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Chapter 1

Chapter 1. Individuals and Government. Public Finance. Public finance is the field of economics that studies government activities and the alternative means of financing government expenditures. Figure 1.1 A Production-Possibility Frontier. C. B. G 2. Government Goods and

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Chapter 1

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  1. Chapter 1 Individuals and Government

  2. Public Finance • Public financeis the field of economics that studies government activities and the alternative means of financing government expenditures.

  3. Figure 1.1 A Production-Possibility Frontier C B G2 Government Goods and Services per Year A G1 X2 M X1 0 Private Goods and Services per Year

  4. Distribution of Government Goods and Services • Nonmarket rationing: • Prices and willingness to pay those prices are not applicable to goods like national defense.

  5. The Mixed Economy: Markets and Politics • Pure Market Economy • Virtually all goods and services are supplied by for-profit private firms. • Supply and demand determine price. • Mixed Economy • A mixed economyis one in which government supplies a considerable amount of goods and services and regulates private economic activity.

  6. Figure 1.2 Circular Flow in the Mixed Economy Goods & Services Goods & Services Output Market Dollars Dollars Income Support & Subsidies Subsidies Taxes, fees, charges Taxes, fees, charges Government Services Government Services Dollars Dollars Resources Resources Households Government Firms Input Market

  7. Government Expenditures in the United States • Government purchases of • labor • land • capital • Government Transfer Payments • Welfare • Social Security

  8. Year GDP Federal Government State and Local Government Total Government Percentage of GDP Total 1930 91.3 2.5 7.5 10.0 10.95 1945 223.0 84.7 8.5 93.2 41.79 1960 527.4 85.8 34.1 119.9 22.73 1975 1635.2 345.4 152.1 497.5 30.42 2002 10442.1 2073.9 1050.9 3124.8 29.93 Growth in Government Expenditures Table 1.1 (abbreviated)

  9. Country Government Current Expenditures as a Percentage of GDP 2001 Denmark 49.1 France 48.8 Germany 45.1 United Kingdom 39.4 Japan 38.1 Canada 36.7 United States 31.9 International Comparisons

  10. Federal Government Expenditures by Function

  11. State and Local Government Expenditures

  12. Federal Revenues

  13. State and Local Government Revenues

  14. State Budget Crunch of 2002 • 37 states were forced to reduce their budgets. • Revenues were typically 10% less than anticipated. • States with the most severe deficits: • AK, AZ, CA, NY, NC, OK, OR, VA, and WA • Causes • Cuts in taxes on business and individuals in the 1990s • No sales tax collections on services • Growth in costs of Medicaid

  15. Implications of a Graying America • Social Security • In 2008 baby-boomers start to retire and collect • The ratio of workers to retiree falls • Medicare • Health care inflation is substantially higher than overall inflation • Medicaid • Increased use of long-term care for baby-boomers

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