Governments and Public Policy Overview

1
Lecture 1

• Governments and Public PolicyOverview

2
Governments and Public Policy

• The every day life of citizens is affected by
  decisions by Governments (public polices
• Some fundamental questions
• What are governments?
• Why do we need governments?
• What do governments do?
• What can government (really) do (constraints)?

3
Some fundamental questions

• 1. What are governments?
• Hyman "Governments are organizations formed to
  exercise authority over the actions of persons
  who live together in society and to provide and
  finance essential services"
• 2. Why do we need governments?
• The existence of governments stems from the
  necessity of finding a mechanism to undertake
  decisions that affect a group of people
• How does a group of people come to decide on an
  issue that affects them all BUT in a different
  way (heterogenity of preferences)?
• Amartya Sen (Nobel Price 1998) the choices of
  the people, by the people, for the people is
  broadly speaking the subject of social choice

4
Basics of Collective Decision Making

• Collective choice in a society
• societies two to global
• city, state, federal
• Households, university, firms, clubs,...
• How are collective decisions taken?
• The problem of social decisions that involve
  conflicting interests is a fundamental question
• Aristotle ( ancient Greece, IV century BC),
  Kautila (ancient India, IV century BC)
• Social theory as a systematic discipline begins
  around the time of the French Revolution (XVIII
  century) when Borda (1781) and Condorcet (1785)
  began to formulate the social choice in terms of
  voting

5
Basics of Collective Decision Making

• Many voting rules and decision making methods
  exist
• Majority rule, (unanimous) agreement,
  dictatorship, representative democracy
• In modern democracies, typically citizens vote
  some representatives to whom they delegate
  collective decision making
• Elected representatives operate within the limits
  set by political institutions (rules, procedures
  etc) that affect political choices

6
Basics of Collective Decision Making

• A key concern in the delegation of collective
  decision making to elected representatives is the
  motivation of policy makers and legislators
• one extreme is that policy makers are benevolent
  dictators and follow the best interests of
  society
• another extreme is that they are Leviathans who
  act in their narrow self interest
• the role of self interest within the government
  is a controversial question

7
Basics of Collective Decision Making

• Government failure may arise from
• poor government design
• legislative abuse of power
• It is also conceivable that even with the best
  intentions and well intentioned policy makers,
  governments may not be able to achieve an ideal
  outcome
• governments may lack information or inherent
  power

8
Basics of Collective Decision Making

• Problem even assuming that governments are
  welfare maximizers and have all the tools to
  achieve their goal, what is the best interest of
  a society?
• Traditional welfare economics originating from
  the utilitarian approach (Bentham, 1789) is
  concerned with the total utility which is the
  sum of private utility
• Modern welfare economics Pareto Comparisons
  Social Welfare Function
• To sum up
• Are government welfare maximisers?
• Assuming they are, how do we define welfare (and
  can we really define it)?

9
What do governments do?

• Direct state involvement in economic activity
• regulation (includes laws and assignment of
  property rights)
• price setting, especially using taxes subsidies
  but also state run enterprises
• public provision and production of goods and
  services
• The last two activities - revenue and expenditure
  - represent the traditional partition for
  economists in public economics
• there are, however, close links and interactions
  between the two

10
What do governments do?

• Possible Objectives of Public Policy
• Make, enforce and interpret rules or laws to
• "improve" (including redistributed) allocations
• stabilize economic fluctuation
• guarantee rights and freedoms
• determine property rights

11
What do governments do?

• Public Policy Actions
• Provision of public and private goods
• Governments provide several goods and services.
  Some of those goods are public other are
  private. We will later discuss the difference
  between private and public goods and the
  rationale for their government provision
• Taxation
• Governments have near monopoly power to tax,
  subsidize and regulate
• Taxes, subsidies and regulation alter individual
  incomes and incentives via budget constraint

12
What do governments do?

• The Size and Shape of Governments
• A mixed economy has 1/4 - 1/2 of all economic
  activity done through the government.
• UK government plays a prominent role in the
  allocation of resources
• ownership, (re)distribution, and consumption
• done through taxes, subsidies, regulation, public
  provision and so on
• typical of most modern economies

13
What do governments do?

• Total U.K. government expenditure (Total Managed
  Expenditure or TME)
• in 2003-4, UK government spent 453bn or 40.6 of
  national income
• 7,700 per person or 9,600 per adult
• includes central government, local authorities
  and public corporations
• 40 is about average for OECD economies

14
(No Transcript)
15
What do governments do?

• Expenditure breakdown in 1993
• purchases of goods and services approx. ½ of
  total expenditure 22 of GDP
• health 14.1
• education 12.8
• social security or transfer payments 35 of TE
  15 of GDP (most important budget item)
• interest payments 7.5 and 3
• capital expenditure 7.5 and 3
• health and social security expenditure have
  expanded tremendously since WWII

16
(No Transcript)
17
What can government (really) do?

• The government faces several constraints when
  deciding on public policies
• Constraints on state actions
• governments can coerce and constrain individual
  decisions, up to a point
• limited power and limited information (first best
  versus second best world)
• Political constraints - policy makers are
  accountable to
• themselves via constitutions defining the role of
  different government bodies (separation of
  power)
• their society or to their constituent voters
• other governments, either vertically or
  horizontally via treaties and proximity