Economic Functions of Government√ Legal and Social Framework • provides legal framework and servicesneeded for a market economy to functionefficiently. • sets “rules of the game” governingbusiness relationships such as contractenforcement • services like police powers, weightsand measures, and system of money • agencies that protect consumer andregulate businesses
Economic Functions of Government√ Maintaining Competition • actions that encourage competitionin order to promote efficiency to providelow prices and an adequate quantity ofgoods for consumers • Regulation and ownership controls • Anti-monopoly laws
Economic Functions of Government√ Redistribution of Income • providing for those unable to do sothemselves • transfer payments such as welfare,SS payments, food stamps; unemployment compensation • market intervention such as pricecontrols or price supports • sharing the wealth of the nationthrough income-based taxation
Economic Functions of Government√ Reallocation of Resources • measures to correct over- and under-allocation ofresources • Externalities or Spillovers occur when some of thecosts or the benefits of the good or service are passed onto parties other than the immediate buyer or seller. Negative Externalities or spillover costs √ production or consumption costs inflicted on a third party without compensation; pollution of air, water are examples Positive Externalities or spillover benefits √ production or consumption costs conferred on a third party or community at large without their compensating the producer; education, vaccinations are examples
Economic Functions of Government√ Provider of Public Goods and Services • providing goods and services to societythat the private sector is not willing or able toprovide √ private goods are subject to exclusionprinciple—those unable or unwilling to pay donot get the product. √ exclusion principle does not apply to public goods—there is no effective way to exclude individuals
Economic Functions of Government What goods and services should be provided by Gov’t?Two principles apply:1. Nonexclusion √ no effective way to excludeindividuals2. Shared Consumption √ one person’s use does not reduceusefulness to others
Economic Functions of Government Shared Consumption NO YES Exclusion Y Pure Private Toll Goods E Bread Theatres S Ice cream Parks N Common Pool Pure Public O Resources National defense Irrigation water Flood control Fish in the river
Economic Functions of Government Public or Private? College Education? Interstate Highway System? Electric Power? Elementary Schools? National Defense? Police Protection? Groceries? Garbage collection? Water? Recreational Facilities? Postal Service? Sporting Facilities? Prisons? Flood Control?
Economic Functions of Government√ Provider of Public Goods and Services • Quasi-public Goods—goods and servicesproduced and delivered in such a way that theexclusion principle applied even though the privatesector could offer √ Often, government will provide these g/s since private sector may tend to underallocate resources for their production; Medical care and public housing are examples. • Allocation of resources to public and quasi- public goods—government spending, taxing policies, and manipulating interest rates are the ways government can shift resource use.
Economic Functions of Government√ Promoting Stability • Use of Fiscal and Monetary Policy Unemployment Inflation
Land, Labor, Capital & Entrepreneruial Ability to bs and govt Resource Money Payments paid by bs. and govt Bs. Taxes TaxesBusinesses Government Households Subsidy Transfers Money Payments for goods and services from government and households Goods and Services for Households and Government
Federal Finance—Expenditures Total• Social Security Expenditures• National Defense $2,011 Billion• Health• Interest on Public Debt• Other Entitlements• Other mandatory 2002 Data 2002 Data
Federal Finance—Federal Tax Revenues•Social Insurance Total Tax RevenuesReceipts $1,853 Billion•Personal Income Tax•Corporate IncomeTax•Excise Tax•Other 2002 Data
State FinanceState RevenuesSales & Excise Taxes ~ 47%State Income Taxes ~ 34%Corporate Income Taxes ~ 7%License Fees ~ 6%Other taxes ~5%Non-tax sourcesLotteriesIntergovernmental GrantsState Owned Utilities/Stores
State FinanceState Expenditures Education ~ 36% Public Welfare ~ 25% Health and Hospitals ~ 8% Highways ~ 8% Public Safety ~ 5%
Local Finance Local RevenuesProperty Taxes 72%Sales & Excise Taxes 17% Local ExpendituresEducation 44%Welfare, Health, and Hospitals 12%Public Safety 11%Housing, Parks, 8%and SewerageHighways 5%