CHAPTER 1 regulation of international trade to generate wealth and
strengthen national power.
THE PUBLIC SECTOR IN A MIXED ECONOMY
Economics - The word "economy" derived from the greek
word oikonomos.
• Oikos - House Nomos - distribute “Household
management"
• The social science that studies the production,
distribution, and consumption of goods and
services through our scarce resources.
Public economics- (economics of the public sector) is the
study of the government Policy through the lens of
economic efficiency. and equity.
• Public economics builds on the theory of welfare
economics and is ultimately used as a tool to
improve social welfare.
• Provides a framework for thinking about whether
or not the government should participate in
economic markets and to what extend it should do
so.
Microeconomics - Is the study of how households and
firms make decisions and how they interact in markets.
• Individual markets (products), industries, sectors
Microeconomic - is utilized to assess whether the private
market theory is likely to provide efficient outcomes in the
Socialism - is an economic and political system based on
collective ownership of the means of production
• All legal production and distribution decisions are
made by the government in a socialist system.
• Government also determines an output and pricing
levels and supplies its citizens with everything from
food to healthcare
Privatization - converting government enterprises into
private firms
DIFFERENT PERSPECTIVES ON THE ROLE OF
GOVERNMENT
Mercantilism - was an economic system of trade that
spanned from the 16th century to the 18th Century.
Mercantilism was based on the idea that nation's wealth
and power were best served by increasing exports and so
involved increasing trade. Advocates government
• Government should actively promote trade and
industry - advocates are called mercantilists.
• Maximize the exports, minimize imports.
Adam Smith - Founder of modern Economics (Wealth of
Nations, 1776)
• Competition | Profit - would lead Individuals in
pursuing their own private interests. to Serve
public interest.
• Also, according to Adam Smith, the economy was
led, as if by an invisible hand, to produce what was
desired and in the best possible way.
LAISSEZ FAIRE
• french term, “Leave alone" (Let you do)
• John Stuart Mill
• Nassau Senior
• The government should leave the private sector
alone"
• It should not attempt to regulate or control private
enterprise.
• Economic system in which transactions between
private groups of people are free from any form of
economic interventionism deriving from any form
of special interest groups.
OWEN - saw the solution neither in the state nor in private
enterprise, but in smaller groups of Individuals getting
together and acting cooperatively for their mutual interest.
• On one hand, private ownership of capital and
unfettered free enterprise, on the other,
government control of the means of production.
GOVERNMENT FAILURES
1. Governments limited information on the consequences
of its actions. (Public Policies)
2. Limited control over private market responses
3. Limited control over bureaucracy
4. Limitations imposed by political processes
1. Governments Limited information on the
consequences of its actions
 • Government cannot anticipate expenditures
effects
• Lack on research and data base
2. Limited Control over private market responses
• It cannot control utilization rates
• Government did not directly control the total level
of expenditures.
3. Limited Control over bureaucracy
• Congress and state and local legislature design
legislation, but delegate implementation to
government agencies.
• Political interest of Bureaucrats
4. Limitations imposed by political processes
• Flectorate's habits on looking for simple solutions
to complex problems.
• causes delays
ACHIEVING BALANCE BETWEEN THE PUBLIC AND
PRIVATE SECTORS
Limitations of both government and markets
• Government should direct its energies only at
those areas in which market failures are most
significant and whether is evidence that govt
intervention make a significant difference.
Limited government intervention
• Govt should take an active role in maintaining full
employment and alleviating the worst aspects of
poverty.
Private enterprise should play the central role in the
economy
• means of production must come from the private
sector.
THE EMERGING CONSENSUS
An important motivation for government's Undertaking
certain activities is actual or perceived failures of the
market.
Deregulate - DEREGULATION
• The process of removing or reducing state
regulations, typically in the economic Sphere. It is
the repeal of the governmental regulation of the
economy.
• Provides more freedom for the private Sector.
Privatize - PRIVATIZATION
• Sought to turn over to the private sector activities
previously taken by the govt.
• Facilitates healthy competition X free from political
influence.
WHAT OR WHO IS THE GOVERNMENT
DIFFERENCE OF GOV'T FROM PRIVATE
(G) democracy, people in a govt institution are elected
"legitimacy," of the position derived from electoral process.
(P) shareholders, chosen by a self-perpetuating board of
trustees.
(G) Government has certain rights of compulsion that
private doesn't have.
• Right to impose tax (power of taxation)
• Right to seize private property for public use
(eminent domain)
(P) All private exchanges are voluntary.
SUMMARY OF THE DIFFERENCE BETWEEN THE
GOVERNMEND AND THE PRIVATE SECTOR
GOVERNMENT: (A) Elected (B) Compulsory
PRIVATE SECTOR: (A) Chosen) (B) Voluntary
THINKING LIKE A PUBLIC SECTOR ECONOMIST
FOUR CENTRAL ECONOMIC QUESTIONS
1. What is to be produced
2. How is it to be produced
3. For whom is it to be produced
4. How are these decisions made
1. What is to be produced? MUSGRAVE’S 3 BRANCHES

