For example, if apple prices are higher than orange prices, consumers are likely to buy more oranges, since the fruits are virtually substitute goods for one another. So long as the apple growers can still make a profit, they will very likely lower their prices to meet consumer demand, until demand for apples increases again. Another example is that of gas prices. While gas 'gouging' certainly exists, it is difficult for one gas station to have prohibitively high costs for its product than other nearby suppliers, given that consumers will vote with their dollars and go to the more inexpensive station right down the highway.
Fully explain what is meant by the concept of transfer payments and how the government uses transfer payments to redistribute income in society. Give a concrete example of how the government is doing this.
Transfer payments are often thought of as the government taxing the wealthy to redistribute income to the poor. This concept is evident in how the U.S. government taxes wealthier individuals at a higher rate to pay for programs such as Medicare and Medicaid that provide services for the impoverished members of society. However, transfer payments also include other forms of money given by the government to its citizens, such as Social Security. In this program, younger individuals have money taken out of their paychecks to pay for aid for the retired elderly. Then, later on, according to the system, these same individuals will receive similar aid when they are retired, from other working young people ("Transfer payments," 2007, Investor Words). But the payment is in proportion to the money the worker 'pays in' to the system, in other words, how high his or her wages were while working, and how long he or she worked.
Other examples of transfer payments include unemployment compensation, where the unemployed receive benefits provided by working members of society. While they were working, or when they worked, they paid taxes to support this program, which exists as a way to keep all of society afloat, weak and strong. Welfare and disability payments are also transfer payments. Individuals pay for these programs through their taxes to support the ideal that society as a whole is stronger if people are not suffering. If people have some hope to better their futures they will be able to pay 'back' into the system (if they have not already) in the form of wages when they 'get on their feet' again ("Transfer payments," 2007, Investor Words).
Based on your experiences and/or what is happening in the news today, fully explain why you think your respective government is or is not doing a good job correcting for spillover costs and/or benefits. Give examples of this that are very explicit.
The market economic system operates on the theory that both consumers and producers have the freedom to make certain economic decisions to solve the basic problem of scarcity. When consumers and producers meet to exchange goods, services and ideas, a market exists. However, there are times in which the effects of such transactions have a negative effect on those NOT directly involved in such exchanges. When this occurs, a spillover cost...exists. In our contemporary market economic system, the government has assumed the responsibility to take corrective actions in order to protect citizens from the adverse effects of such spillovers" (Litchka, 2007).
Examples of spillover costs include environmental pollution caused by manufacturing plants that can affect the lives of individuals who do not even purchase such goods. Although the Environmental Protection Agency attempts to reign in such spillover costs, the overall effects of global warming that impact the entire earth, including the developing world that has not profited from industrial expansion, is one example of how the Western capitalist market economy created an system of exchange where consumers and producers benefited in the short-term, but negatively impacted the lives of others in the long-term.
Consumers in a market economy." (2007). U.S. State Department. Retrieved 11 Oct 2007 at http://usinfo.state.gov/products/pubs/market/mktec3.htm
Litchka, Peter. (2007). "Toxic waste in Grand Banks." Lesson Plan. Retrieved 11 Oct 2007 at http://www.fte.org/teachers/lessons/prize/toxic_waste.htm
Opportunity cost." (2007). Investopeida. Retrieved 11 Oct 2007 at http://www.investopedia.com/terms/o/opportunitycost.asp
Transfer payments." (2007). Investor Words. Retrieved 11 Oct 2007 at http://www.investorwords.com/5050/transfer_payments.html