Question

1. List the six economic functions of the United States Government and explain each using a brief statement.

2. Describe what constitutes a "Spillover Cost" and provide an example of one.

3. Describe what constitutes a Spillover Benefit and provide an example of one.

Answer 1

1.

Economic functions are as below:

#1) Legal and Social functions: the government of a country must not create legal and social frameworks. These are created by respective departments. The government only regulates or control these frameworks in the country so that these could be established there.

#) Competition function: the government should maintain competition in goods and services market so that consumers get better goods and services at lower price.

#) the function of public goods and services: the government has full control of these (like military service, improved roads, etc.). Therefore, they provide these to public.

#) the function of Externalities: this is the effect to third party by an economic act (like, carbon emission from a factory). The government regulates negative externalities (as in the example above) in order to protect the environment. This is done by an imposition of tax, cap and command, etc.

#) Stabilization: the government stabilizes the economy by taking appropriate policies – expansionary fiscal policy at the time of inflationary gap, and contractionary fiscal policy at the time of recessionary gap.

#) Income redistribution: this function indicates the collection of tax from high-income people and giving subsidy to poor people. Making the right calculation for the amount of redistribution is a key.

2.

Negative externality constitutes a spillover cost, since it affects third party negatively. This is called spillover, because the third party ends up by paying for that externality.

Example: a passive smoker, who is not smoking but inhaling other smoker’s smoke, may be ill seriously and hospitalized. This creates hospitalization cost.

3.

This is just opposite. Positive externality constitutes a spillover benefit, since it affects third party positively. The government encourages such spillover benefit, because it gives economic benefits to the society.

Example: public education system and its related cost is spillover benefit, since the society as a whole would get benefit even if few of them are educated.