MARKET FAILURESROLE OF GOVERNMENT<br />May 08, 2011<br />
QUIZ<br />1. Give an example of a positive externality. Briefly explain why it is a positive externality.<br />2. Define a...
QUIZ<br />For the next items, identify what market failure/s is associated with each program.<br />3. PhilHealth<br />4. P...
MARKET FAILURES<br />Imperfect Competition<br />Public Goods<br />Externalities<br />Incomplete Markets<br />Imperfect Inf...
SOLUTIONS<br />How do we solve market failures?<br />Who gives us a hand when the invisible hand fails?<br />10 mins to di...
SOLUTIONS<br />Imperfect Competition – regulation <br />Public Goods – gov’t provision<br />Externalities – penalties <br ...
GOVERNMENT INTERVENTION<br />
GOVERNMENT INTERVENTION<br />Distribution of income<br />Individuals may not act in their best interest<br />Examples: Smo...
GOVERNMENT INTERVENTION<br />Merit Goods – goods that the government compels individuals to consume<br />Seatbelts<br />El...
Role of Government<br />What is the role of the gov’t?<br />How should they intervene in the market?<br />Do we need a gov...
The Price is Right…OR IS IT?<br />Some components of the 2010 budget are listed.<br />Give ‘bids’ on how much is appropria...
PHP 28,686,083,000<br />(1.39%)<br />DEPARTMENT OF HEALTH<br />
PHP 4,259,376,000<br />(0.21%)<br />OFFICE OF THE PRESIDENT<br />
PHP 126,930,988,000<br />(6.15%)<br />DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS<br />
PHP 161,405,905,000<br />(7.82%)<br />DEPARTMENT OF EDUCATION<br />
PHP 276,212,000,000<br />(13.38%)<br />DEBT SERVICE - INTEREST<br />
PHP 405,363,000,000<br />(19.63%)<br />DEBT SERVICE - PRINCIPAL<br />
PHP 681,575,000,000<br />(33%)<br />TOTAL DEBT SERVICE<br />
PHP 47, 685.89<br />EACH FILIPINO OWES<br />
PHP 681,575,000,000<br />18,685,574 – 64-gb Ipads (with wifi+3g)<br />456,336 – 2010 Chevrolet Camaro<br />18,420,946 – Ni...
PHILIPPINE DEBT<br />Total: PHP 4,396,639 M = 50% of GNP<br />Declining shares of the budget<br />Education, Health, Agric...
Illegitimate Cases of Debt<br />Compiled by Freedom from Debt Coalition<br />Nationwide multi-sectoral coalition conductin...
Textbook Scam<br />Second Social Expenditure Management Project (SEMP2)<br />improve basic social services by enhancing pe...
Textbook Scam<br /><ul><li>The Secondary Education Development and Improvement Project (SEDIP)
aims to improve equitable access to quality secondary education in poverty-affected areas. 	</li></li></ul><li>Textbook Sc...
Textbook Scam<br />Conflict of Interest – Vibal group’s attempt to distort the bidding process. WatanaPhanit, Alkem, and t...
Textbook Scam<br />Vibal monopoly – cornered 75.96% of the DepEd bids from 1999 to 2004, or P2,658,756,511 of P3.5 billion...
Textbook Scam<br />Defective textbooks – At least 60,000 of the textbooks were found to contain inverted pages. At least 5...
North Luzon Railways Project<br />Connect Clark to Bonifacio to provide highspeed link to new international airport<br />H...
North Luzon Railways Project<br />Creditor: Chinese Export-Import Bank<br />Loan amount: PHP 20.6B (USD503M) at 3% per ann...
North Luzon Railways Project<br />Illegal – no competitive bidding (RA9184), no prior concurrence by monetary board (Sec. ...
North Luzon Railways Project<br />More expensive than 1998 NLRC project cost – everything is the same except the track gau...
North Luzon Railways Project<br />Onerous burden – Total project cost of USD503M was approved by NEDA<br />USD82-107 earma...
National Broadband Network Project<br />Telecom infrastructure to link all gov’t offices nationwide<br />Conceptualized as...
