Está en la página 1de 23

Chapter 5 Public Spending and Public Choice

Copyright 2011 by Pearson Education, Inc. All rights reserved.

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

5-2
Copyright 2011 Pearson Education, Inc. All rights reserved.

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
5-3
Copyright 2011 Pearson Education, Inc. All rights reserved.

Learning Objectives (cont'd)


Analyze how Medicare affects the incentives to consume medical services Explain why increases in government spending on public education have not been associated with improvements in measures of student performance Discuss the central elements of the theory of public choice
5-4
Copyright 2011 Pearson Education, Inc. All rights reserved.

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
5-5
Copyright 2011 Pearson Education, Inc. All rights reserved.

Did You Know That...


The U.S. government has a roughly 30 percent ownership share in Citigroup, a New Yorkbased banking organization that ranks among the worlds largest financial institutions? That same firm has utilized the governments funds to repay debts, purchase other banks, and make profitable investments, instead of making loans to consumers and businesses
5-6
Copyright 2011 Pearson Education, Inc. All rights reserved.

Did You Know That (contd)


The incentives and institutional arrangements that condition the behavior of private firms and governments differ in some fundamental respects One key distinction is that while firms function within the price system, a key rationale for the operations of government is to perform functions that the price system does not do well

5-7
Copyright 2011 Pearson Education, Inc. All rights reserved.

What a Price System Can and Cannot Do


In its most ideal form, a price system allows resources to move from lower-valued to higher-valued uses through voluntary exchange
Economic efficiency arises when all mutually advantageous trades have taken place

There are, however, situations when a price system does not generate the desired results
5-8
Copyright 2011 Pearson Education, Inc. All rights reserved.

What a Price System Can and Cannot Do (cont'd)


Market Failure
A situation in which the unrestrained market economy leads to too few or too many resources going to a specific economic activity
Prevents economic efficiency and individual freedom Is addressed by public policy (government)

5-9
Copyright 2011 Pearson Education, Inc. All rights reserved.

Correcting for Externalities


In a pure market system, economic efficiency occurs when individuals know and must bear the true opportunity cost of their actions
In some cases, the price that someone actually pays for a resource, good, or service is higher or lower than the opportunity cost that all society pays

5-10
Copyright 2011 Pearson Education, Inc. All rights reserved.

Correcting for Externalities (cont'd)


Market failure: an example
Assume
No government regulation against pollution A town with clean air A steel mill opens and emits smoke that causes
More respiratory diseases Dirtier clothes, houses, cars

5-11
Copyright 2011 Pearson Education, Inc. All rights reserved.

Correcting for Externalities (cont'd)


Market failure: an example
Market failure occurs
Steel mill does not pay for the clean air Costs of production have spilled over to the residents (third parties) Lower production cost
More steel is produced than would otherwise be the case

5-12
Copyright 2011 Pearson Education, Inc. All rights reserved.

Correcting for Externalities (cont'd)


Externalities
Occur when the consequences of an economic activity spill over to affect third parties

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
5-13
Copyright 2011 Pearson Education, Inc. All rights reserved.

Correcting for Externalities (cont'd)


Externalities are examples of market failures Pollution is an example of a negative externality Inoculations generate external benefits

5-14
Copyright 2011 Pearson Education, Inc. All rights reserved.

Figure 5-1 External Costs and Benefits, Panel (a)

5-15
Copyright 2011 Pearson Education, Inc. All rights reserved.

Figure 5-1 External Costs and Benefits, Panel (b)

5-16
Copyright 2011 Pearson Education, Inc. All rights reserved.

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
5-17
Copyright 2011 Pearson Education, Inc. All rights reserved.

Correcting for Externalities (contd)


Resource misallocations of externalities
External costsmarket overallocates External benefitsmarket underallocates

Government can correct negative externalities


Special taxes (i.e. a pollution tax or effluent fee) Regulation
5-18
Copyright 2011 Pearson Education, Inc. All rights reserved.

Correcting for Externalities (cont'd)


How the government can correct positive externalities
Government financing and production Subsidies Regulation

5-19
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-20
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Other Economic Functions of Government


Providing a legal system Promoting competition Providing public goods Ensuring economy-wide stability

5-21
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Other Economic Functions of Government (cont'd)


Providing a legal system
Enforcing contracts Defining and protecting property rights Establishing legal rules of behavior

5-22
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Other Economic Functions of Government (cont'd)


Promoting competition
Market failure may occur if markets are not competitive.
Antitrust legislation Monopoly power

5-23
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Other Economic Functions of Government (cont'd)


Antitrust Legislation
Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices

Monopoly
A firm that can determine the market price, in the extreme case is the only seller of a good or service

5-24
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Other Economic Functions of Government (cont'd)


Providing public goods
Goods to which the principle of rival consumption does not apply In contrast, private goods can be consumed by one individual at a time

5-25
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Other Economic Functions of Government (cont'd)


Principal of Rival Consumption
Recognizes individuals are rivals in consuming private goods

Public Goods
Can be jointly consumed by many individuals simultaneously

5-26
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Other Economic Functions of Government (cont'd)


Characteristics of public goods
1. Can be used by more and more people at no additional opportunity cost 2. Difficult to charge for a public good based on consumptionthe exclusion principle

5-27
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Other Economic Functions of Government (cont'd)


Exclusion Principle
Anyone can enjoy the benefits of a public good, even if they have not paid for it

Free-Rider Problem
Arises when some individuals take advantage of the fact that others will take on the burden of paying for public goods

5-28
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Other Economic Functions of Government (cont'd)


Ensuring economy-wide stability
Smooth ups and downs in overall business activity Full Employment Act 1946
Full employment Price stability Economic growth

5-29
Copyright 2011 Pearson Education, Inc. All rights reserved.

