Public Finance. Econ 4520

Transcription

1 Public Finance Econ 4520

2 Introduction What words come to mind when you hear the word government? President Senate House of Representatives Laws Why do we have government? Does government do things for us? Do we do things for the government? Which is more important?

3 Public Finance What is Public Finance? Definition: The study of the role of government in the Economy Perspective: Two views on Government Organic View Mechanistic View Video Example JFK

4 Organic View Society is a natural organism. Each individual is part of the organism and government can be thought of as its heart. Individual has significance only as part of the community Individual can only be explained with respect to the good of the whole

5 Mechanistic View Government is not perceived as organic part of Society Government is contrived by individuals to better achieve their individual goals. The individual rather than the group is at center stage.

6 4 questions of Public Finance 1. When should the government intervene in the economy? 2. How might the government intervene 3. What is the effect of those interventions on economic outcomes? 4. Why do governments choose to intervene on economic outcomes?

7 4 questions of Public Finance 1. When should the government intervene in the economy? A. Market Failure (Decisions you make in the market affect other people) i. Measles ii. Education 2. How might the government intervene A. Taxes and Subsidies B. Restrict or mandate sale or purchase i. Weapons ii. Auto Insurance C. Government provision: Example Gov Health Insurance

8 4 questions of Public Finance 3. What is the effect of those interventions on economic outcomes? A. Who are the people affected? B. What are their behavioral responses i. The case of taxes going up ii. The case of free provision of a good that you once paid for. 4. Why do governments choose to intervene on economic outcomes? A. Political Economy: The theory of how the political process produces decisions that affect individuals and the economy

9 Warm-Up Review From Last Time Weber State University Budget: 2010 Total Revenues = $113,321,800 Revenue From Tuition = $48,099,100 Tuition/Total Revenue = 42% The government is very involved in the production of education. Discuss the four questions of public economics as they relate to the provision of education 1. When should the government intervene in market for education? 2. How might the government intervene? 3. What is the effect of those interventions on economic and educational outcomes? 4. Why do governments choose to intervene in educational economic outcomes?

10 Motivation for the Course What has motivated you to take Public Finance? Some Motivation for how the issues of public finance directly affect you Tax Freedom Day Social Security Payments

11 Tax Freedom Day

12 Social Security Payment

13 What the Government Does Circular Flow Model of the Economy How an economy is connected. Where do households get their paychecks from? Where do firms get labor and resources to make it possible to put things on their shelf? What do households do with their paychecks? When do firms get the money to put goods on their shelves? Is the government involved at all in this process? What does gov t give to households? What does gov t receive from households? What do firms receive from gov t? What does gov t receive from firms. $ $ $ $

14 Is government the Panacea? There are problems in society, do we want the government to fix them, or is private enterprise capable of fixing them? What might be some problems that arise when government steps in? Is the government the able to fix everything? Every case of market failure?

15 Milton Friedman

16 What is at Stake? How many people in the World live in Poverty? How many People live on less than $10 per day, $3650 per year?

17 How is it possible that people get out of poverty on a large scale? GDP across Countries

18 Size of Government

19 Changing Role of Government Transfer Interest Consumption Payments Expenditures When Payments you Payments Government spend more Government than makes you without makes make, you for receiving a have a to good good take or or out service. a loan. National in The return. Govt Defense, Social has loans Security education, and must Pensions, transportation pay interest cash assistance on to them. unemployed etc Where did this money come from?

20 Size of Government State vs. Federal We have 50 states, but only one Federal Government, which spends more? State/Local: 36.5% of Gov't Spending (12.1% of GDP) Federal: 63.50% of Total Gov't Spending (21% of GDP)

21 Federal Spending 1960 about half of government spending was on the Military 2004 about 20% Spending on Health Care has Expanded dramatically. Age Distribution

22 State Spending Majority for Education Health Is expanding

23 Revenue - Federal Individual income tax provides somewhat less than half of federal revenue Big decline in corporate income tax Who own corporations? Fewer excise taxes. Large Growth In Payroll Taxes

24 State Revenue Currently there is fairly even split in state revenue What is this Federal Grants Category?

25 Government Spending in Other Nations How does Govt spending in the US compare with other nations?

26 Other Costs to Consider The government is more influential than just the money it spends Consider government regulation: May increase costs to business without an increase in government expenditures FDA regulates 25% of consumer expenditures OSHA regulates workplace safety FCC EPA Ethanol

27 Real Cost of Government Spending Real means in terms of goods and services. Understand the Real Cost by using a model Called the Production Possibility Frontier: Def: A curve measuring the maximum combination of outputs that can be obtained from a given number of inputs Outputs Inputs Maximum

28 Real Cost of Government All Government Goods, No private goods Govern ment Goods a b G2 G1 c Equal Government Goods and Private Services d PPF What does society give up if it wants more government goods (say from d to c)? ANS: Private goods. Main Point: The Real Cost of Government goods and services is the private goods and services that we have to give up. e All Private Goods Private Goods Given Up Private Goods

29 Review Questions Using a Circular flow Model of the Economy, explain how the government interacts with the economy. Give example of things the government gets from output markets and input markets. What has happened to the share of transfer payments relative to consumption expenditures by the government over the last 40 years? Why? Which tax provides the main source of revenue for the federal government? What is the main spending category for state and local governments? What is the real cost of government expenditures? Explain use the production Possibilities Model