Transcript Public sector

Chapter 6
Government and the
Economy
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
• Discuss the changes in the economic
role of the government over time,
including the New Deal and deregulation.
• Explain the benefits of government
action.
• Describe the limits and downsides of
government action.
• List and illustrate circumstances in which
government intervention in the economy
may be useful.
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Private versus Public Sectors
• Economists generally believe that
providing goods and services through
the private sector is preferable to
having it supplied by the government.
– Private sector includes privately owned
businesses and shareholder-owned
corporations.
– Public sector includes the federal, state,
and local government.
• The public sector provides goods and
services, collects taxes, and regulates
industry.
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Private versus Public Sectors
• How large the public sector should be and
what goods and services it should provide
are the subject of heated debate among
economists.
• Controversial questions include:
– Should the government or the private sector be
the main provider of health care?
– Should the government regulate the gas mileage
of automobiles?
– Should passenger trains be funded and operated
by the government?
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The Changing Role of
Government
• Today, the government plays a large role in
the economy.
• But 80 years ago, the role of the
government was much smaller.
• The change in the government’s role
occurred during the Great Depression,
beginning in 1929.
• Economic conditions were so bad that
people began to look to the government for
help.
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The Great Depression and the
New Deal
• Because of the Great Depression,
businesses and voters demanded that
the federal government do something
to stimulate the economy.
• The Roosevelt Administration
proposed a series of programs called
the New Deal.
• Many of the New Deal programs are
still with us today.
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Programs Created During the
New Deal
Program
What it Does Today
Social Security
Financial support for elderly
Unemployment insurance
Financial support for the
unemployed
Securities and Exchange
Commission
Protection for stock market
investors
Federal Deposit Insurance
Corporation
Protection for bank depositors
from bank failures
Federal minimum wage
Minimum wage for workers
Ban on Child Labor
Tight restrictions on children
being forced to work
Welfare for dependent mothers
and children
Financial support for poor
families
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Era of Government Growth
• After World War II and during the
decades of the 1950s, 1960s, and 1970s
the role of government gradually
expanded.
• This occurred during both Democratic
and Republican administrations.
– The Interstate highway program was started
during the term of President Eisenhower.
– The space program was started during the
term of President Kennedy.
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Era of Deregulation
• Beginning in the mid-1970s, the public
began to feel the role played by
government in the economy had grown
too far.
• The mid-1970s was the start of the era of
deregulation, when the role of government
in the economy was reduced.
• Deregulation is defined as the reduction
of government control over particular
industries.
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Era of Deregulation
• President Carter began the move toward
deregulation when he rolled back
government oversight of the airline and
trucking industries.
• The deregulation movement got into full
swing during the term of President
Reagan.
• The goal of the deregulation movement
was to restrict the role of the government
in the economy and reduce government
spending and employment.
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Era of Deregulation
• The philosophy under the Reagan
Administration shifted to the less
government, the better.
• Despite the anti-government
movement, the role of the public sector
in today’s economy remains very
significant, and much higher than the
pre-Depression level.
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Comparing Government Spending
in Different Countries (2009)
In comparison to other countries, role of the public
sector in the US economy is relatively small.
60
50
40
30
20
10
0
Government 2009 outlays as percent of GDP
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The Benefits of
Government Action
• The role of government is to protect
against external threats.
• The goal of giving everyone at least a
high school education (through public
schools) is achieved by government
action.
• Government plays key role in
encouraging technological change by
funding basic research.
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The Benefits of
Government Action
• Government plays a key role in managing
global trade by establishing trade
agreements.
• Government plays a key role in supervising
and regulating the financial markets.
• Government action is required when there
are deficiencies in private markets (market
failure).
– An example of a market failure is pollution.
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Downsides of
Government Action
• There are several problems with
government intervention in the
economy.
– First, public sector managers face an
incentive problem, since there isn’t a
need to make a profit.
– Second, government often suffers from a
lack of flexibility and innovation.
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Downsides of
Government Action
– Third, the bigger the role that the
government plays in the economy, the
more it pays for businesses and
individuals to lobby public officials.
• Lobbying is what economists call rentseeking behavior.
• Rent-seeking behavior means that
companies spend money trying to influence
the government, rather than cutting costs or
improving products.
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Downsides of
Government Action
– Finally, the main argument against
government intervention has to do with
the inefficiency of taxation.
• The imposition of a tax means the seller
receives less than the buyer pays.
• Since sellers receive less than they would in
a competitive market, they reduce their
quantity supplied.
• Buyers also reduce their quantity demanded,
since they pay more.
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Common Taxes
Some of the common taxes include:
• Income
• Sales
• Excise
• Payroll
• Corporate Estate
• Property or wealth
• Capital gains
• Carbon tax
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Inefficiency of Taxes
Price of
chairs
B
After-tax price
paid by buyers
Pre-tax price
paid by buyers
and received
by sellers
After-tax price
received by
sellers
Market supply
curve
Tax of
$20 per
chair
A
C
Market demand
curve
After-tax
quantity
Pre-tax
quantity
Quantity of chairs
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The Right Role for Government
Economic Policy
• In cases of market failures and where
the pluses of government actions are
greater than the minuses, there is a
role for government intervention.
• One can justify government
intervention in the following
circumstances:
– Public good provision, market regulation,
externalities, and income redistribution.
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Public Goods Provision
• Public goods benefit many people in
a city, region, or country to some
degree.
• In contrast, private goods only benefit
the buyer and his or her family.
• Public goods include national defense,
police and fire protection, the road
system, primary and secondary
education, and public health efforts
such as clean water.
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Public Goods Provision
• Public goods face the free rider problem.
• People benefit from public goods even if
they don’t pay for them. Thus, they get a
free ride from everyone else’s contribution.
• Government can solve the free rider
problem by forcing everyone to pay through
taxes.
• One of the most important public goods
provided by government is basic research.
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Market Regulation
• Government sets the rules for market
competition.
• While markets, in theory, can set their
own rules, it is easier and more workable
for the government to set them.
• Government regulators monitor the
safety of products from autos to drugs,
protect consumers against defective
products, watch the financial system, etc.
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Example of Government
Agencies
• The Federal Trade Commission (FTC)
and Department of Justice (DOJ) are
responsible for enforcing antitrust laws.
• Antitrust laws make sure companies
don’t unfairly try to get market power or
reduce the amount of competition in a
market or industry.
• They must approve mergers and
acquisitions that companies make, and
watch for signs of price-fixing.
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Externalities
• An externality is the secondary impact
that market transactions can have on
others.
• With externalities, the benefit achieved
from a market economy may break
down (market failure).
• Externalities can be either positive or
negative.
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Externalities
• An example of a negative externality is
pollution.
– A factory that emits dangerous fumes is
imposing a negative externality on the
nearby community.
• Positive externalities come about when
your actions benefit other people.
• A network externality means that your
decision to use a network affects the
value of that network to other people.
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Income Redistribution
• An important economic function of
government is income redistribution - the
shifting of money from rich to poor in order to
narrow big income differences.
– This is accomplished through the tax system and
through government programs such as Medicare.
• The role that government should play in
helping the poor is a controversial economic
policy issue.
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