The Public Sector

1
The Public Sector

• ECN 111 SLN 63791
• Lecture 10
• Spring Semester 2000
• Instructor Igor Lukashin

2
Fundamental Questions

• How does the government interact with other
  sectors of the economy?
• What is the economic role of government?
• Why is the public sector such a large part of a
  market economy?
• What does the government do?
• How do the sizes of public sectors in various
  countries compare?

3
Government Costs Benefits

• Costs
• Limitation of freedom (laws, rules regulations)
• Taxes inefficiencies
• Fair government? Any other costs?
• Benefits
• Provision of public goods (national defense,
  roads)
• Superivsion of externalities (pollution,
  education)
• Reallocation of resources in a more socially
  desirable way (rent control, FDIC, food stamps,
  etc.)

4
The Circular Flow
Financial Intermediaries
Investment ()
Saving ()
Goods Services
Payments for Goods Services ()
Households
Firms
Taxes ()
Taxes ()
Government
Gvt Services
Gvt Services
Goods Services
Resource services
Payments for Resource Services ()
Payments for Goods Services()
Resource Services
Payments for Resource Services
Foreign Countries
Net Exports
Payments for Net Exports
5
Role of Government in a Market System

• Guardian of efficiency
• Regulates information disclosure
• Internalizes externalities
• Provides public goods
• Regulates monopolies
• Ensures property rights
• Pursues policies of economic growth and minimal
  unemployment

6
The Concept of Efficiency

• Technical Efficiency
• Operating at a point on the Production
  Possibilities Curve
• Economic Efficiency
• a situation where no one in society can be made
  better off without making someone else worse off
• Example breakfast barter
• occurs in the market system simply through the
  self-interested individual actions of
  participants except in cases of market failure
  to allocate resources efficiently

7
Information and the Price System

• Imperfect Information inefficient allocation
• Market Imperfection
• a lack of efficiency that results from imperfect
  information in the marketplace
• Resources may not be used where they have the
  highest value
• Least-cost combinations of resources may not be
  used
• Government Role
• Regulate Information Disclosure
• Food Drug labels (what would happen if no
  requirement?)
• Testing Licensing (why does the public want
  this?)
• Drugs Professions Medical, Legal, Etc.

8
Externalities Efficiency

• Market system is efficient only if the market
  price reflects the full costs and benefits of
  producing and consuming a good or service
• Externalities
• costs or benefits of a transaction that are borne
  by someone not directly involved in the
  transaction
• Beehive near an apple orchard (positive)
• Loud music from the neighbours party (negative)
• Pollution from cars, factories, etc. (negative)
• Government Role
• Regulation to internalize externalities
• Auto emission control Nuisance ordinances etc.

9
Government the Public Goods

• Public goods
• goods whose consumption cannot be limited only to
  the person who purchased the good
• National defense, Radio broadcasts Street
  lights?
• not all goods services provided by the
  government are public goods
• also, public goods CAN be provided by the private
  sector. The amount provided may not be the
  optimal amount
• Problem w/private provision of public good
• If a neighbour got it, I can use it dont have
  to pay for it, so why pay for it? Laundry
  detergent problem.

10
Public Goods, continued

• Private Property Right
• the limitation of ownership to an individual
• car, pizza, computer, backpack are private goods
  you (or someone else) has a private property
  right in them
• no one has a private property right to a public
  good
• Free Ride
• the enjoyment of the benefits of a good by a
  producer or consumer without having to pay for it
  
• Government Role
• Provision of public goods claiming ownership
• Discuss government vs. private provision of
  police protection

11
Monopoly

• a situation where there is only one producer of
  the good
• arises from
• Economies of Scale (natural monopolies)
• Utilities (imagine 2 sets of water pipes to your
  house)
• Patents encouraging RD
• AZT
• creates inefficiencies
• Deadweight loss
• X-inefficiency technical inefficiency due to
  lack of competition
• Government Role Regulate Monopolies or ensure
  competitive environment

12
Economic Growth

• Business Cycles
• fluctuation in the economy between growth and
  stagnation
• Government Role Foster Growth
• Control the money supply and other important
  parts of the economy
• Government-financed programs aimed to offset some
  of the losses associated with downturns
• unemployment benefits
• job creation programs

13
Public Choice Theory of Government

• Who gets the most say in government decisions?
• Rent Seeking
• the use of resources to transfer income from one
  sector to the other
• Farming subsidies
• Public Choice
• the study of how government actions result from
  the self-interested behaviours of voters and
  politicians.
• Government may be brought into the market
  whenever someone can benefit, even if the
  efficiency is not served
• E.g. FDA, licensing protect current participants
  from entry

14
Overview of the U.S. Government

• What does the Government do?
• Microeconomic Policy
• Provides public goods
• Taxes or subsidizes some activities that create
  externalities
• Regulates industries where free market
  competition may not exist and polices other
  industries to promote competition
• Macroeconomic Policy
• Monetary Policy policy directed toward control
  of money credit
• Federal Reserve the central bank of the United
  States
• Fiscal Policy policy directed toward spending
  and taxation
• Government has the responsibility to minimize the
  damage from business cycles

15
Government Spending

• Purchases of goods and services by the government
• Transfer Payments
• income transferred from a citizen who is earning
  income to another citizen by the government
• Budget Surplus
• the excess that results when government spending
  is less than revenue
• Budget Deficit
• the shortage that results when government
  spending is greater than revenue
• Have to BORROW affects spending investment

16
Government in Other Economies

• Centrally Planned (nonmarket) Economies
• an economic system in which the government
  determines what goods and services are produced
  and the prices at which they are sold. E.g. East
  Europe (pre-91)
• No Private Property Rights (Or very limited)
• Goods Services allocated by government
• Prices are set by the government, so persistent
  shortages or surplusses exist (long lines, etc.)
• Shares of Government Spending for Major Market
  Economies
• France - 50, England - 42, Germany 34, Japan
  - 23, Sweden 45, and the U.S. about 22