Inefficiency: the Pervasive Economic Problem

Inefficiency: the Pervasive Economic Problem

Chapter 3

Inefficiency: The Pervasive Economic Problem

Activity 3.1Alphabet Soup: The Role of Government

Type: In-class assignment

Topics: the role of government

Materials : None

Time: 15 minutes

Class limitations: Works in any size class


This activity shows many government activities exist in the U.S. economy.


Ask students to list as many government-provided goods and services as possible. The list should include activities at the federal, state and local levels.

Ask students to list all the "alphabet" agencies (FBI, CIA, USDA, etc.).

The most important question to ask is "Why?" Why, in a predominantly market economy, does the government play so many roles?


Students will be able to list dozens of government activities and nearly as many agencies.

The rationale for government action can include:

Creating an institutional framework for markets (laws, courts, money, SEC)

Addressing market failure (national defense, education, highways, EPA)

Addressing monopoly (antitrust, public utilities, FTC)

Addressing equity and income distribution (Social Security, foods stamps)

Macroeconomic stability (fiscal policy, monetary policy)

Financing the above activities (taxes, bonds, IRS)

Activity 3.2Role of Government

Type: Take-home assignment

Topics: the role of government, market failure

Materials:"Role of Government" worksheet

Class limitations: Works in any size class


This activity gives students an opportunity to identify real world market failures and how government can address these issues. Categorizing a real problem helps students clearly distinguish the various types of market failure.


This assignment (on the following page) is difficult for many students, particularly if they are unclear on the concept of market failure. Not every example of government action will be appropriate for this assignment. Students may find it easier to make a list of possible areas of market failures and to refer to the list in the chapter before looking for an article.


A market system depends on accurate price signals to allocate goods and services. Market failure distorts the price system leading to the inefficient use of resources. Government intervention in cases of market failure can improve economic efficiency.

Some students may choose inappropriate examples for this assignment. Emphasize the fact that business failure is not the same as market failure. An effective market will drive inefficient firms out of business; this is a market success. Similarly, entry or the introduction of new technology may hurt the profits of incumbent firms, but these are not examples of market failure.


Role of Government

1. Find an article in a recent newspaper or magazine that shows the government addressing market failure.

2. Identify the type of market failure. Is it a problem of negative externalities, positive externalities, public good, or common property resources?

3. Explain how government action can improve economic efficiency.

4. Graph the market failure and explain the problem. Then show how the government action will change the situation.

5. Turn in a copy of your article with your explanation. (Be sure to write the date and source on the article.)

Activity 3.3A Flat Tax?

Type: In-class activity

Topics: progressive, regressive, proportional taxes

Materials: None

Time: Three minutes

Class limitations: Works in any size class


This activity emphasizes the importance of looking at percentages when classifying a tax as progressive, regressive, or proportional.


Tell students that Congress has approved a new tax to fund scientific research on clones. Everyone will pay $1,000.

Ask them to classify this tax as progressive, regressive, or proportional.


Many students erroneously see this head tax as proportional. A simple example can show its regressive nature.

Compare a low-income student who earns only $1,000 washing dishes at a summer job to a high-income university president who earns $100,000 running the school. Each are required to pay $1,000 for this tax. For the student, the effective tax rate would be 100%. For the president, the effective tax rate would be 1%.

A head tax taxes low income individuals at a higher percentage of their incomes and taxes high-income individuals at a lower percentage. This is a regressive tax.

It may help to point out that low-income earners pay a lower dollar amount when taxes are proportional. Using the same example, if the student paid $10 and the university president paid $1,000, then the tax would be proportional.

This example can be used to introduce other types of taxes with regressive impacts, such as sales tax on food or cigarettes.