Public Finance

Econ 4520

Introduction

What words come to mind when you

hear the word government?

◦ President

◦ Senate

◦ House of Representatives

◦ Laws

Why do we have government?

◦ Does government do things for us?

◦ Do we do things for the government?

◦ Which is more important?

Public Finance What is Public Finance?

◦ Definition: The study of the role of

government in the Economy

Perspective: Two views on Government

◦ Organic View

◦ Mechanistic View

Video Example – JFK

Organic View

Society is a natural organism. Each

individual is part of the organism and

government can be thought of as its

heart.

Individual has significance only as part of

the community

Individual can only be explained with

respect to the good of the whole

Mechanistic View

Government is not perceived as organic

part of Society

Government is contrived by individuals to

better achieve their individual goals.

The individual rather than the group is at

center stage.

4 questions of Public Finance

1. When should the government intervene in

the economy?

2. How might the government intervene

3. What is the effect of those interventions on

economic outcomes?

4. Why do governments choose to intervene

on economic outcomes?

4 questions of Public Finance

1. When should the government intervene in the economy?

A. Market Failure (Decisions you make in the market affect other people)

i. Measles

ii. Education

2. How might the government intervene A. Taxes and Subsidies

B. Restrict or mandate sale or purchase i. Weapons

ii. Auto Insurance

C. Government provision: Example – Gov Health Insurance

3. What is the effect of those interventions on economic outcomes? A. Who are the people affected?

B. What are their behavioral responses i. The case of taxes going up

ii. The case of free provision of a good that you once paid for.

4. Why do governments choose to intervene on economic outcomes? A. Political Economy: The theory of how the political

process produces decisions that affect individuals and the economy

4 questions of Public Finance

Warm-Up – Review From Last Time Weber State University Budget:

◦ 2010

Total Revenues = $113,321,800

Revenue From Tuition = $48,099,100

Tuition/Total Revenue = 42%

The government is very involved in the production of

education. Discuss the four questions of public economics

as they relate to the provision of education

1. When should the government intervene in market for

education?

2. How might the government intervene?

3. What is the effect of those interventions on economic and

educational outcomes?

4. Why do governments choose to intervene in educational

economic outcomes?

Motivation for the Course

What has motivated you to take Public

Finance?

Some Motivation for how the issues of

public finance directly affect you

◦ Tax Freedom Day

◦ Social Security Payments

Tax Freedom Day

Social Security Payment

What the Government Does – Circular

Flow Model of the Economy How an economy is connected.

Where do households get their

paychecks from?

Where do firms get labor and

resources to make it possible to

put things on their shelf?

What do households do with

their paychecks?

When do firms get the money

to put goods on their shelves?

Is the government involved at all

in this process?

◦ What does gov’t give to households?

◦ What does gov’t receive from

households?

◦ What do firms receive from gov’t?

◦ What does gov’t receive from firms.

$ $

$ $

Is government the Panacea?

There are problems in society, do we

want the government to fix them, or is

private enterprise capable of fixing them?

◦ What might be some problems that arise

when government steps in?

◦ Is the government the able to fix everything?

Every case of market failure?

Milton Friedman

What is at Stake?

How many people in the World live in

Poverty?

How many People live on less than $10

per day, $3650 per year?

How is it possible that people get out of

poverty on a large scale?

GDP across Countries

Size of Government

Changing Role of Government Transfer Payments – Payments Government makes without receiving

a good or service in return. Social Security Pensions, cash assistance

to the unemployed etc…Where did this money come from?

Interest Payments – When you spend more than you make, you have

to take out a loan. The Govt has loans and must pay interest on

them.

Consumption Expenditures– Payments Government makes for a

good or service. National Defense, education, transportation

Size of Government State vs.

Federal We have 50 states, but only one Federal

Government, which spends more?

2004

State/Local: 36.5% of

Gov't Spending (12.1% of

GDP)

Federal: 63.50% of Total Gov't Spending

(21% of GDP)

2008

•1960 about half of government spending was on the

Military

•2004 about 20%

•Spending on Health Care has Expanded dramatically.

•Age Distribution

Federal Spending

State Spending

•Majority for Education

•Health Is expanding

Revenue - Federal

•Individual income tax provides somewhat less than half of federal

revenue

•Big decline in corporate income tax

•Who own corporations?

•Fewer excise taxes.

•Large Growth In Payroll Taxes

State Revenue

•Currently there is fairly even split in state revenue

•What is this Federal Grants Category?

Government Spending in Other

Nations How does Govt spending in the US compare with other

nations?

Other Costs to Consider

The government is more influential than

just the money it spends

◦ Consider government regulation: May

increase costs to business without an increase

in government expenditures

◦ FDA regulates 25% of consumer expenditures

◦ OSHA regulates workplace safety

◦ FCC

◦ EPA

◦ Ethanol

“Real” Cost of Government

Spending “Real” means in terms of goods and

services.

Understand the Real Cost by using a

model Called the Production Possibility

Frontier:

◦ Def: A curve measuring the maximum

combination of outputs that can be obtained

from a given number of inputs

◦ Outputs

◦ Inputs

◦ Maximum

“Real” Cost of Government

Govern

ment

Goods

Private Goods

a b

c

d

e

All Government Goods, No private goods

All Private Goods

Equal Government Goods

and Private Services

PPF

G1

G2

What does society give up

if it wants more

government goods (say

from d to c)?

ANS: Private goods.

Main Point: The Real Cost

of Government goods and

services is the private

goods and services that

we have to give up.

Private Goods Given Up

Review Questions

Using a Circular flow Model of the Economy, explain

how the government interacts with the economy. Give

example of things the government gets from output

markets and input markets.

What has happened to the share of transfer payments

relative to consumption expenditures by the

government over the last 40 years? Why?

Which tax provides the main source of revenue for the

federal government?

What is the main spending category for state and local

governments?

What is the real cost of government expenditures?

Explain use the production Possibilities Model