Mpp#015+government.sector.(15)

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Mpp#015+government.sector.(15)

  1. 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. 2. The Miller VentureCapital Company, Ltd. • The problem • The solution • Who wants to invest? Government Sector 2
  3. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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