bah - macroprinciples 05 the public sector

8/13/2019 Bah - MacroPrinciples 05 the Public Sector

1/19

The Public SectorThe Public Sector

Chapter 5Chapter 5

An Introduction to the

Foreign Exchange

Market and the

Balance of Payments


2/19

2

The Circular Flow:The Circular Flow:

Households, Firms,Households, Firms,Government, andGovernment, and

Foreign CountriesForeign Countries


3/19

3

An efficient use of resources implies a

maximum value of output from a resource

base (producing on the PPC). This is called

technical efficiency . Equivalently, it is when one person cannot be

made better off without making someone else

worse off. This is called economic efficiency. If the market system doesnt result in

economic efficiency, there wil l be a role for

the government to correct it .

Economic efficiencyEconomic efficiency


4/19

4

The Governments RoleThe Governments Role

1. Imperfect Information

2. Externalities

3. Public Goods4. Lack of Competition

5. Business Cycles

There are five reasons why marketsmay fail, creating a role for

government:


5/19

5

False information Asymmetric information

Either the buyer or seller has more or betterinformation than others

Brand names, franchises, and product warrantiesare helpful ways of dealing with informationproblems.

When information is not perfect, marketimperfections may result, leading to inefficiency.

Government may require full and correctdisclosure. (Food labels, stock prospectuses, etc.)

Imperfect InformationImperfect Information


6/19

6

Externalities are the costs or benefitsof a transaction that are borne bysomeone not directly involved in thetransaction.

External benefits and External costs Someone opens a large shopping mall next to

an existing retail business.

Pollution by a manufacturer

The government intervene to resolveexternality problems. The E.P.A and the department of education

ExternalitiesExternalities


7/19

7

Public Goods are goods whoseconsumption by one person does notdiminish the quantity or quality available

to other consumers. Specifically, they: Can be jointly consumed

Individuals can simultaneously enjoyconsumption of same product or service.

Are non-excludableConsumption of the good cannot berestricted to the customers who pay for it.

Public GoodsPublic Goods


8/19

8

It is not possible to offer a public good to some peoplewhile simultaneously restrict ing access to it to others.

No one enjoys a private property right to the good.

As a result, people have an incentive to try and enjoy

the benefit of the good without helping to pay for

them. That is, everybody has an incentive to become a

free rider:

a person who receives the benefits of the good

without helping to pay for it.

But to the extent that people do become free riders,

too l ittle will be produced.

Characteristics of a Public GoodCharacteristics of a Public Good


9/19

9

Lack of CompetitionLack of Competition

Sellers may gain by restricting output and raisingprice. Too few units will be produced.

Consumers may not be able to get needed goods.

Monopoly: a market with only one producer Example: utility companies

Oligopoly: a market with only few producers (whomay operate jointly as a monopolist through a

cartel). Example: OPEC

Monopsony: a market with only one buyer

Role of the Government: ..


10/19

10

Business CyclesBusiness Cycles

Fluctuations in the economy betweengrowth and recessions

When there is recessions, people are

hurt (higher unemployment for

example)

Government intervene to help peopleduring recessions


11/19

11

Public Choice TheoryPublic Choice Theory

Public Choice is the study of how government actions resultfrom the self-interested behaviors of voters and polit icians.

Self-interested behavior is present in both the public and

private sectors, it only differs in the way it plays out.

Public Choice theory suggests that government may bebrought in to benefit specific individuals or groups. Such

people may seek government intervention because they do

not favor the market outcome.

This is referred to as rent-seekingthe use of resourcesto transfer wealth from one individual to another without

increasing production or total wealth.

Thus government intervention may not seek efficiency gains.


12/19

12

Public Choice ConclusionsPublic Choice Conclusions

Self-interest directs public sectoractivity, just as it directs market

activity.

Government actions (like price

ceilings or floors) are often enacted

for political gain, not as a remedy foreconomic inefficiency.


13/19

13

Microeconomic PolicyMicroeconomic Policy

Government provides public goods to avoid thefree rider problem in the private production of

certain goods.

Government taxes or subsidizes activities that

create externalities. If you tax something, you get less of it.

If you subsidize something, you get more of it.

Government regulates noncompetitive industriesin the public interest, and ensures competitive

markets where possible.


14/19

14

Macroeconomic PolicyMacroeconomic Policy

Monetary Policy Policies directed toward the control of money

and credit (money supply and interest rates).

In the U.S., the Federal Reserve Board ( the

fed ) is responsible for this.

Fiscal Policy

Policies directed toward government spending

and taxation. In the U.S. federal government, itis Congress that enacts these policies, signed

into law by the President.


15/19

15

Federal, State, and Local Government Expenditures forFederal, State, and Local Government Expenditures for

Goods and ServicesGoods and Services


16/19

16

Government SpendingGovernment Spending

Transfer payments: incometransferred by the government from a

citizen to another citizen.

Budget surplus: when government

spending is less than revenue.

Budget deficit: when governmentspending is greater than revenue


17/19

17

U.S. Federal BudgetU.S. Federal Budget DeficitsDeficits


18/19

18

The Economic Systems around the worldThe Economic Systems around the world


19/19

19

Test questionTest question

Does copying from another student apositive externality ?

Property rights refer to what?

If the government doesnt intervene, goods and services will beunderprovided.

There is no pure private economy.True or False?

bah - macroprinciples 05 the public sector

Documents