Role of Government & Comparison of the sizes of public sectors in various countries.

Presented by Youri, Marshella, Carolyn, Min, Azfar (Group 5)

Guidance of Efficiency

“A firm is said to be operating efficiently when it produces a given quantity and quality of goods at the lowest possible cost” (101).

“One person cannot be made better off without harming someone else, then economic efficiency prevails” (101).

Group 5.Carolyn Chan

Information

Market Imperfections—information is not perfect.

Group 5.Carolyn Chan

Information

Imperfect Market:– Market for used cars.

• “Prospective buys cannot distinguish between low-quality cars and high-quality cars. Although a buyer can get some information about a particular car by looking at the car and taking it for a test drive, this information is not sufficient to determine whether the car is a low- or high-quality. In contrast, the seller knows from experience” (Sullivan 317).

Group 5.Carolyn Chan

Price System

When the market price rises, buyers know that the quantity demanded at the prior equilibrium price exceeded the quantity supplied.

Group 5.Carolyn Chan

Externalities

“The cost or benefits of a transaction that are borne by someone not directly involves in the transaction” (103).– Government can use tuition subsidies to

increase the equilibrium number of college degree.

Group 5.Carolyn Chan

Externalities

Group 5.Carolyn Chan

Public Goods

Consumption of the good by one individual does not reduce the amount of the good available for consumption by others.

• Example: all sorts of goods and services, including: streets, highways, education, parks, and public safety, national defense, and space exploration.

• For example, if one individual eats a cake, there is no cake left for anyone else; but breathing air or drinking water from a stream does not significantly reduce the amount of air or water available to others.

Group 5. Marshella

Private Property Right

The limitation of ownership to an individual

Example : when a person buys a house, he/she must pay a certain price to the seller before getting the right to own it. Once the price is paid, the house is that person’s possession and no one else can enter or trespass without permission by the owner.

Free RideThe enjoyment of the benefits of a good by

a producer or consumer without having to pay for the good.

Example: People enjoy the public radio and television stations without having to spend money on them. They get free rides from people who donate money to them.

Group 5. Marshella

Defined as a persistent market situation where there is only one provider of a product or service.

It happens because : - lack of economic competition for the good or service.- lack of viable substitute goods.

Example: Microsoft has achieved market dominance because Microsoft’s plan to charge subscription fees for access and use. Microsoft sees itself as a Global- Software Utility Company in the future.

Group 5. Marshella

Monopoly

Business CycleThe periodic but irregularup-and-down movements ineconomic activity, measuredby fluctuations in real GDPand other microeconomicsvariables.A business cycle is identified as a

sequence of six phases :

• Contraction• Trough • Expansion • Peak• Recession• Depression or slump

Group 5. Marshella

The Public Choice Theory of Government

Rent seeking : occurs when an individual, organization, or firm seeks to make money by manipulating the economic environment rather than by making a profit through trade and production of wealth.

Such as by : Gaining control of land and other pre-existing natural resources or by imposing burdensome regulations or other government decisions that may affect consumers or businesses.

Group 5. Marshella

Public Choice Theory

How individual decision- making results in policy that conflicts with the overall desires of the general public.

For instance: Many special interest and pork barrel projects are not the desire of the overall democracy. However, it makes sense for politicians to support these projects because it will benefit them psychologically as they feel more powerful and important. It also can benefit them financially as it may open the door to future wealth as lobbyist ( after they retire ).

Group 5. Marshella

Microeconomic Policy1. Provide the public goods that society requires

Government provides public goods avoid the free-rider

problem that would occur if private firms provided the goods

2. Internalizing the externality

A wide range of government policies have been proposed to

deal with externalities -regulation -taxes and subsidies -market-based regulation

3. Promoting CompetitionGovernment regulates industries where free market competition may not

exist and policies other industries to promote competition.Ex) Justice Department , Federal Trade Commission Group 5. Yuri

Macroeconomic Policy

1.Monetary Policy Monetary policy is policy directed toward control of money

and credit. Major player is the Federal Reserve

The Federal Reserve controls the three tools of monetary policy-

open market operations, the discount rate, and reserve requirements

Two basic goals: to promote "maximum" sustainable output and employment and to promote "stable" prices

Group 5. Yuri

2. Fiscal policy

Policy directed toward government spending and taxation. Fiscal policy is determined by laws that are passed by Congress and

signed by the president. Government has the responsibility of minimizing the damage from

business cycles.

Inflation is too strong

government can use fiscal policy increase taxes

decrease in government spending increase taxes

decrease the money in circulation Group 5. Yuri

Budget surplus

When government spending is less than revenue

Budget deficit

When government spending is greater than revenue

Current situation U,S . Budget deficit 2007 is

$400 billion

20073. Government Spending

Group 5. Yuri

Group 5. Yuri

Market Centrally Planned

Types of economy

United

States

Japan

Germany United Kingdom

Sweden

Cuba

25

50

75

100

Canada

Go

vern

men

t ex

pen

dit

ure

s as

P

erce

nt

of

tota

l o

utp

ut

North Korea

Vietnam

Group 5. Azfar

Centrally planned economy

• An economic system where government has control over the goods and services produced and the control of prices that they are sold to the citizens.

• Ex) Cuba, North Korea

Group 5. Azfar

Market economy

When the government plays a small role in control of goods and services plus the control of the economy

• Ex) United States, Canada

Group 5. Azfar