National Broadband Network Project<br />Creditor: Chinese Export-Import Bank<br />Loan amount: PHP13.51B (USD329.5M) @3% p...
North Luzon Railways Project<br />Irrelevant and unviable – already existing inter-connectivity infrastructures in place (...
North Luzon Railways Project<br />Disadvantageous to gov’t– originally PHP5.1B but ballooned to PHP19.3B<br />Gov’t opted ...
North Luzon Railways Project<br />Violation of Phil Laws<br />Procurement Law and BOT Law: Requires bidding for projects >...
ECONOMIC ROLE OF GOV’T<br />From birth to death<br />Public Hospitals/Health Care Centers<br />Public Schools<br />Roads, ...
MIXED ECONOMY<br />Many economic activities undertaken by private firms, others by the government<br />Government alters t...
PERSPECTIVES ON THE ROLE OF GOVERNMENT <br />Mercantilists – gov’t should promote trade and industry (18th)<br />Adam Smit...
GOVERNMENT FAILURES<br />Limited information<br />Limited control over private market responses<br />Limited control over ...
FUNDAMENTAL QUESTIONS	<br />What is to be produced?<br />PPF – public goods and private goods<br />How should it be produc...
How does the government get revenue to provide services to its people?<br />
TAXATION <br />Of two things you can be certain; death and taxes. -Benjamin Franklin.<br />As old as gov’t itself<br />2 K...
TAXATION <br />Middle Ages – services to feudal lords<br />Philippines – Polo y Servicio<br />Exemption by paying falla<br...
TAXATION<br />Go to your groups and list down as many taxes as you can<br />
FORMS OF TAXATION<br />Direct Taxes<br />Personal Income Tax<br />Corporate Income Tax<br />Transfer Tax- gift tax estate ...
DIRECT TAXES<br />Personal Income Tax<br />All taxable income net of deductions<br />Exemptions if single<br />Resident an...
DIRECT TAXES<br />Corporate Income Tax<br />On businesses (firms)<br />Corporations no matter how created or organized inc...
 <br />
DIRECT TAXES<br />Transfer Tax<br />Gift tax – imposed on right to transfer property during lifetime of transferer levied ...
Levied on production and sales of goods and services<br />Sales tax – imposed on all g/s exchanged in the country<br />Tax...
INDIRECT TAXES<br />Specific tax – tobacco, alcohol, gas, oil, excise duties<br />Export tax, import tax<br />Regressive T...
DISTRIBUTION OF TAX<br />Direct Taxes – more progressive<br />Indirect Taxes – more regressive<br />Philippines –in genera...
DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM<br />Economic Efficiency – not interfere with efficient allocation of resource...
DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM<br />Political responsibility – should be transparent<br />Fairness – should b...
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Ec102 may 09

  1. 1. MARKET FAILURESROLE OF GOVERNMENT<br />May 08, 2011<br />
  2. 2. QUIZ<br />1. Give an example of a positive externality. Briefly explain why it is a positive externality.<br />2. Define a merit good.<br />
  3. 3. QUIZ<br />For the next items, identify what market failure/s is associated with each program.<br />3. PhilHealth<br />4. PAG-ASA<br />5. Anti-smoke Belching Law<br />BONUS: As of 2011, the richest Filipino, ranked 173 in the 2011 Forbes World’s Billionaires list <br />
  4. 4. MARKET FAILURES<br />Imperfect Competition<br />Public Goods<br />Externalities<br />Incomplete Markets<br />Imperfect Information<br />Unemployment<br />Inflation<br />
  5. 5. SOLUTIONS<br />How do we solve market failures?<br />Who gives us a hand when the invisible hand fails?<br />10 mins to discuss with group<br />2 mins to present in front<br />
  6. 6. SOLUTIONS<br />Imperfect Competition – regulation <br />Public Goods – gov’t provision<br />Externalities – penalties <br />Incomplete Markets – govt provision, regulation<br />Imperfect Information – gov’t provision<br />Unemployment, Inflation – policies<br />
  7. 7. GOVERNMENT INTERVENTION<br />
