Mpp#015+government.sector.(15)

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  • 1. Actions of Government• What does the government sector do?• Establishes and enforces the • Redistributes income rules • e.g. commerce • Actions & Examples • e.g. property rights • Provides public goods• Regulates & manages the macro • competition economy via • the environment • Monetary policy • Fiscal policy Government Sector 1
  • 2. The Miller VentureCapital Company, Ltd. • The problem • The solution • Who wants to invest? Government Sector 2
  • 3. Private & Public Goods• Two (2) criteria• consider Rival Consumption versus Shared Consumption • Does consumption by one person reduce the benefit of the good (or service) to someone else?• consider Excludability • Can the good (or service) be easily withheld from those who do not pay? Government Sector 3
  • 4. considering Private Goods • with respect to Rival Consumption • with respect to Excludability • consider the example of ~ • a can of soda • a neighborhood enjoying your newly painted house • the installation of a new tennis court in your back yard Government Sector 4
  • 5. considering Public Goods • Shared (non-rival) Consumption • a ship steering by the light of and from a lighthouse does not reduce the ability of other ships to steer by the same light • Non-excludability • there is no practical way to exclude non paying ships from using the lighthouse Government Sector 5
  • 6. considering Mixed Goods Criteria Rival Shared Excludable Private Mixed Likely provided a can of soda A pay per view privately TV show Not excludable Mixed PublicLikely provided publicly Busy city street Lighthouse (Free riders) Government Sector 6
  • 7. Government: Providing PublicGoods & Some Mixed Goods• Government must provide public (some mixed) goods since they would be UNDERPRODUCED by the private sector •Examples are • Streetlights • National Defense (oh really?) Government Sector 7
  • 8. Practice• Right hand: Consumption • Rival • Shared • Left hand: Excludability • Excludable  • Non-excludable • Show me PUBLIC • Right  Left • Show me Private • Right  Left  Government Sector 8
  • 9. Practice• Busy hospital ER – all emergency cases accepted • Right hand: Consumption   • Left hand: Excludability  • Rock concert – not sold out • Right hand: Consumption   • Left hand: Excludability  • Town 4th of July fireworks display • Right hand: Consumption   • Left hand: Excludability   Government Sector 9
  • 10. Managing theMacro Economy • Monetary Policy • Stabilizing the economy via managing the economy’s M (= the money supply) and the economy’s interest rates • Fiscal Policy • Stabilizing the economy through changes in taxes and government spending Government Sector 10
  • 11. Fiscal Policy• may be used to Fight Recession• if more economy wide spending is needed • Cut taxes • Increase government spending• may be used to Fight Inflation• if more economy wide spending is needed • Increase taxes • Decrease government spending (HA!) • realign incentive structures in the economy Government Sector 11
  • 12. Fiscal Policy• A caveat on: “Crowding Out ” 1. Deficits increase the volume of borrowing by the government ~ the demand for loanable funds increases 2. Interest rates are prices reflecting the relative scarcity of loanable funds ~ scarcity increases and interest rates rise 3. Private investment that would have been profitable at lower rates is crowded out by the increased level of government borrowing Government Sector 12
  • 13. Should You Be Worried?• DEFINITION: the Federal Deficit is the amount the national government spends in excess of the national government’s revenue in a year. • (a Federal Surplus vice versa)• A deficit adds to the total debt of the federal government and the total debt is known as the “federal” or “national” debt Government Sector 13
  • 14. Should You Be Worried?Data for Your Consideration• the Annual Deficit • is currently around $300 billion • is currently around 3.75% of GDP • In 1983 the Annual Deficit was 8% of GDP • In 2000 there was a SURPLUS of 2% of GDP• the Federal Debt • is closing in on $8 trillion • is about 63% of GDP • @ the end of WWII debt as a %age of GDP was >100% Government Sector 14
  • 15. Actions of Government• What does the government sector do?• Establishes and enforces the • Redistributes income rules • e.g. commerce • Actions & Examples • e.g. property rights • Provides public goods• Regulates & manages the • competition macro economy via • the environment • Monetary policy • Fiscal policy Government Sector 15