Instructions for Macroeconomics Assignment 1 – Spring 2017The fo.docx

Instructions for Macroeconomics Assignment 1 – Spring 2017
The following style (30% of the grade) and content (70% of the
grade) guidelines apply for the Topic Paper assignments.
* The assignment should be prepared in MS-WORD and
submitted as a single attachment to the Blackboard
Turnitin Assignment on or before the due date.
* The assignment submission should contain a Title Page as the
first page and it should include:
Students Name
Name of the Course (Current Economic Problems)
Topic of the paper
Date submitted
* The body of the paper should be 4-5 pages in length (this
means 4-5 pages that cover the subject in addition to the cover
page and references page.
You should
* Provide an overview of each Concept (I – V), in
your own words.
* Discuss each concept sufficiently to demonstrate a
complete understanding of the concept.
NOTE: Your goal for this assignment is to lay the foundation
for analyzing current economic problems/issues. You will
use these concepts in your analysis for future assignments.
* The reference page should follow the body of the paper. Your
references may include the text. You should use other
resources in addition to those provided by the Instructor.
Scholarly journal articles are encouraged. If your source is
on the web, you should include a link to the website in your
references page.
* USE IN-TEXT CITATIONS to avoid plagiarism.

* Double space the text.
* Use 12 point, times new roman font.
* Set all borders at 1”.
* Indent paragraphs.
* Check your spelling and grammar!
* DO NOT USE A BLOG as a source.
* The papers for this class are individual assignments. Do not
work in groups when writing the papers.
* LIMIT QUOTES TO LESS THAN 5% OF YOUR TEXT.
Economic Concepts Resources
Concept I. Economics Defined and the Economizing Problem
1. http://www.investopedia.com/terms/e/economics.asp
definition and introductory video
2. http://www.whatiseconomics.org/
3. Dr. Reavis’ favorite definition of economics: the study
of the allocation of scarce resources.
4.
http://www.economicsdiscussion.net/essays/economics/economi
c-theory-essay-on-economic-theory/807
Concept II. Efficiency vs. Equality:
1. Efficiency vs Equity
by Tejvan Pettinger on November 30, 2010 in economics
A big issue in economics is the trade-off between efficiency and
equity.
· Efficiency is concerned with the optimal production and

allocation of resources given existing factors of production.
See: Different types of efficiency
· Equity is concerned with how resources are distributed
throughout society.
Taken from
http://www.economicshelp.org/blog/2473/economics/efficiency-
vs-equity/
2. Youtube video:
https://www.youtube.com/watch?v=ulukrRJdu-I
3. Equity vs. Efficiency: The False Trade-off
Andrew Larkin
In 1975, Arthur Okun published a small book entitled Equality
and Efficiency: The Big Tradeoff [1]; since that time if not
before, there has been an assumption among many, almost a
truism, that such a trade-off in fact exists. The book was a
compilation of four lectures, and Irving Kristol was quoted on
the back of the paperback edition as saying that “These lectures
will be a standard ‘text’ around which all discussions of
equality will revolve for a long time to come.”
These two words – ‘equality’ and ‘efficiency’ – are larger
categories of evaluative criteria. The concept ‘efficiency’
designates a category of indicators that includes not only the
more precisely defined concept of productivity, but many other
output or product concepts as well. ‘Efficiency,’ if it were to be
loosely defined, would refer to the effective use of resources to
provide adequate product to a society and its members, and with
such a definition, it is commonly agreed that efficiency is good,
that it can be used to evaluate economies and economic
behavior. Efficiency would include all sorts of product
indicators, such as Gross Domestic Product and various
indicators of per capita product. It would include a precise
measure of productivity, i.e. output measured in terms of inputs,
such as labor inputs. And it would include indicators of the
growth and stability of the product and productivity indicators.
‘Equality,’ on the other hand, when examined, more

accurately becomes the broader concept of ‘equity.’ Most
realize that absolute equality is not a reasonable goal (not
everyone has the same needs, for example), but most believe in
a reasonable degree of equity as a social and economic and
political goal; the way most seem to view it, the goal of equity
would probably mean that more equality is better than less, and
that society should move more in the direction of equality rather
than away. Equity means treating people and groups of people
fairly. The equity criterion thus includes the fair distribution of
income, wealth, and product as well as many other indicators,
such as democracy, freedom, and choice, accepted rights,
independence and interdependence, and on and on.
Every economy can be judged by these criteria; the
economy that accomplishes them will be judged better than the
one that does not. If two economies are equally efficient, the
one that is more equitable is better; if two economies are
equally equitable, the one that is more efficient is better. (Taken
from http://web.stcloudstate.edu/lalarkin/tradeoff.html)
Concept III. The Purpose of Taxes and other Government
Intervention
1. Taken from: Why Governments Intervene In Markets
Governments intervene in markets to address inefficiency. In an
optimally efficient market, resources are perfectly allocated to
those that need them in the amounts they need. In inefficient
markets that is not the case; some may have too much of a
resource while others do not have enough. Inefficiency can take
many different forms. The government tries to combat these
inequities through regulation, taxation, and subsidies. Most
governments have any combination of four different objectives
when they intervene in the market.
Maximizing Social Welfare
In an unregulated inefficient market, cartels and other types of

