Chapter 2: Introduction
Markets or Government? The Cardinal Economic Choice
Instructional Objectives
After completing this chapter, your students should know:
1. The principal economic activities of government.
2. How large the government sector is relative to the private sector.
3. What government can, and cannot do to help the economy achieve the social goals of smoothly rising real output, economic efficiency, and distributional equity.
4. The types and sources of market failure.
5. The types and sources of government failure.

Terms from Previous Chapters
You should review the terms in this section at the beginning of your discussion of the chapter.

supply (Chapter 1)
demand (Chapter 1)
market equilibrium (Chapter 1)

Key Terms
These terms are introduced in this chapter:

transfer payment
gross domestic product (GDP)
real gross domestic product
allocative efficiency
dynamically efficient economy
X-efficient economy
allocatively efficient economy
marginal private benefits (MPB)
marginal private costs (MPC)
marginal external benefits (MEB)
marginal external costs (MEC)
marginal social benefits (MSB)
marginal social costs (MSC)
capture theory

Additional References
The suggestions for additional reading at the end of Chapter 2 in the textbook provide a thorough review of most of the issues involved in choosing between the private and public sectors. All of the selections are accessible to beginning students, with the possible exception of Wolfs, Markets or Government...
Our philosophical position in this chapter is closest to that of Wolf. If it appeals to you, a careful reading of Markets or Government... will provide useful supplemental material for lectures. Any of the leading undergraduate textbooks in Public Finance will also address the questions posed in this chapter. See, especially: Harvey S. Rosen, Public Finance, Richard D. Irwin, Inc., and David N. Hyman, Public Finance, The Dryden Press.
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