Question

Here is a second hypothesis: A well-funded social safety net may lead to less regulation of the market economy. Explain why this might be so, and sketch a production possibility curve that shows this tradeoff.

a. True
b. False

Answer 1

A well-funded social safety net may lead to less regulation of the market economy due to the theory of crowding out. This can decrease economic output and shift the production possibility curve inward.

Step-by-step explanation:

A well-funded social safety net may lead to less regulation of the market economy due to the theory of crowding out. Crowding out occurs when government spending on social safety nets, such as welfare programs, reduces the available resources for private businesses and individuals. This can lead to a decrease in economic output and a need for less regulation as the government is already providing support.

A production possibility curve (PPC) can be used to illustrate this tradeoff. The PPC shows the maximum combination of goods and services that an economy can produce with its given resources and technology. With a well-funded social safety net, resources are allocated towards welfare programs, reducing the availability of resources for other sectors of the economy. The PPC would shift inward, indicating a decrease in potential economic output.