  8. 8. GOVERNMENT INTERVENTION<br />Distribution of income<br />Individuals may not act in their best interest<br />Examples: Smoking<br />Not wearing seatbelts<br />
  9. 9. GOVERNMENT INTERVENTION<br />Merit Goods – goods that the government compels individuals to consume<br />Seatbelts<br />Elementary Education<br />Paternalism - <br />
  10. 10. Role of Government<br />What is the role of the gov’t?<br />How should they intervene in the market?<br />Do we need a gov’t?<br />DO YOU TRUST OUR GOVERNMENT?<br />
  11. 11. The Price is Right…OR IS IT?<br />Some components of the 2010 budget are listed.<br />Give ‘bids’ on how much is appropriated for each.<br />The bidder whose bid is closest to the exact amount receives a prize.<br />Clue: PHP 1, 300,000 – 405,363,000,000 (0%-20%)<br />Total 2010 budget: PHP 2,064,875,646,000<br />
  12. 12. PHP 28,686,083,000<br />(1.39%)<br />DEPARTMENT OF HEALTH<br />
  13. 13. PHP 4,259,376,000<br />(0.21%)<br />OFFICE OF THE PRESIDENT<br />
  14. 14. PHP 126,930,988,000<br />(6.15%)<br />DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS<br />
  15. 15. PHP 161,405,905,000<br />(7.82%)<br />DEPARTMENT OF EDUCATION<br />
  16. 16. PHP 276,212,000,000<br />(13.38%)<br />DEBT SERVICE - INTEREST<br />
  17. 17. PHP 405,363,000,000<br />(19.63%)<br />DEBT SERVICE - PRINCIPAL<br />
  18. 18. PHP 681,575,000,000<br />(33%)<br />TOTAL DEBT SERVICE<br />
  19. 19. PHP 47, 685.89<br />EACH FILIPINO OWES<br />
  20. 20. PHP 681,575,000,000<br />18,685,574 – 64-gb Ipads (with wifi+3g)<br />456,336 – 2010 Chevrolet Camaro<br />18,420,946 – Nikon D90<br />1,514,611 – Two-classroom school buildings<br />1,703,937 – Standard classrooms<br />1,363,150,000 – Armchairs<br />34,078,750 – Personal Computers<br />1,310,721 – Ateneo Graduates (8 sems)<br />
  21. 21. PHILIPPINE DEBT<br />Total: PHP 4,396,639 M = 50% of GNP<br />Declining shares of the budget<br />Education, Health, Agriculture, Agrarian Reform, Trade and Industry, etc.<br />Collection shortfalls (2006)<br />BIR and BOC = PHP 21.9B<br />Delaying the release of funds  projects suffer<br />Infrastructure dev’t slowing down, inability to produce jobs<br />
  22. 22. Illegitimate Cases of Debt<br />Compiled by Freedom from Debt Coalition<br />Nationwide multi-sectoral coalition conducting advocacy work in the national, local and international arenas, to realize a common framework and agenda for economic development.<br />
  23. 23. Textbook Scam<br />Second Social Expenditure Management Project (SEMP2)<br />improve basic social services by enhancing performance and governance in the social sector departments <br />through systems improvement and reforms (in particular, procurement, financial management and information technology reforms). <br />
  24. 24. Textbook Scam<br /><ul><li>The Secondary Education Development and Improvement Project (SEDIP)
  25. 25. aims to improve equitable access to quality secondary education in poverty-affected areas. </li></li></ul><li>Textbook Scam<br />Project Name: SEMP 2<br />Creditor: IBRD (World Bank)<br />Loan Amount: USD 100M = PHP5,212,920,000<br />Amount Outstanding: PHP4,022,603,480<br />Project Name: SEDIP<br />Creditor: ADB, JBIC<br />Loan Amount: USD53M (ADB); JPY7.21M (JBIC) = PHP4,562,051,000<br />Amount Outstanding: PHP 2,567,237,140<br />
  26. 26. Textbook Scam<br />Conflict of Interest – Vibal group’s attempt to distort the bidding process. WatanaPhanit, Alkem, and two other publishing groups (SD Publishing and JTW) engaged in the bidding process are all partners of Vibal, <br />World Bank intervention – pressure IABAC to reverse its earlier disqualification of Vibal due to conflict of interest <br />
  27. 27. Textbook Scam<br />Vibal monopoly – cornered 75.96% of the DepEd bids from 1999 to 2004, or P2,658,756,511 of P3.5 billion, under WB loans. <br />Vibal’s qualification despite blunders (e.g. 316-page public elementary school textbook with 431 errors). <br />
