Understanding Public Finance: Government Activities, Expenditures, and Impact, Study notes of Economics of the Public Sector

Download Understanding Public Finance: Government Activities, Expenditures, and Impact and more Study notes Economics of the Public Sector in PDF only on Docsity! Public Finance ◼ Public Finance is the field of economics that studies government activities and the alternative means of financing government expenditures. ◼ A crucial objective of the analysis is to understand the impact of government expenditures, regulations, taxes, and borrowing on incentives to work, invest, and spend income. 1 Basic Concepts Public economics It examines the role of government in the economy. What are the economic functions of government, and what should they be? How should the government finance the services that it provides? What kinds of government programs should confront the problems of poverty, unemployment, and pollution? What problems does government involvement create? 2 THE ALLOCATION OF RESOURCES BETWEEN GOVERNMENT AND PRIVATE USE ◼ Government provision of goods and services requires labor, equipment, buildings, and land. ◼ The real cost of government goods and services is the value of private goods and services that must be sacrificed when resources are transferred to government use. ◼ When citizens pay taxes, their capacity to purchase goods and services for their own exclusive use is reduced. ◼ Resources that are thereby diverted from private use are purchased or otherwise obtained by the government. 5 Private vs. Gov’t goods and services ◼ Private goods and services are those items, such as food and clothing, that are usually made available for sale in markets. ◼ Government goods and services, such as roads, schooling, and fire protection, usually are not sold in markets. 6 Production-Possibility Curve ◼ The trade-off (i.e., crowding-out) between government and private goods and services can be illustrated with the familiar production-possibility curve. ◼ The production-possibility curve shows alternative combinations of government goods and services and private goods and services that can be produced in an economy, given its productive resources and technology, and assuming that resources are fully employed. ◼ An increase in government goods requires a sacrifice of private goods. 7 THE MIXED ECONOMY, MARKETS, AND POLITICS ◼ A mixed economy is one in which government supplies a considerable amount of goods and services and regulates private economic activity. ◼ In a pure market economy, virtually all goods and services would be supplied by private firms for profit and all exchanges of goods and services would take place through markets, with prices determined by free interplay of supply and demand. 10 11 ❑ Government purchases are those that require productive resources (land, labor, and capital) to be diverted from private use by individuals and corporations, so that such resources can be used by the government. ❑ The bulk of government purchases are Consumption expenditures & Gross investment & Transfer payments. 1. Consumption expenditures that use resources to satisfy current needs. 2. Gross investment is the expenditure for new capital such as roads, equipment, and structures. 12 3. Transfer payments constitute a source of income given to recipients who are not required to provide any service in return (Social benefits, Social Security, Medicare). ❑ Transfer payments redistribute purchasing power among citizens. ❑ Transfer payments differ from earnings in that they are not payments made in exchange for productive services. ❑ All of those government purchases are financed with taxes, fees, charges levied on persons and firms, and loans. How Government Goods and Services Are Distributed ◼ Government goods and services are typically allocated to individuals through nonmarket rationing methods and not through market-based pricing. ◼ Some services are available to all people without charges or requirements, like national defense. ◼ Other servies use criteria such as income, age, or residency to establish eligibility. For instance, Social Security pensions require a specific age, and work history. Public transportation often involves a fare that might not cover the service costs, potentially supplemented by government taxes. Similarly, Residing within a specific school district is necessary for elementary schooling eligibility. Structure of Federal Government Expenditure Housing and Transportation Community Services 0.90% 1.42% Public Order and Safety All Other 1.46% 5.35% Education 2.43% ici ccig Meee \ULIT= 1418S Baca Health 29.86% National Defense 14.02% = 7 Stores e10 and Other Retirement ati eb) 18.85 Income Security 14.39% “Includes expenditure financed by Federal Grants-in-Aid. Source: National Income and Product Accounts, Interactive Tables, http://bea.gov. Based on calendar year data.  Financing Government Expenditures BEET. overnment Receipts, 2017 Customs Duties 1% Excise Taxes 3% Corporate Profits Taxes 8% Federal Revenues 2017. Personal Income Taxes chsh