Download - Bah - MacroPrinciples 05 the Public Sector
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The Public SectorThe Public Sector
Chapter 5Chapter 5
An Introduction to the
Foreign Exchange
Market and the
Balance of Payments
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The Circular Flow:The Circular Flow:
Households, Firms,Households, Firms,Government, andGovernment, and
Foreign CountriesForeign Countries
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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
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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:
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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
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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
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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
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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
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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: ..
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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
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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.
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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.
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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.
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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.
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Federal, State, and Local Government Expenditures forFederal, State, and Local Government Expenditures for
Goods and ServicesGoods and Services
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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
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U.S. Federal BudgetU.S. Federal Budget DeficitsDeficits
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The Economic Systems around the worldThe Economic Systems around the world
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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?