Chapter 5
This presentation is the property of its rightful owner.
Sponsored Links
1 / 53

Chapter 5 PowerPoint PPT Presentation


  • 43 Views
  • Uploaded on
  • Presentation posted in: General

Chapter 5. Public Spending and Public Choice. Introduction. Many feel that ethanol-based motor fuel offers a win-win situation: less reliance on gasoline derived largely from foreign oil and reduced carbon pollution from auto emissions.

Download Presentation

Chapter 5

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Chapter 5

Chapter 5

Public Spending

and Public Choice


Introduction

Introduction

Many feel that ethanol-based motor fuel offers a win-win situation: less reliance on gasoline derived largely from foreign oil and reduced carbon pollution from auto emissions.

The U.S. government agrees—to the tune of more than $8 billion in annual government subsidies for ethanol production.


Learning objectives

Learning Objectives

Explain how market failures, such as externalities, might justify economic functions of government

Distinguish between private and public goods and explain the nature of the free-rider problem

Describe the political functions of government that entail its involvement in the economy


Learning objectives1

Learning Objectives

Analyze how Medicare affects the incentives to consume medical services

Explain why increases in government spending on public education have not been associated with improvements in measures of student performance

Discuss the central elements of the theory of public choice


What a price system can and cannot do

What a Price System Can and Cannot Do

In its most ideal form, a price system allows resources to move from lower-valued to higher-valued uses through voluntary exchange.

Economic efficiency arises when all mutually advantageous trades have taken place.

There are, however, situations when a price system does not generate the desired results.


What a price system can and cannot do1

What a Price System Can and Cannot Do

Market Failure

A situation in which the unrestrained market economy leads to too few or too many resources going to a specific economic activity

Prevents economic efficiency and individual freedom

Is addressed by public policy (government)


Correcting for externalities

Correcting for Externalities

In a pure market system, economic efficiency occurs when individuals know and must bear the true opportunity cost of their actions.

In some cases, the price that someone actually pays for a resource, good, or service is higher or lower than the opportunity cost that all society pays.


Correcting for externalities1

Correcting for Externalities

Market failure: an example

Assume

No government regulation against pollution

A town with clean air

A steel mill opens and emits smoke that causes

More respiratory diseases

Dirtier clothes, houses, cars


Correcting for externalities2

Correcting for Externalities

Market failure: an example

Market failure occurs

Steel mill does not pay for the clean air

Costs of production have “spilled over” to the residents (third parties)

Lower production cost

More steel is produced than would otherwise be the case


Correcting for externalities3

Correcting for Externalities

Externalities

Occur when the consequences of an economic activity spill over to affect third parties

Third Parties

Parties who are not directly involved in a given activity or transaction

Property Rights

Rights of an owner to use and exchange property


Correcting for externalities4

Correcting for Externalities

Externalities are examples of market failures.

Pollution is an example of a negative externality.

Inoculations generate external benefits.


External costs and benefits

External Costs and Benefits


External costs and benefits1

External Costs and Benefits


Correcting for externalities5

Correcting for Externalities

Resource misallocations of externalities

External costs—market over allocates

External benefits—market under allocates

Government can correct negative externalities

Special taxes (i.e. a pollution tax)

Regulation


Correcting for externalities6

Correcting for Externalities

How the government can correct positive externalities

Government financing and production

Subsidies

Regulation


The other economic functions of government

The Other Economic Functions of Government

Providing a legal system

Promoting competition

Providing public goods

Ensuring economywide stability


The other economic functions of government1

The Other Economic Functions of Government

Providing a legal system

Enforcing contracts

Defining and protecting property rights

Establishing legal rules of behavior


The other economic functions of government2

The Other Economic Functions of Government

Promoting competition

Market failure may occur if markets are not competitive.

Antitrust legislation

Monopoly power


The other economic functions of government3

The Other Economic Functions of Government

Antitrust Legislation

Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices

Monopoly

A firm that can determine the market price, in the extreme case is the only seller of a good or service


The other economic functions of government4

The Other Economic Functions of Government

Providing public goods

Goods to which the principle of rival consumption does not apply

In contrast, private goods can be consumed by one individual at a time.