organizations can wield monopolistic power, raising entry costs
and limiting the development of infrastructure. Without
regulation, businesses can produce negative externalities
without consequence. This all leads to diminished resources,
stifled innovation, and minimized trade and its corresponding
benefits. Government intervention through regulation can
directly address these issues.
Another example of intervention to promote social welfare
involves public goods. Certain depletable goods, like public
parks, aren't owned by an individual. This means that no price
is assigned to the use of that good and everyone can use it. As a
result, it is very easy for these assets to be depleted.
Governments intervene to ensure those resources are not
depleted.
Macro-Economic Factors
Governments also intervene to minimize the damage caused by
naturally occurring economic events. Recessions and inflation
are part of the natural business cycle but can have a devastating
effect on citizens. In these cases, governments intervene
through subsidies and manipulation of the money supply to
minimize the harsh impact of economic forces on its
constituents.
Socio-Economic Factors
Governments may also intervene in markets to promote general
economic fairness . Government often try, through taxation and
welfare programs, to reallocate financial resources from the
wealthy to those that are most in need. Other examples of
market intervention for socio-economic reasons include
employment laws to protect certain segments of the population
and the regulation of the manufacture of certain products to
ensure the health and well-being of consumers.
Other Objectives
Governments can sometimes intervene in markets to promote
other goals, such as national unity and advancement. Most
people agree that governments should provide a military for the
protection of its citizens, and this can be seen as a type of

intervention. Growing a large and impressive military not only
increases a country's security, but may also be a source of pride.
Intervening in a way that promotes national unity and pride can
be an extremely valuable goal for government officials.
Source: Boundless. “Why Governments Intervene In
Markets.” Boundless Economics. Boundless, 03 Jul. 2014.
Retrieved 18 May. 2015
from https://www.boundless.com/economics/textbooks/boundles
s-economics-textbook/introducing-supply-and-demand-
3/government-intervention-and-disequilibrium-49/why-
governments-intervene-in-markets-182-12280/
2. http://beta.tutor2u.net/economics/reference/government-
intervention-in-markets
3. http://thelawdictionary.org/article/what-are-the-pros-
and-cons-of-government-intervention-in-the-economy/
4. Taxation, imposition of compulsory levies on
individuals or entities by governments. Taxes are levied in
almost every country of the world, primarily to raise revenue
for government expenditures, although they serve other
purposes as well.
Principles of taxation
The 18th-century economist and philosopher Adam
Smith attempted to systematize the rules that should govern a
rational system of taxation. In The Wealth of Nations(Book V,
chapter 2) he set down four general canons:
I. The subjects of every state ought to contribute towards the
support of the government, as nearly as possible, in proportion
to their respective abilities; that is, in proportion to the revenue
which they respectively enjoy under the protection of the
state.…
II. The tax which each individual is bound to pay ought to be
certain, and not arbitrary. The time of payment, the manner of
payment, the quantity to be paid, ought all to be clear and plain
to the contributor, and to every other person.…
III. Every tax ought to be levied at the time, or in the manner,

in which it is most likely to be convenient for the contributor to
pay it.…
IV. Every tax ought to be so contrived as both to take out and
keep out of the pockets of the people as little as possible over
and above what it brings into the public treasury of the state.…
Although they need to be reinterpreted from time to time, these
principles retain remarkable relevance. From the first can be
derived some leading views about what is fair in the distribution
of tax burdens among taxpayers. These are: (1) the belief that
taxes should be based on the individual’s ability to pay, known
as the ability-to-pay principle, and (2) the benefit principle, the
idea that there should be some equivalence between what the
individual pays and the benefits he subsequently receives from
governmental activities. The fourth of Smith’s canons can be
interpreted to underlie the emphasis many economists place on a
tax system that does not interfere with market decision making,
as well as the more obvious need to avoid complexity and
corruption.
Purposes of taxation
During the 19th century the prevalent idea was that taxes should
serve mainly to finance the government. In earlier times, and
again today, governments have utilized taxation for other than
merely fiscal purposes. One useful way to view the purpose of
taxation, attributable to American economist Richard A.
Musgrave, is to distinguish between objectives of resource
allocation, income redistribution, and economic stability.
(Economic growth or development and international
competitiveness are sometimes listed as separate goals, but they
can generally be subsumed under the other three.) In the
absence of a strong reason for interference, such as the need to
reduce pollution, the first objective, resource allocation, is
furthered if tax policy does not interfere with market-
determined allocations. The second objective, income
redistribution, is meant to lessen inequalities in the distribution
of income and wealth. The objective of stabilization—
implemented through tax policy, government expenditure

