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Introduction
Recently, the U.S. government funneled funds to General Motors to meet payrolls and to construct new plants even as the company was in the midst of bankruptcy proceedings. In addition, it worked to boost the demand for GM vehicles In this chapter, you will learn about the rationales for and implications of the U.S. governments financial support for GM
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Learning Objectives
Explain how market failures, such as externalities, might justify economic functions of government Distinguish between private and public goods and explain the nature of the freerider problem Describe the political functions of government that entail its involvement in the economy
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Chapter Outline
What a Price System Can and Cannot Do Correcting for Externalities The Other Economic Functions of Government The Political Functions of Government Public Spending and Transfer Programs Collective Decision Making: The Theory of Public Choice
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There are, however, situations when a price system does not generate the desired results
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Third Parties
Parties who are not directly involved in a given activity or transaction
Property Rights
Rights of an owner to use and exchange property
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Example: Billboards That Catch Drivers Eyes, Sometimes for Too Long Of the 500,000 billboards lining U.S. highways and city streets, approximately 2,000 are digital billboards Critics suggest that the bright, eye-catching digital billboards are diverting drivers eyes from roadways and causing accidents They argue that digital billboards bright messages distract drivers, and thereby create a negative externality by making the roads less safe for drivers, their passengers and occupants of other cars
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Policy Example: Incentives Coax Senior Citizens from Behind the Wheel
Many people age 85 or older continue driving even after their skills and senses falter, and so they have higher crash rates per mile traveled than all age groups except 16- and 18-yearolds Governments are working to make roadways safer by providing incentives for aging baby boomers to park their cars and choose alternative modes of transportation Many state governments are easing regulations that impede efforts by private firms to offer elderly people transportation Some municipal governments are providing vouchers that help cover most of the price of public transportation
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Monopoly
A firm that can determine the market price, in the extreme case is the only seller of a good or service
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Public Goods
Can be jointly consumed by many individuals simultaneously
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Free-Rider Problem
Arises when some individuals take advantage of the fact that others will take on the burden of paying for public goods
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International Policy Example: Chinas Government Struggles With How to Regard Tobacco About 36% of all adults in China smoke, as compared with 21% of adults in the U.S For Chinas government , the good news is that it owns the nations cigarette manufacturing company, China National Tobacco Corporation Although one measure of meritattendanceis declining Who bears the cost?
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International Policy Example: Chinas Government Struggles with How to Regard Tobacco (contd)
The good news is that the government puts earnings into a variety of activities, including constructing highways, hydroelectric dams, and railroads The bad news is that all the smoking promoted in China is creating an epidemic of diseases
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Figure 5-3 Federal Government Spending Compared to State and Local Spending
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Medicaid
Subsidizes people with lower incomes
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Policy Example: If the Government Doesnt Pay for It, Physicians Dont Do It Most professionals regard telephone and e-mail as indispensable tools for communicating with clients In contrast, phone consultations and e-mail contact with physicians are very rare Medicare pays for face-to-face visits with physicians, but not for telephone or email consultation with patients
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Policy Example: If the Government Doesnt Pay for It, Physicians Dont Do It (cont'd)
Thus, Medicare gives physicians incentives to schedule appointments with patients in their offices but provides no incentives to utilize more efficient modes of communication Physicians then schedule office visits with patients and avoid phone calls and e-mail communications
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Policy Example: If the Government Doesnt Pay for It, Physicians Dont Do It (cont'd)
Who pays for the fact that Medicares payment rules promote higher-priced, faceto-face physician-patient communications instead of lower-priced, remote communications?
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Public Spending and Transfer Programs (contd) Economic Issues of Public Education State and local governments provide primary, secondary, and post-secondary education at prices well below those that would otherwise prevail in the marketplace
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E-Commerce Example: The Miniscule Payoff from Public School Internet Subsidies
The E-Rate program of 1996 provides a subsidy to public schools for use in making classrooms Web-connected The E-Rate subsidy is about $100 per pupil The objective of this subsidy was to boost the breadth of students access to the Internet
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E-Commerce Example: The Miniscule Payoff from Public School Internet Subsidies (cont'd)
The effects of the E-Rate program on student performances in Texas and California found no concrete evidence of improved student performance Why might the $100-per-student E-Rate subsidy provide a miniscule learning payoff for students who already have Internet access at home?
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Collective Decision Making: The Theory of Public Choice (cont'd) Theory of Public Choice
The study of collective decision making Assumes that individuals will act within the political process to maximize their individual (not collective) well-being
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Collective Decision Making: The Theory of Public Choice (cont'd) Similarities in market and public-sector decision making
Self-interest Opportunity cost Competition Similarity of individuals, but different incentive structures
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Collective Decision Making: The Theory of Public Choice (cont'd) Incentive Structure The system of rewards and punishments individuals face with respect to their actions
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Collective Decision Making: The Theory of Public Choice (cont'd) Differences between market and collective decision making
Government goods at zero price Use of force Voting versus spending
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Collective Decision Making: The Theory of Public Choice (cont'd) Differences between market and collective decision making
Voting versus spending
Political system versus market system
Political system Run by majority rule Market system Run by proportional rule
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Collective Decision Making: The Theory of Public Choice (cont'd) Government or Political Goods
Goods (and services) provided by the public sector
Majority Rule
Collective decision making, decisions based on more than 50%
Proportional Rule
If 10% of dollar votes cast for blue cars, 10% of output is blue
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Collective Decision Making: The Theory of Public Choice (cont'd) Differences between market and collective decision making
Voting versus spending
Spending of dollars can indicate intensity of want Votes cannot; each vote counts with the same intensity
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International Example: Why a Synonym for Big Oil is Big Government Politicians and pundits commonly blame big oil their shorthand for private oil companiesfor higher oil prices Today private companies such as Chevron, British Petroleum, ConocoPhillips, and ExxonMobil directly manage oil production from only 5 percent of the worlds known reserves. Governments and government-owned companies coordinate production from the remaining 95 percent of reserves Why might dictators in totalitarian regimes make different oil production choices than private companies would have made?
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Issues and Applications: General Motors Becomes Government Motors General Motors (GM) was the largest private employer in the United States by the end of the 1970s Between 2007 and 2008, overall U.S. purchases of motor vehicles dropped by nearly 20 percent, but GMs sales declined by an even larger percentage. By December 2008, company officials were in Washington, D.C., seeking government assistance
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Issues and Applications: General Motors Becomes Government Motors (contd) In 2009, the company went through a government-organized bankruptcy proceeding and emerged as a company 70 percent owned by the U.S. government Thus, GM vehicles became a governmentsponsored good whose production was subsidized by U.S. taxpayers In addition, Congress authorized the distribution of tax-funded vouchers worth up to $4,500 apiece to people trading in clunkers. GM also benefited from this consumption-subsidization program
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Issues and Applications: General Motors Becomes Government Motors (contd) In response to continued proportional-rule voting by its customers not to buy as many of its products, GM announced its intention to end ties to more than 2,400 vehicle dealerships Later, GM discovered that its new primary owner, the U.S. government, is driven by majority-rule voting. The U.S. House of Representatives voted to require GM to reinstate dealerships
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Incentive structures
Rewards and punishments affect provision of government goods
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