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Ec102 may 09
Ec102 may 09
Ec102 may 09
Ec102 may 09
Ec102 may 09
Ec102 may 09
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Ec102 may 09

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

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