might not be satisfactory. For example,
the incomes people earn are in part due to luck. Much income results
from inherited wealth and thus depends on the family into which one
happens to have been born. Likewise, talent is distributed in unequal
measure. Many people suffer handicaps that limit their earning
potential. Changes in demand and supply can produce huge changes in the
values—and the incomes—the market assigns to particular skills. Given
all this, many people argue that incomes should not be determined solely
by the marketplace.
A
more fundamental reason for concern about income distribution is that
people care about the welfare of others. People with higher incomes
often have a desire to help people with lower incomes. This preference
is demonstrated in voluntary contributions to charity and in support of
government programs to redistribute income.
A
public goods argument can be made for government programs that
redistribute income. Suppose that people of all income levels feel
better off knowing that financial assistance is being provided to the
poor and that they experience this sense of well-being whether or not
they are the ones who provide the assistance. In this case, helping the
poor is a public good. When the poor are better off, other people feel
better off; this benefit is nonexclusive. One could thus argue that
leaving private charity to the marketplace is inefficient and that the
government should participate in income redistribution. Whatever the
underlying basis for redistribution, it certainly occurs. The
governments of every country in the world make some effort to
redistribute income.
Experiments
conducted by behavioral economists also provide insights into notions
of fairness. In various versions of the “ultimatum game,” experimenters
tell one player in the game to propose to give a share of an amount of
money (say $10) to the other player. If the other player accepts the
offer, both players keep their shares of the total. If the other player
refuses the offer, both walk away with nothing.
If
the responding player were selfish, he or she would accept any positive
offer, and a selfish proposer would offer only a small amount, perhaps a
penny or a nickel. In actual experiments, though, proposing players
tend to offer about 40% of the total ($4 in this example) and responding
players tend to reject offers of less than 20% ($2 in this example).
The conclusion seems to hold even when substantial sums of money are
used to play the game. Rejecting any offer that leaves both players
better off seems irrational and suggests a concern for fairness.
Programs
to redistribute income can be divided into two categories. One
transfers income to poor people; the other transfers income based on
some other criterion. A means-tested transfer paymentTransfer payment for which the recipient qualifies on the basis of income.
is one for which the recipient qualifies on the basis of income;
means-tested programs transfer income from people who have more to
people who have less. The largest means-tested program in the United
States is Medicaid, which provides health care to the poor. Other
means-tested programs include Temporary Assistance to Needy Families
(TANF) and food stamps. A non-means-tested transfer paymentTransfer payment for which income is not a qualifying factor.
is one for which income is not a qualifying factor. Social Security, a
program that taxes workers and their employers and transfers this money
to retired workers, is the largest non-means-tested transfer program.
Indeed, it is the largest transfer program in the United States. It
transfers income from working families to retired families. Given that
retired families are, on average, wealthier than working families,
Social Security is a somewhat regressive program. Other non-means tested
transfer programs include Medicare, unemployment compensation, and
programs that aid farmers.
shows federal spending on means-tested and non-means-tested programs as
a percentage of GDP, the total value of output, since 1962. As the
chart suggests, the bulk of income redistribution efforts in the United
States are non-means-tested programs.
The
fact that most transfer payments in the United States are not
means-tested leads to something of a paradox: some transfer payments
involve taxing people whose incomes are relatively low to give to people
whose incomes are relatively high. Social Security, for example,
transfers income from people who are working to people who have retired.
But many retired people enjoy higher incomes than working people in the
United States. Aid to farmers, another form of non-means-tested
payments, transfers income to farmers, who on average are wealthier than
the rest of the population. These situations have come about because of
policy decisions, which we discuss later in the chapter.
Key Takeaways
- One role of government is to correct problems of market failure
associated with public goods, external costs and benefits, and imperfect
competition.
- Government intervention to correct market failure
always has the potential to move markets closer to efficient solutions
and thus reduce deadweight losses. There is, however, no guarantee that
these gains will be achieved.
- Experiments and surveys undertaken by behavioral
economists suggest that consumers may not always make rational
decisions. Thus, governments may seek to alter the provision of certain
goods and services or the amounts consumed based on the notion that
consumers will otherwise consume too much or too little of the goods.
- Governments redistribute income through transfer
payments. Such redistribution often goes from people with higher incomes
to people with lower incomes, but other transfer payments go to people
who are relatively better off.
