Chapter 3 – What Economies Do 13
9. Lorenz
10. zero
11. free rider
12. Transaction (cost)
13. externality
14. externality
15. True
16. False, it’s a flow.
17. True
18. False, wealth is more unequally distributed than income is in the U.S.
19. False
20. The four essential economic activities are: resource management, production,
distribution, and consumption.
21. The five types of capital are: natural capital, manufactured capital, human capital,
social capital, and financial capital.
22. A stock is something whose quantity is measured at a point in time, whereas a flow
measures the quantity of something over a period of time.
23. The two main forms of economic distribution are exchange and transfer. Exchange
involves a two-way distribution, trading one thing for another, whereas a transfer
involves a one-way distribution, giving something with nothing specific expected in
return.
24. Someone with a blind faith in substitutability will think that the depletion of a non-
renewable resource like fossil fuels is not such a serious problem, since they have
faith that in the future other resources can cheaply be substituted for it. While
someone who has adopted the precautionary principle will think that we should err
on the cautions side and not simply assume that other resources can be cheaply
substituted for the non- renewable resource.
25. The two types of government cash transfer programs in the U.S., used to help
households achieve income security are social insurance programs (like Social
Security and Medicare) and means-tested programs (like welfare, food stamps,
housing subsidies).
26. A proportional income tax takes the same percentage of a person’s income, whether
they are rich or poor. A progressive income tax takes a larger percentage of income
from the rich, while a regressive income tax takes a larger percentage from the poor.
27. A Lorenz curve is a line that portrays a nation’s income distribution, by dividing up
households by into quintiles from poor to rich, and then plotting the cumulative
percent of income flowing each quintile of households. The Gini ratio measures the
level of income inequality by taking the area between the Lorenz curve and line of
perfect equality (A), divided by the total area under the line of perfect equality
(A+B). The higher the Gini, the more inequality there is in the income distribution.
28. It rises, since these benefits are enjoyed primarily by the middle class and the
relatively wealthy.
29. A local farmer’s market would be an example of a market understood as a
physical place with both buyers and sellers of a good. The market for goods
sold on eBay, the stock market or the market for oil, are examples of markets
understood as institutions.