The other economic functions of government5

The Other Economic Functions of Government

Principal of Rival Consumption

Recognizes individuals are rivals in consuming private goods

Public Goods

Can be jointly consumed by many individuals simultaneously


The other economic functions of government6

The Other Economic Functions of Government

Characteristics of public goods

Can be used by more and more people at no additional opportunity cost

Difficult to charge for a public good based on consumption—the exclusion principle


The other economic functions of government7

The Other Economic Functions of Government

Exclusion Principle

Anyone can enjoy the benefits of a public good, even if they have not paid for it.

Free-Rider Problem

Arises when some individuals take advantage of the fact that others will take on the burden of paying for public goods


The other economic functions of government8

The Other Economic Functions of Government

Ensuring economywide stability

Smooth ups and downs in overall business activity


The political functions of government

The Political Functions of Government

Merit Goods

Goods deemed socially desirable through the political process

Museums

Demerit Goods

Goods deemed socially undesirable

Illegal substances


The political functions of government1

The Political Functions of Government

Income redistribution: includes progressive income tax system and transfers


The political functions of government2

The Political Functions of Government

Transfer Payments

Money payments made by governments to individuals for which in return no services or goods are rendered

Examples are Social Security old age and disability benefits and unemployment insurance benefits


The political functions of government3

The Political Functions of Government

Transfers in Kind

Payments that are in the form of goods and services

Include food stamps, subsidized public housing, medical care


Public spending and transfer programs

Public Spending and Transfer Programs

Government Outlays

All federal, state and local spending

Examples

Defense, income security, Social Security—at the federal level

Education, health and hospitals, public welfare—at the state level


Figure 5 3 federal government spending compared to state and local spending

Figure 5-3Federal Government Spending Compared to State and Local Spending

Sources: Budget of the United States government; government finances.


Public spending and transfer programs1

Public Spending and Transfer Programs

Publicly subsidized healthcare

Medicare

Began in 1965

Pays hospital and physicians’ bills for U.S. residents over 65 with public monies

2.9% of earnings taxed

Second biggest domestic program in existence

Medicaid

Subsidizes people with lower incomes


Public spending and transfer programs2

Public Spending and Transfer Programs

To increase the quantity of medical care, the government pays a subsidy.

The price per unit paid to medical service providers increases.

The price per unit paid by consumers falls.

More medical services are consumed.


Policy example if the government doesn t pay for it physicians don t do it

Policy Example: If the Government Doesn’t Pay for It, Physicians Don’t Do It

Most professionals regard telephone and e-mail as indispensable tools for communicating with clients.

In contrast, phone consultations and e-mail contact with physicians are very rare.

Medicare pays for face-to-face visits with physicians, but not for telephone or email consultation with patients.


Policy example if the government doesn t pay for it physicians don t do it1

Policy Example: If the Government Doesn’t Pay for It, Physicians Don’t Do It

Thus, Medicare gives physicians incentives to schedule appointments with patients in their offices but provides no incentives to utilize more efficient modes of communication.

Physicians then schedule office visits with patients and avoid phone calls and e-mail communications.


Policy example if the government doesn t pay for it physicians don t do it2

Policy Example: If the Government Doesn’t Pay for It, Physicians Don’t Do It

Who pays for the fact that Medicare’s payment rules promote higher-priced, face-to-face physician-patient communications instead of lower-priced, remote communications?


Public spending and transfer programs3

Public Spending and Transfer Programs

Economic Issues of Public Education

State and local governments provide primary, secondary, and post-secondary education at prices well below those that would otherwise prevail in the marketplace.


Public spending and transfer programs4

Public Spending and Transfer Programs

Economics of public education

Publicly subsidized, similar to government subsidized healthcare

Education priced below market


Public spending and transfer programs5

Public Spending and Transfer Programs

Incentive problems of public education

Various measures of performance show no increase or decline in performance.

Many economists argue failure to improve relies on incentive effects.

Higher subsidies may translate to services unrelated to learning.