Try It!
Here is a list of actual and proposed
government programs. Each is a response to one of the justifications for
government activity described in the text: correction of market failure
(due to public goods, external costs, external benefits, or imperfect
competition); encouragement or discouragement of consumption due to
consumers not making rational choices; and redistribution of income. In
each case, identify the source of demand for the activity described.
- The Justice Department sought to prevent Microsoft Corporation from
releasing Windows ’98, arguing that the system’s built-in Internet
browser represented an attempt by Microsoft to monopolize the market for
browsers.
- In 2004, Congress considered a measure that would
extend taxation of cigarettes to vendors that sell cigarettes over the
Internet.
- The federal government engages in research to locate
asteroids that might hit the earth, and studies how impacts from
asteroids could be prevented.
- The federal government increases spending for food stamps for people whose incomes fall below a certain level.
- The federal government increases benefits for recipients of Social Security.
- The Environmental Protection Agency sets new standards for limiting the emission of pollutants into the air.
- A state utilities commission regulates the prices charged by utilities that provide natural gas to homes and businesses.
Case in Point: Externalities, Irrationalities, and Smoking
Smokers
impose tremendous costs on themselves. Based solely on the degree to
which smoking shortens their life expectancy, the cost per pack of
cigarettes is estimated to be $35.64. That cost, of course, is a private
cost. In addition to that private cost, smokers impose costs on others.
Those external costs come in three ways. First, they increase health
care costs and thus increase health insurance premiums. Second, smoking
causes fires that destroy property. Third, other people die each year as
a result of secondhand smoke. Various estimates of these external costs
put them at about $.40 per pack. If a tax were to be based solely on
external effects, one would also need to recognize that smokers also
generate external benefits. They contribute to retirement programs and
to Social Security and then die sooner than nonsmokers. They thus
subsidize the retirement programs of the rest of the population. So from
the perspective of externalities, the optimal tax would be less than
$.40 per pack.
Cigarette
taxes, though, are much higher than that. Should they be? Is that fair?
One rationale is simply that “sin” taxes are a source of government
revenue. Economists Jonathan Gruber and Botond Koszegi suggest something
else—that an excise tax on cigarettes of as much as $4.76 per pack may
actually improve the welfare of smokers. Smokers, they argue, are
“time-inconsistent.” Lacking self-control or willpower, they seek the
immediate gratification of a cigarette and then regret their decisions
later. Higher taxes would serve to reduce the quantity of cigarettes
demanded and thus reduce behavior smokers would otherwise regret. Their
argument is that smokers impose “internalities” on themselves and that
higher taxes would reduce this.
Where does
this lead us? If smokers are “rationally addicted” to smoking (i.e.,
they have weighed the benefits and costs of smoking and have chosen to
smoke), then the only program for public policy is to design a tax that
takes into account the net external costs of smoking. Current excise
taxes on cigarettes seem to more than accomplish that. But if the
decision to smoke is an irrational one, welfare may be improved by
higher excise taxes on smoking.
In a study
titled, “Do Cigarette Taxes Make Smokers Happier,” Gruber and Sendhil
Mullainathan used self-reported happiness measures and variations in
cigarette excise taxes across states to see the effect of excise taxes
on happiness of people who have a propensity to smoke. They found that
people with a propensity to smoke were significantly happier with higher
cigarette excise taxes. This finding, they argue, is more consistent
with a model based on bounded willpower and time inconsistency than one
based on rational addiction.
Sources: Jonathan Gruber and Botond
Koszegi, “Tax Incidence When Individuals Are Time-Inconsistent: The Case
of Cigarette Excise Taxes,” Journal of Public Economics 88 (2004); 1959–1987; Jonathan H. Gruber and Sendhil Mullainathan, “Do Cigarette Taxes Make Smokers Happier?” Journal of Economic Analysis and Policy: Advances in Economic Policy 5:1 (2005): 1–45.
Answers to Try It! Problems
- This is an attempt to deal with monopoly, so it is a response to imperfect competition.
- Cigarette consumption may result from an irrational decision.
- Protecting the earth from such a calamity is an example of a public good.
- Food Stamps are a means-tested program to redistribute income.
- Social Security is an example of a non-means-tested income redistribution program.
- This is a response to external costs.
- This is a response to monopoly, so it falls under the imperfect competition heading.
