Transcript Chapter 29 Government Spending

Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
©1999 South-Western College Publishing
1
Chapter 29
Government Spending
3/25/2016
©1999 South-Western College Publishing
2
What is the role of
government?
• Note that this is a normative issue
• Begin with the market failure
theory of government, government
intervenes when the market fails
to do something
3
First case of market failure,
government must provide pure public
goods
• A pure private good is rival and
exclusion is possible
• A pure public good is just the
opposite, non-rival and
exclusion difficult or
impossible
4
Example of a pure public
good
• National defense
• Police and fire protection come
close
• The free rider problem
5
Second case of market failure,
government needs to correct for
serious externalities (see chapter 14
for a discussion of externalities
Externalities: side effects in
production or consumption, or
unpriced by-products
Can be both positive and
negative externalities
6
Negative externalities (external or social
costs)--pollution for example
Positive externalities (external benefits),
inoculation from disease, education,
etc.
The market tends to overproduce things
with negative externalities and
underproduce things with positive
externalities
Can try to correct for this with taxes,
subsidies, regulation, etc.
7
Other roles of government
• Merit goods • Redistribution of
income
• Promote
competition • Stabilize the
economy
©1999 South-Western College Publishing
8
What is a Merit Good?
A good with strong positive
externalities that market
demand and supply do not
produce enough of, in some
people’s opinion
©1999 South-Western College Publishing
9
What are examples of a
Merit Good?
• higher education
• artistic endeavors
• health related goods
• public libraries
• national public radio
©1999 South-Western College Publishing
10
How can government
redistribute income?
Through a system of taxes
and transfers
11
What is a
Transfer Payment?
Government spending that
transfers income from
one person to another
©1999 South-Western College Publishing
12
What are examples of
Transfer Payments?
• welfare
•Medicare
• food stamps •Medicaid
• social security
• unemployment benefits
©1999 South-Western College Publishing
13
2 ways of measuring the
growth of government
spending
• Absolute dollars
• Relative measure, as a %
of GDP
14
How much does the
government spend?
In 1996, state and
federal governments
spent $2,636.1 billion
©1999 South-Western College Publishing
15
Government as a % of
GDP
1929, all levels of government,
about 10%
Today, between 35-40%
Normative issue, is this good or
bad?
16
http://www.ssa.gov
http://nces.ed.gov
http://www.idresearch.com
http://www.ed.gov
http://www.socialsecurity.org
http://www.ncpssm.org/menu.html
http://www.publicdebt.treas.gov
©1999 South-Western College Publishing
1
17 7
•
•
•
•
•
•
•
•
•
What comprises government spending?
What is a Public Good?
What is a Merit Good?
What is a Transfer Payment?
What is Welfare?
What is Medicaid?
What is Social Security?
What is Medicare?
What percent of GDP does the
government spend?
18
END
©1999 South-Western College Publishing
19