MicroEconomics
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
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