E-Commerce Example: Is the Nu Internet Domain a Public Good?


Residents in a South Pacific island nation of Niue, were to first to possess nationwide wireless Internet access A private company Medfield of Massachusetts provides the wireless service in exchange for the legal rights to the Internet domain name dot-nu Is the nu domain on the Internet a public good?

5-30
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Political Functions of Government


Government-Sponsored Goods (Merit Goods)
Goods deemed socially desirable through the political process
Museums

Government-Inhibited Goods (Demerit Goods)


Goods deemed socially undesirable
Illegal substances
5-31
Copyright 2011 Pearson Education, Inc. All rights reserved.

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?

5-32
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-33
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Political Functions of Government (cont'd)


Income redistribution: includes progressive income tax system and transfers
Transfer payments Transfers in kind

5-34
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Political Functions of Government (cont'd)


Transfer Payments
Money payments made by governments to individuals for which in return no services or goods are rendered Examples are Social Security old age and disability benefits and unemployment insurance benefits

5-35
Copyright 2011 Pearson Education, Inc. All rights reserved.

The Political Functions of Government


Transfers in Kind
Payments that are in the form of goods and services Include food stamps, subsidized public housing, medical care

5-36
Copyright 2011 Pearson Education, Inc. All rights reserved.

Public Spending and Transfer Programs


Government Outlays
All federal, state and local spending Examples
Defense, income security, Social Securityat the federal level Education, health and hospitals, public welfareat the state level

5-37
Copyright 2011 Pearson Education, Inc. All rights reserved.

Figure 5-2 Total Government Outlays over Time

5-38
Copyright 2011 Pearson Education, Inc. All rights reserved.

Figure 5-3 Federal Government Spending Compared to State and Local Spending

5-39
Copyright 2011 Pearson Education, Inc. All rights reserved.

Public Spending and Transfer Programs (cont'd)


Publicly subsidized healthcare
Medicare
Began in 1965 Pays hospital and physicians bills for U.S. residents over 65 with public monies 2.9% of earnings taxed Second biggest domestic program in existence

Medicaid
Subsidizes people with lower incomes

5-40
Copyright 2011 Pearson Education, Inc. All rights reserved.

Figure 5-4 The Economic Effects of Medicare Subsidies

5-41
Copyright 2011 Pearson Education, Inc. All rights reserved.

Public Spending and Transfer Programs (contd)


To increase the quantity of medical care, the government pays a subsidy
The price per unit paid to medical service providers increases The price per unit paid by consumers falls More medical services are consumed

5-42
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-43
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-44
Copyright 2011 Pearson Education, Inc. All rights reserved.

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?

5-45
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-46
Copyright 2011 Pearson Education, Inc. All rights reserved.

Public Spending and Transfer Programs (contd)


The Economics of Public Education
Publicly subsidized, similar to government subsidized healthcare Education priced below market

5-47
Copyright 2011 Pearson Education, Inc. All rights reserved.

Public Spending and Transfer Programs (contd)


The Incentive Problems of Public Education
Various measures of performance show no increase or decline in performance Many economists argue failure to improve relies on incentive effects Higher subsidies may translate to services unrelated to learning

5-48
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-49
Copyright 2011 Pearson Education, Inc. All rights reserved.

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?

5-50
Copyright 2011 Pearson Education, Inc. All rights reserved.

Collective Decision Making: The Theory of Public Choice


Collective Decision Making
How voters, politicians, and other interested parties act and how these actions influence nonmarket decisions

5-51
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-52
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-53
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-54
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-55
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-56
Copyright 2011 Pearson Education, Inc. All rights reserved.

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
5-57
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-58
Copyright 2011 Pearson Education, Inc. All rights reserved.

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?
5-59
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-60
Copyright 2011 Pearson Education, Inc. All rights reserved.

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
5-61
Copyright 2011 Pearson Education, Inc. All rights reserved.

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

5-62
Copyright 2011 Pearson Education, Inc. All rights reserved.

Summary Discussion of Learning Objectives


How market failures such as externalities might justify economic functions of government
Market failure is a situation in which an unhindered free market allocates too many or too few resources to a specific economic activity

Private goods versus public goods and the freerider problem


Private goods are subject to rival consumption Public goods are not subject to rival consumption Free-riders anticipate others will pay

5-63
Copyright 2011 Pearson Education, Inc. All rights reserved.

Summary Discussion of Learning Objectives (cont'd)


Political functions of government that lead to its involvement in the economy
Merit goods deemed socially desirable Demerit goods deemed socially undesirable Redistributing income
Transfer payments In kind transfers

5-64
Copyright 2011 Pearson Education, Inc. All rights reserved.

Summary Discussion of Learning Objectives (cont'd)


The effect of Medicare on incentives to consume medical services
Subsidies lead to a higher quantity of medical services consumed Medicare encourages people to consume medical services that are low in per-unit value relative to the cost

5-65
Copyright 2011 Pearson Education, Inc. All rights reserved.

Summary Discussion of Learning Objectives (cont'd)


Why bigger subsidies for public schools do not necessarily translate into improved student performance
Last unit of educational services provided likely to cost more than its valuation by parents and students Services provided in excess of those best suited to promoting student learning

5-66
Copyright 2011 Pearson Education, Inc. All rights reserved.

Summary Discussion of Learning Objectives (cont'd)


Central elements of the theory of public choice
Collective decision making
Voters, politicians, other participants influence nonmarket choices

Incentive structures
Rewards and punishments affect provision of government goods

Similarities and differences with market system structures


Scarcity, competitionsimilarities Legal coercion, majority ruledifferences

5-67
Copyright 2011 Pearson Education, Inc. All rights reserved.

También podría gustarte