Economic Assignment

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Chapter 1 DEFINING PUBLIC SECTOR RESPONSIBILITIES

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Economics of the Public Sector, Fourth Edition

Agenda

What is public finance?

How does it relate to budgeting?

The economic role of government

Thinking like a public sector economist

Economic models

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Economics of the Public Sector, Fourth Edition

What is Public Finance?

Public Finance is the study of the relationship between government and the economy. It is that branch of Economics which deals with, the income and expenditure of a government.

Four general stages of analysis are identified:

1) describing public activities

2) understanding the economic consequences of those activities

3) evaluating alternative policies

4) interpreting the political process

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Economics of the Public Sector, Fourth Edition

What is Public Finance?

In the words of Adam Smith:

"The investment into the nature and principles of state expenditure and state revenue is called public finance".

Public sector economics is defined as the

study of government activity in such an economic environment.

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Economics of the Public Sector, Fourth Edition

The Economic Role of Government

A mixed economy as one in which the private sector has primary responsibility for production but in which the government also plays a broad economic role.

In a mixed economy, the gov’t alters the behavior of the private sector through:

Regulations

Taxes

Subsidies

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Economics of the Public Sector, Fourth Edition

Privatization

Privatization refers to when a government-owned business, operation, or property becomes owned by a private, non-government party.

Since the 1980’s Privatization has been the trend in Europe. In recent years, privatization has also become more prominent in the US

A Public-Private Partnership (PPP) is a collaborative effort between gov’t & the private sector to deliver public services

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Economics of the Public Sector, Fourth Edition

Different Perspectives on the Role of Gov’t

Some advocate for gov’t to have a larger role in the economy. Mercantilists believe that gov’t should actively promote trade and industry.

Adam Smith, referred to as the “father of modern economics,” preferred that gov’t take a smaller role.

Competitiveness

Profit Motive

According to Smith, only firms that produced goods that were wanted, at the lowest possible price, would be successful

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Economics of the Public Sector, Fourth Edition

Different Perspectives on the Role of Gov’t

Scholars such as Karl Marx, Jean Charles Leonard de Sismondi and Robert Owens thought the evils in society were due to the private ownership of capital

Both approaches to governments role in the economy come with positive and negative unintended consequences

What are some examples?

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Economics of the Public Sector, Fourth Edition

Smith & Marx

Adam Smith: https://www.youtube.com/watch?v=ejJRhn53X2M

https://www.youtube.com/watch?v=NqUSDi-mvqw

Karl Marx:

https://www.youtube.com/watch?v=fSQgCy_iIcc

https://www.youtube.com/watch?v=rj1fjy0iM6U

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Economics of the Public Sector, Fourth Edition

Unintended Consequences

The reduction of the speed limit to 55 miles per hour following the oil embargoes was intended to conserve energy, but it led to a marked decrease in highway fatalities.

Thus, even after the energy crisis had passed, the 55-mile-per-hour speed limit was retained

until 1997.

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Economics of the Public Sector, Fourth Edition

Thinking like a public sector economist

Economists study scarcity – how societies make choices concerning the use of limited resources. They inquire into four central economic questions:

What is to be produced?

How is it to be produced?

Privately, or publicly?

Energy-efficient technologies?

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Economics of the Public Sector, Fourth Edition

Thinking like a public sector economist

3. For whom is it to be produced?

Deciding whether to tax, or a welfare program inform decision-making

What public goods should be produced?

4. How are these decisions made?

Collective choices are those that a society must make together:

Legal structure; Public good expenditures; the size of the military

Public decision-making

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Economics of the Public Sector, Fourth Edition

Analyzing the Public Sector

In addressing each of the fundamental economic questions, there are four (4) general stages of analysis:

Describing what the government does

Analyzing the consequences of gov’t action

Evaluating alternative policies

Interpreting the political forces that underlie the decisions gov’t makes

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Economics of the Public Sector, Fourth Edition

Economic Models

A model of the economy attempts to depict the basic features of the economy.

Positive Economics – Describes the economy and constructs models that predict either how the economy will change or the effects of different policies. For example,

The benefits of the price subsidies accrue mainly to large farmers (because they produce more).

Many farmers still have incomes below the poverty line.

Positivist – What it is. Value-free.

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Economics of the Public Sector, Fourth Edition

Economic Models

A model of the economy attempts to depict the basic features of the economy.

Normative Economics – Attempts to evaluate alternative policies, weighing the various benefits and costs. For example:

Our farm program has been a failure.

Direct grants to farmers would be preferable to our price-support program.

Normative = What should be. Value judgement

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Economics of the Public Sector, Fourth Edition

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Economics of the Public Sector, Fourth Edition

SOCIETY’S PRODUCTION POSSIBILITIES SCHEDULE

This depicts the maximum level of private goods that society can enjoy for each level of public goods. If society wishes to enjoy more public goods, it must give up some private goods.

Summary & Review

An economic model tries to:

a. include in detail all known features of some part of the economy.

b. show how a perfect economy would work.

c. reflect the important features of some part of the real economy.

d. derive appropriate values for attacking a problem.

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Economics of the Public Sector, Fourth Edition

Summary & Review

An economic model tries to:

a. include in detail all known features of some part of the economy.

b. show how a perfect economy would work.

c. reflect the important features of some part of the real economy.

d. derive appropriate values for attacking a problem.

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Economics of the Public Sector, Fourth Edition

Review (continued)

Positive statements are those about which all economists agree. True or False?

In mixed economics, such as the US, economic activity is carried on by both private enterprise and government

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Economics of the Public Sector, Fourth Edition