policy, monetary policy, and debt management—is that of
maintaining high employment and price stability.
There are likely to be conflicts among these three objectives.
For example, resource allocation might require changes in the
level or composition (or both) of taxes, but those changes might
bear heavily on low-income families—thus upsetting
redistributive goals. As another example, taxes that are highly
redistributive may conflict with the efficient allocation of
resources required to achieve the goal of economic neutrality.
In modern economies taxes are the most important source
of governmental revenue. Taxes differ from other sources of
revenue in that they are compulsory levies and are unrequited—
i.e., they are generally not paid in exchange for some specific
thing, such as a particular public service, the sale of
public property, or the issuance of public debt. While taxes are
presumably collected for the welfare of taxpayers as a whole,
the individual taxpayer’s liability is independent of any specific
benefit received. There are, however, important
exceptions: payroll taxes, for example, are commonly levied
on labourincome in order to finance retirement benefits, medical
payments, and other social security programs—all of which are
likely to benefit the taxpayer. Because of the likely link
between taxes paid and benefits received, payroll taxes are
sometimes called “contributions” (as in the United States).
Nevertheless, the payments are commonly compulsory, and the
link to benefits is sometimes quite weak. Another example of a
tax that is linked to benefits received, if only loosely, is the use
of taxes on motor fuels to finance the construction and
maintenance of roads and highways, whose services can be
enjoyed only by consuming taxed motor fuels. (Taken from:
http://www.britannica.com/EBchecked/topic/584578/taxation/72
010/Principles-of-taxation).
Concept IV. The Principle of Supply and Demand
1.
http://www.investopedia.com/university/economics/economics3.

asp
Concept V. Incentives
1. Incentives
The term ’incentive’ is not peculiar to economics alone, it is a
general term used in many spheres of life. However, in
economics, it is a very important word. In fact you can never
study economics successfully without understanding what
incentives are. One American economist says that economics in
its entirety is a study of people’s response to incentives.
Whether that statement is accurate or not is subject to one’s
point of view, but what comes out clearly is the fact that
incentives are truly central to the study of economics.
A dictionary definition of an incentive is ‘something that
motivates you to do something’. In economics one can say that
an incentive is a benefit, reward, or cost that motivates an
economic action. Human beings do things deliberately and
purposefully, and, naturally, people expect to benefit from their
own decisions and actions. Before someone decides to produce
something and sell it to people, they should have taken time to
think and decide that doing this will help them earn something.
Likewise, before a consumer buys anything, they know (or at
least they think) that they are going to benefit from the product.
In strict sense, it is more than just the usual concepts or trade
and economics, it is about human nature. No one does
something for no reason. Not when they have to spend time and
resources in doing so.
Types of incentives
Incentives can be grouped into four main categories, or types.
These types of incentives apply both to economics and to other
spheres of life.
Financial incentives
Perhaps in the modern times, financial incentives are more
dominant. Before you get to business, you know that it is
always about profit. Employment is all about salary and
remuneration. It is true that sometimes people do voluntary jobs
for some reasons other than financial ones. But ultimately, the

main reason why human beings do business or work at all in
modern days is money. It is this type of incentive that informs
the idea of product promotions, where people are told that if
they buy a certain product; they stand a chance of winning a
certain amount of money.
Moral incentives
Moral incentives motivate people to do things on the basis of
right and wrong. People are encouraged to do certain action
because morally, it is the right thing to do. Aspects of morality
today are quite diverse, varying broadly from one society to the
next, and it is practically impossible to define morals of society
in general. Moral incentives therefore generally appeal to an
individual’s own conscience.
Natural incentives
“What will happen if I do this?” We often ask ourselves.
Humans are naturally curious creatures, and we do many things
for no reason other than to find out what the consequences are.
Coercive incentives
Coercive investments emphasize on the consequences of not
doing something, rather than the benefit of doing it.A good
example is blackmail. You are warned to do something or risk
being beaten up, or being reported to your seniors. That is a
coercive incentive. (Taken from:
http://www.whatiseconomics.org/what-is-
economics/incentives).
2. What Are Economic Incentives?
Economic incentives are offered to encourage people to make
certain choices or behave in a certain way. They usually involve
money, but they can also involve goods and services.
Positive economic incentives leave you better off if you do what
was asked of you. These incentives benefit you in some way.
They reward you with money or some sort of financial gain such
as a better price, a free item, or an upgraded item. Coupons,
sales, freebies, discounts, and rewards can be positive economic
incentives. They are called positive because they are associated

