Actions of Government

1
Actions of Government

• What government does
• Establish and enforce the rules
• e.g. property rights
• Regulate
• competition
• environment

• Redistribute income
• Examples?
• Provide public goods
• Manage the macro economy
• Monetary policy
• Fiscal policy

2
The Miller Venture Capital Company, Ltd.

• The problem
• The solution
• Who wants to invest??

3
Private and Public Goods

• Two criteria
• Rival vs. shared consumption
• Does consumption by one person reduce the benefit
  of the good (or service) to someone else?
• Excludability
• Can the good (or service) be easily withheld from
  those who do not pay?

4
Private goods

• Rival consumption
• Excludable
• Example
• Can of soda

5
Public goods

• Shared (non-rival) consumption
• A ship steering by the light from the lighthouse
  does not reduce the ability of other ships to
  steer by that light
• Non-excludability
• No practical way to exclude ships that dont pay
  from using the lighthouse

6
Mixed goods
7
Government Providing Public Goods and Some Mixed
Goods

• Government must provide public goods (and some
  mixed goods) since they will be UNDERPRODUCED
• Examples
• Streetlights
• National defense

8
Practice

• Right hand Consumption
• Rival?
• Shared ?
• Left hand Excludability
• Excludable ?
• Non-excludable ?
• Show me PUBLIC
• Right ? Left ?
• Show me Private
• Right ? Left ?

9
Practice

• Busy hospital ER all emergency cases accepted
• Right hand Consumption
• ?
• Left hand Excludability
• ?
• Rock concert not sold out
• Right hand Consumption
• ?
• Left hand Excludability
• ?
• Town 4th of July fireworks display
• Right hand Consumption
• ?
• Left hand Excludability
• ?

10
Manage the macro economy

• Monetary Policy
• Stabilizing the economy through managing M and
  interest rates
• Fiscal Policy
• Stabilizing the economy through changes in taxes
  and government spending

11
Fiscal Policy

• Fight recession
• Need more spending
• Cut taxes
• Increase govt spending
• Fight Inflation
• Need less spending
• Increase taxes
• Decrease govt spending (HA!)
• Incentives again

12
Fiscal policy

• A caveat Crowding out
• Deficits increase borrowing by the government
  demand for loanable funds increases
• Interest rates are prices that reflect the
  relative scarcity of loanable funds they rise
• Private investment that would have been
  profitable at lower rates is crowded out

13
Should you worry?

• Federal deficit is the amount the national
  government spends in excess of its revenue in a
  year.
• (surplus vice versa)
• A deficit adds to the total debt of the federal
  government the federal or national debt

14
Should you worry? Some data

• Annual deficit
• Around 300 billion
• Around 3.75 of GDP
• 1983, 8 of GDP
• 2000, a SURPLUS of 2 of GDP
• Federal debt
• Closing on 8 trillion
• About 63 of GDP
• End of WWII debt as a of GDPgt100

15
Actions of Government

• What government does
• Establish and enforce the rules
• e.g. property rights
• Regulate
• competition
• environment

• Redistribute income
• Examples?
• Provide public goods
• Manage the macro economy
• Monetary policy
• Fiscal policy