  28. 28. Textbook Scam<br />Defective textbooks – At least 60,000 of the textbooks were found to contain inverted pages. At least 5 of the 6 books were found to have defects. As much as 170 factual errors in one textbook had been reported. <br />Bribery to obstruct investigation – Sen. Lacson disclosed that there had been at least two pay-offs to stop the Senate proceeding. <br />
  29. 29. North Luzon Railways Project<br />Connect Clark to Bonifacio to provide highspeed link to new international airport<br />However, plans changed and gov’t opted to revive the Phil National Railways<br />
  30. 30. North Luzon Railways Project<br />Creditor: Chinese Export-Import Bank<br />Loan amount: PHP 20.6B (USD503M) at 3% per annum, in 20 years (inclusive of 5-year grace period)<br />Specified Contractor: China National Machinery and Equipment Corporation<br />Part of loan agreement requires all contractors and suppliers be Chinese nationals<br />
  31. 31. North Luzon Railways Project<br />Illegal – no competitive bidding (RA9184), no prior concurrence by monetary board (Sec. 20, Art. VII of Constitution)<br />Unviable – CNMEC is not a qualified contractor; it has not done any railway project of similar magnitude, nor does it manufacture railroad equipment<br />
  32. 32. North Luzon Railways Project<br />More expensive than 1998 NLRC project cost – everything is the same except the track gauge: CNMEC version is narrow while NLRC is standard; narrow gauges are actually cheaper than <br /> standard gauges<br />
  33. 33. North Luzon Railways Project<br />Onerous burden – Total project cost of USD503M was approved by NEDA<br />USD82-107 earmarked as counterpart fund to be provided by RP gov’t through North Luzon Railways Corporation<br />Unclear whether RP counterpart is intended to cover costs not revealed in original cost breakdown<br />Large portion of relocation and resettlement costs hidden in NHA budget<br />
  34. 34. National Broadband Network Project<br />Telecom infrastructure to link all gov’t offices nationwide<br />Conceptualized as part of GMA’s 2006 SONA <br />Suspended indefinitely on Sept. 22, 2007 <br />Cancelled on Oct. 2, 2007<br />
  35. 35. National Broadband Network Project<br />Creditor: Chinese Export-Import Bank<br />Loan amount: PHP13.51B (USD329.5M) @3% per annum in 20 years<br />Specified contractor: Zhong Xing Telecommunication Equipment Company (ZTE)<br />
  36. 36. North Luzon Railways Project<br />Irrelevant and unviable – already existing inter-connectivity infrastructures in place (PLDT, Telco); gov’t already has two broadband networks; no feasibility study was done by DOTC<br /> Not transparent, questionable process – Originally a BOT project but later became an Executive Agreement with no bidding<br />
  37. 37. North Luzon Railways Project<br />Disadvantageous to gov’t– originally PHP5.1B but ballooned to PHP19.3B<br />Gov’t opted for the more expensive loan agreement<br />Take-or-pay agreement<br />Lost revenue from tax<br />Onerous debt burden – total of USD527.2M<br />USD329.48M – principal<br />USD9.88MM – annual interest for 20 years<br />
  38. 38. North Luzon Railways Project<br />Violation of Phil Laws<br />Procurement Law and BOT Law: Requires bidding for projects > PHP2M; unsolicited BOT projects requires Swiss challenge<br />Graft and Corrupt Policies Act<br />USD10M bribery to AHI to back out<br />PHP200M offered to NEDA Dir. Gen. Romulo Neri<br />USD130M commission of Abalos<br />Omnibus Election Code – agreement was signed April 2007 during elections season<br />
  39. 39. ECONOMIC ROLE OF GOV’T<br />From birth to death<br />Public Hospitals/Health Care Centers<br />Public Schools<br />Roads, highways, traffic lights<br />SSS, PhilHealth<br />Taxes – income, VAT, etc<br />Constitution<br />
  40. 40. MIXED ECONOMY<br />Many economic activities undertaken by private firms, others by the government<br />Government alters the behavior of the private sector through taxes, regulations and subsidies<br />
