MicroEconomics

5 Pages 1261 Words

1. a) Why should policymakers think about incentives for people?
- Policymakers should never forget about incentives, for many policies change the cost or benefits that people face and, therefore, alter behavior. When policymakers fail to consider how their policies affect incentives, they can end up with results that they did not intend.


b) Give three examples of valuable economic policy incentives.

- Eliminate the “Marriage Penalty Tax”
- Eliminate taxation on stock dividends
- Increase tax deductions for families with children

2. a) Explain the two main causes of market failures.
- Externality: Refers to the impact of one person’s actions on the well-being of a bystander. The classic example of an external cost is pollution. If a chemical factory does not bear the entire cost of the smoke it emits, it will likely emit too much. Here, the government can raise economic well-being through environmental regulations. The classic example of an external benefit is the creation of knowledge. When a scientist makes an important discovery, he produces a valuable resource that other people can use. In this case, the government can raise economic well-being by subsidizing basic research.
- Market Power: Refers to the ability of a single economic actor (or a small group of actors) to have a substantial influence on market prices. For example, suppose that everyone on town need water but there is only one well. The owner of the well has the market power over the sale of water. The owner is not subject to rigorous competition with which the invisible hand normally keeps self-interest in check.

3. How are inflation and unemployment related in the short run?
- In order to explain this I will use the following example: When the government reduces the quantity of money, for instance, it reduces the amount that people spend. Lower spending, together with prices that are stuck to high, reduces the quantity of go...