with things many people would like to get.
Negative Incentives leave you worse off financially by making
you pay money. These incentives cost you money. Fines, fees,
and tickets can be negative economic incentives. They are
called negative because they are things you don't want to get.
Economic Incentives:
· encourage you
· persuade you
· convince you
· bribe you
· punish you
· reward you
· penalize you
· influence you
You will only get the economic incentive if you make the
required choice or behave in the way that you are asked. You
might be influenced by the incentive, but you still must make
a choice.
Who Offers Economic Incentives and Why?
Businesses often use economic incentives to encourage people
to come and do business with them. Offering incentives is one
way to get customers to choose to come and spend money at a
business.
· Restaurants use coupons, buy-one, get-one deals, Kid's Eat
Free Night, and other incentives to encourage people
to choose their restaurant.
· Stores offer coupons, sales, discounts, buy-one, get-one free
and other incentives to get customers to choose their store.
· Airlines give frequent flier miles as incentives for people
to choose to fly with them.
Government agencies also use economic incentives, but they
usually do it to encourage certain behaviors in people. Offering
incentives is one way the government tries to get people to

behave responsibly.
· Public libraries use library fines to discourage people from
keeping the books too long. Fines encourage people to choose to
turn books in on time.
· Park rangers & park police officers use littering fines as a way
to keep people from littering. Fines help people choose not to
litter, and this keeps the parks clean.
· Police officers use speeding tickets and parking tickets as
incentives to keep people safe. Speeding tickets discourage
people from choosing to speed and encourage them to drive
safely. Parking tickets help keep parking spaces open for the
handicapped and fire hydrants clear of unwanted cars. Parking
tickets encourage people to choose only legal parking spaces.
· Police officers give out tickets if babies are not riding in car
seats or if people are not wearing their seatbelts. These negative
incentives discourage people fromchoosing unsafe behaviors.
(Taken from :
http://www.econedlink.org/lessons/index.php?lid=390&type=stu
dent).
3. When Economic Incentives Backfire
Organizations and societies rely on fines and rewards to harness
people’s self-interest in the service of the common good. The
threat of a ticket keeps drivers in line, and the promise of a
bonus inspires high performance. But incentives can also
backfire, diminishing the very behavior they’re meant to
encourage.
A generation ago, Richard Titmuss claimed that paying people
to donate blood reduced the supply. Economists were skeptical,
citing a lack of empirical evidence. But since then, new data
and models have prompted a sea change in how economists
think about incentives—showing, among other things, that
Titmuss was right often enough that businesses should take
note.
Experimental economists have found that offering to pay women
for donating blood decreases the number willing to donate by

almost half, and that letting them contribute the payment to
charity reverses the effect. Consider another example: When six
day-care centers in Haifa, Israel, began fining parents for late
pickups, the number of tardy parents doubled. The fine seems to
have reduced their ethical obligation to avoid inconveniencing
the teachers and led them to think of lateness as simply a
commodity they could purchase.
Dozens of recent experiments show that rewarding self-interest
with economic incentives can backfire when they undermine
what Adam Smith called “the moral sentiments.” The
psychology here has eluded blackboard economists, but it will
be no surprise to people in business: When we take a job or buy
a car, we are not only trying to get stuff—we are also trying to
be a certain kind of person. People desire to be esteemed by
others and to be seen as ethical and dignified. And they don’t
want to be taken for suckers. Rewarding blood donations may
backfire because it suggests that the donor is less interested in
being altruistic than in making a buck. Incentives also run into
trouble when they signal that the employer mistrusts the
employee or is greedy. Close supervision of workers coupled
with pay for performance is textbook economics—and a
prescription for sullen employees.
Perhaps most important, incentives affect what our actions
signal, whether we’re being self-interested or civic-minded,
manipulated or trusted, and they can imply—sometimes
wrongly—what motivates us. Fines or public rebukes that
appeal to our moral sentiments by signaling social disapproval
(think of littering) can be highly effective. But incentives go
wrong when they offend or diminish our ethical sensibilities.
This does not mean it’s impossible to appeal to self-interested
and ethical motivations at the same time—just that efforts to do
so often fail. Ideally, policies support socially valued ends not
only by harnessing self-interest but also by encouraging public-
spiritedness. The small tax on plastic grocery bags enacted in
Ireland in 2002 that resulted in their virtual elimination appears
to have had such an effect. It punished offenders monetarily

while conveying a moral message. Carrying a plastic bag joined
wearing a fur coat in the gallery of antisocial anachronisms.
Understanding why Irish shoppers responded positively to the
fine, unlike Haifa parents, is the next challenge. How to reliably
design synergistic incentives will be a hot topic for behavioral
economists in the coming years. Meanwhile, organizational and
social policy makers would do well to examine their incentive
systems to see whether they’re unwittingly encouraging the
opposite of the behavior they desire.
(Taken from: https://hbr.org/2009/03/when-economic-
incentives-backfire).
1

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