Chapter 1

Individuals and Government
1

Public Finance

Public finance is the field of economics that studies government activities and the alternative means of financing government expenditures.

2

Government

Governments are organizations formed to exercise authority over the actions of persons who live together in a society and to provide and finance essential services.

3

Political Institutions

Political Institutions are rules and generally accepted procedures that evolve for determining what government does and how government outlays are financed.

4

Examples of Political Institutions
 

Majority rule Representative government

5

The Allocation between Private and Government Resources

Private
   

Food Housing Cars Clothing National Defense Public Schools Police

Government
  

6

Figure 1.1 A Production-Possibility Frontier
Government Goods and Services per Year
C G2 G1 B

A

M X2 X1 0 Private Goods and Services per Year
7

Distribution of Government Goods and Services

Nonmarket rationing:

Prices and willingness to pay those prices are not applicable to goods like national defense.

8

The Mixed Economy: Markets and Politics

Pure Market Economy

Virtually all goods and services are supplied by forprofit private firms. Supply and demand determine price. A mixed economy is one in which government supplies a considerable amount of goods and services and regulates private economic activity. 9

Mixed Economy

Figure 1.2 Circular Flow in the Mixed Economy
Goods & Services Dollars Output Market Goods & Services Dollars

Households

Income Support & Subsidies Taxes, fees, charges Government Services

Government

Subsidies Taxes, fees, charges Government Services

Firms

Dollars Resources

Input Market

Dollars Resources

10

Government Expenditures in the United States

Government purchases of
  

labor land capital

Government Transfer Payments
 

Welfare Social Security

11

Growth in Government Expenditures
Table 1.1 (abbreviated)
Year GDP Federal Government State and Local Government Total Government Percentage of GDP Total

1930 1945 1960 1975 2002

91.3 223.0 527.4 1635.2 10442.1

2.5 84.7 85.8 345.4 2073.9

7.5 8.5 34.1 152.1 1050.9

10.0 93.2 119.9 497.5 3124.8

10.95 41.79 22.73 30.42 29.93

12

International Comparisons
Country Denmark France Germany United Kingdom Japan Canada United States
Government Current Expenditures as a Percentage of GDP 2001

49.1 48.8 45.1 39.4 38.1 36.7 31.9 13

Figure 1.3 Total Government Expenditure as a Percentage of GDP 1929-2002

14

Structure of Federal Government Expenditures
  

Purchases of Goods and Services Transfer Payments Grants in Aid to State and Local Governments Net Interest Paid
15

Federal Expenditure by Category, 2002
Table 1.2

Category Transfer Payments Purchases Interest Grants to State and Local Other

Percentage of Total Federal Expenditures

44.9 28.2 14.7 10.0 2.2 16

Figure 1.4 The Distribution of Federal Expenditure, 1966-2002

17

Federal Government Expenditures by Function

18

The Structure of State and Local Government Expenditures in the United States
      

Education Civilian Safety Transportation Executive, Legislative, and Judicial Income Security Health and Hospitals Recreational and Cultural Activities
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State and Local Government Expenditures

20

Financing Government Expenditures in the US

Taxes:
   

Income (Corporate and Personal) Payroll Excise Customs

21

Federal Revenues

22

State and Local Government Revenues

23

State Budget Crunch of 2002
   

37 states were forced to reduce their budgets. Revenues were typically 10% less than anticipated. States with the most severe deficits:

AK, AZ, CA, NY, NC, OK, OR, VA, and WA Cuts in taxes on business and individuals in the 1990s No sales tax collections on services Growth in costs of Medicaid

Causes
  

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Implications of a Graying America

Social Security
 

In 2008 baby-boomers start to retire and collect The ratio of workers to retiree falls Health care inflation is substantially higher than overall inflation Increased use of long-term care for baby-boomers

Medicare

Medicaid

25

How Much Government is Enough?

The question of how much government is enough is an important one in any society. It is the tradeoff between public and private goods. When government gets bigger, its increased involvement comes at the expense of less private consumption.

26

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