  41. 41. PERSPECTIVES ON THE ROLE OF GOVERNMENT <br />Mercantilists – gov’t should promote trade and industry (18th)<br />Adam Smiths’ response – Wealth<br />Laissez faire<br />Government should and could stabilize the level of economic activity<br />
  42. 42. GOVERNMENT FAILURES<br />Limited information<br />Limited control over private market responses<br />Limited control over bureaucracy <br />Limitations imposed by political processes<br />
  43. 43. FUNDAMENTAL QUESTIONS <br />What is to be produced?<br />PPF – public goods and private goods<br />How should it be produced?<br />Privately or publicly?<br />For whom should it be produced?<br />Distribution of benefits<br />How are choices made – collectively <br />
  44. 44. How does the government get revenue to provide services to its people?<br />
  45. 45. TAXATION <br />Of two things you can be certain; death and taxes. -Benjamin Franklin.<br />As old as gov’t itself<br />2 Kings 23:35: Jehoiakim paid Pharaoh Necho the silver and gold he demanded. In order to do so, he taxed the land and exacted the silver and gold from the people of the land according to their assessments<br />
  46. 46. TAXATION <br />Middle Ages – services to feudal lords<br />Philippines – Polo y Servicio<br />Exemption by paying falla<br />Monetized taxes – payment in money instead of services<br />25% tax means working for gov’t 25% of your time<br />
  47. 47. TAXATION<br />Go to your groups and list down as many taxes as you can<br />
  48. 48. FORMS OF TAXATION<br />Direct Taxes<br />Personal Income Tax<br />Corporate Income Tax<br />Transfer Tax- gift tax estate tax<br />Indirect Taxes<br />Sales tax<br />Specific tax – import/export tax<br />
  49. 49. DIRECT TAXES<br />Personal Income Tax<br />All taxable income net of deductions<br />Exemptions if single<br />Resident and non-resident citizens receiving income from sources within or outside the Philippines<br />Aliens, whether resident or not, receiving income from sources within the Philippines<br />
  50. 50. DIRECT TAXES<br />Corporate Income Tax<br />On businesses (firms)<br />Corporations no matter how created or organized including partnerships<br />Estates and trusts engaged in trade or business<br />Progressive Tax – as taxable base increases, tax rate increases<br />
  51. 51.  <br />
  52. 52. DIRECT TAXES<br />Transfer Tax<br />Gift tax – imposed on right to transfer property during lifetime of transferer levied on donor<br />Estate tax – imposed on right of an individual to transfer property at death<br />
  53. 53. Levied on production and sales of goods and services<br />Sales tax – imposed on all g/s exchanged in the country<br />Tax rates vary by essentiality<br />E-Vat<br />INDIRECT TAXES<br />
  54. 54. INDIRECT TAXES<br />Specific tax – tobacco, alcohol, gas, oil, excise duties<br />Export tax, import tax<br />Regressive Tax – tax rate decreases as amount subject to taxation increases<br />
  55. 55. DISTRIBUTION OF TAX<br />Direct Taxes – more progressive<br />Indirect Taxes – more regressive<br />Philippines –in general progressive<br />Argued that may be more regressive since indirect taxes are big<br />Poorer individuals consume more of their income, therefore pay more indirect taxes<br />
  56. 56. DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM<br />Economic Efficiency – not interfere with efficient allocation of resources<br />Administrative simplicity – easy and relatively inexpensive to administer<br />Flexibility – able to respond easily (in some cases automatically) to changed economic circumstances<br />
  57. 57. DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM<br />Political responsibility – should be transparent<br />Fairness – should be and should be seen to be fair, treating those in similar circumstances similarly and imposing higher taxes on those who can better bear the burden of tax<br />

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