Collective decision making the theory of public choice

Collective Decision Making: The Theory of Public Choice

Collective Decision Making

How voters, politicians, and other interested parties act and how these actions influence non-market decisions


Collective decision making the theory of public choice1

Collective Decision Making: The Theory of Public Choice

Theory of Public Choice

The study of collective decision making

Assumes that individuals will act within the political process to maximize their individual (not collective) well-being.


Collective decision making the theory of public choice2

Collective Decision Making: The Theory of Public Choice

Similarities in market and public-sector decision making

Self-interest

Opportunity cost

Competition

Similarity of individuals, but different incentive structures


Collective decision making the theory of public choice3

Collective Decision Making: The Theory of Public Choice

Incentive Structure

The system of rewards and punishments individuals face with respect to their actions


Collective decision making the theory of public choice4

Collective Decision Making: The Theory of Public Choice

Differences between market and collective decision making

Voting versus spending

Political system versus market system

Political system

Run by majority rule

Market system

Run by proportional rule


Collective decision making the theory of public choice5

Collective Decision Making: The Theory of Public Choice

Government or Political Goods

Goods (and services) provided by the public sector


Collective decision making the theory of public choice6

Collective Decision Making: The Theory of Public Choice

Differences between market and collective decision making

Voting versus spending

Spending of dollars can indicate intensity of want

Votes cannot; each vote counts with the same intensity


Issues and applications an ethanol bonanza or an ethanol boondoggle

Issues and Applications: An Ethanol Bonanza, or an Ethanol Boondoggle?

From the U.S. government’s point of view, the use of gasoline as a motor fuel presents two problems.

Many reserves are located in the politically unstable Middle East and air pollution.

The key ingredients for ethanol are homegrown and less pollution is created.


Issues and applications an ethanol bonanza or an ethanol boondoggle1

Issues and Applications: An Ethanol Bonanza, or an Ethanol Boondoggle?

The government has designated ethanol as a merit good and provides a subsidy to ethanol producers of just over $1 per gallon.

Paradoxically, the cost of producing ethanol is very high relative to the benefits.

Gasoline consumption would drop by no more than 20% and decreases in pollution would be minor.


Issues and applications an ethanol bonanza or an ethanol boondoggle2

Issues and Applications: An Ethanol Bonanza or an Ethanol Boondoggle?

Finally, some critics of ethanol subsidies argue that ethanol produced using corn actually requires more energy than the ethanol ultimately creates.


Summary discussion of learning objectives

Summary Discussion of Learning Objectives

How market failures such as externalities might justify economic functions of government

Market failure is a situation in which an unhindered free market allocates too many or too few resources to a specific economic activity.

Private goods versus public goods and the free-rider problem

Private goods are subject to rival consumption.

Public goods are not subject to rival consumption.

Free-riders anticipate others will pay.


Summary discussion of learning objectives cont d

Summary Discussion of Learning Objectives (cont'd)

Political functions of government that lead to its involvement in the economy

Merit goods deemed socially desirable

Demerit goods deemed socially undesirable

Redistributing income

Transfer payments

In kind transfers


Summary discussion of learning objectives cont d1

Summary Discussion of Learning Objectives (cont'd)

The effect of Medicare on incentives to consume medical services

Subsidies lead to a higher quantity of medical services consumed.

Medicare encourages people to consume medical services that are low in per-unit value relative to the cost.


Summary discussion of learning objectives cont d2

Summary Discussion of Learning Objectives (cont'd)

Why bigger subsidies for public schools do not necessarily translate into improved student performance

Last unit of educational services provided likely to cost more than its valuation by parents and students

Services provided in excess of those best suited to promoting student learning


Summary discussion of learning objectives cont d3

Summary Discussion of Learning Objectives (cont'd)

Central elements of the theory of public choice

Collective decision making

Voters, politicians, other participants influence nonmarket choices.

Incentive structures

Rewards and punishments affect provision of government goods.

Similarities and differences with market system structures

Scarcity, competition—similarities

Legal coercion, majority rule—differences


  • Login