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 Venture
Capital 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 Public
Likely provided publicly Busy city street Lighthouse
(Free riders)
Government Sector 6

7. Government: Providing Public
Goods & 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 the
Macro 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