• Production possibilities schedule - traces the 1. STABILIZATION BRANCH

various amounts of two goods that can be
produced efficiently.
• Two goods: Public goods and private goods • ensure that the economy remained at full-
• inefficient: Society could get more goods employment with stable prices.
• Infeasible: not possible; lacking on resources
2. ALLOCATION BRANCH
2. How Should it be produced?
• How the economy allocated its resources-
• Whether to produce privately or publicly
3. DISTRIBUTION BRANCH
• Govt policies affects how firms produce the goods
they produce • How the goods produced are being distributed.
3. For whom it’s to be produced: (distribution)

• taxation or welfare decisions DISAGREEMENTS AMONG ECONOMISTS

4. How are choices made? 1. Consequences of policies

• Collectively; Collective decision making 2. Disagreement over valves

KEY CONCEPTS

4 GENERAL STAGES OF ANALYSIS • Mixed Economy

• Production Possibilities Schedule
1. Knowing what activities the public sector engages in and
• Privatization
how there are organized.
• Economic Models
2. Understanding and, insofar as possible, anticipating the • Mercantilists
full consequences of these governmental activities. • Positive Economics
3. Evaluating alternative policies. • Deregulation
• Normative Economics
4. Interpreting the political process.

ECONOMIC MODELS

POSITIVE ECONOMICS

• Predicts either how the economy will change or the

effects of different policies
• What “is", what "should be "

NORMATIVE ECONOMICS

• Evaluate alternative policies, weighing up the

various benefits and costs.
• Makes use of positive economics.
 CHAPTER TWO • Government directly undertakes certain types of
production
TYPES OF GOVERNMENT ACTS. • Land Bank of the PH, National Power corp.
• TV Broadcasting? (Public sect)

1. PROVIDING A LEGAL SYSTEM > PRIVATIZATION - converting public enterprise to private.

> NATIONALIZATION - private to public enterprise.
2. GOVERNMENT PRODUCTION

3. GOVERNMENT'S INFLUENCE ON PRIVATE PRODUCTION

TAXATION - discourage subsidy
4- GOVERNMENT PURCHASES OF GOODS AND SERVICES
TAX - Revenue of the Government
5. GOVERNMENT REDISTRIBUTION OF INCOME

3) GOVENMENTS INFLUENCE ON PRIVATE PRODUCTION

4 CATEGORIES OF GOVERNMENT ACTIVITIES:
• Govt neither producer or consumer,
1. PRODUCTION
2. REGULATION SUBSIDIES AND TAXES govt subsidizes private production
3. PURCHASE in 3 Broad ways
4. REDISTRIBUTION
✓ DIRECT PAYMENTS
✓ INDIRECT PAYMENTS THROUGH THE TAX SYSTEM
(a) The production of goods and services ✓ OTHER HIDDEN EXPENDITURES

(b) The regulation and subsidization of private production.
(c) The purchase of goods and services, from missiles to
the service of street cleaners
(d) The redistribution of Income
TAX SYSTEM- also sometimes serves to Subsidize
production.
TAX CREDIT - is an amount of money that tax payers can
subtract directly from the taxes they owe.
✓ Tax incentive from gov't

TAX EXPENDITURE - special provisions of the tax code

TRANSFER PAYMENT such as exclusions, deductions, deferrals, credits, and tax
rates that benefits specific activities or groups of tax
• Payments that transfer money from one Individual payers.
to another - but not in return for the provision of
goods or services. GOVERNMENT CREDIT - A special type of subsidy is
• * Subsidy * Ayuda government provision of credit below market interest
rates. In the form of low-interest loans

✓ GSIS
1. PROVIDING A LEGAL SYSTEM ✓ PENSIONS
✓ PAG-IBIG
• establishment of the legal framework within which
firms and individuals can engage in economic
activities.
REGULATING BUSINESS
• enforce CONTRACTS between Individuals.
• Impose RESTRICTIONS on the kinds of contracts • Government regulates business activity in an
that are legally enforceable attempt to protect workers, consumers and the
environment to prevent anticompetitive practices
2. GOVERNMENT PRODUCTION
and to prevent discrimination.
✓ Employers' confederation of the Philippines
(ECOP) (Protects the workers)
 ✓ Trade union congress of the Philippines
(Concerns trade industry of PH)
DEREGULATION - The process of reducing or eliminating
regulations imposed by the gov't
SOCIAL INSURANCE PROGRAMS
• An individual's entitlements are partly dependent
his or her contributions what you give is what you
get on
MIDDLE-CLASS ENTITLEMENT PROGRAMS

• social security and medicare Programs

THREE MAJOR AREAS OF GOV'T EXPENDITURES:
HIDDEN REDISTRIBUTION PROGRAMS
✓ defense
✓ social insurance • Government taxing every one of the same rates
✓ education but then giving grants to those whose income fell
below a certain level.
MAJOR SOURCES OF REVENUES FOR STATE AND LOCAL
• guise of subsidy programs & quotas
GOVERNMENT:

✓ sales tax
TRANSFER PAYMENTS & INTEREST
✓ property tax
✓ Income tax • the increase in interest payments is a
MAJOR SOURCES OF REVENUES 'FEDERAL' consequence of the huge deficits.

✓ Individual income tax

✓ customs tax GAUGING THE SIZE OF THE PUBLIC SECTOR:
✓ payroll tax
✓ excise tax GDP - Gross domestic product
✓ Corporation tax • Since its relative with public expenditure
• measures the value of all the goods & services
4) GOVERNMENT PURCHASES OF GOODS & SERVICES produced in the economy within a year-

• amounts spent for goods & services

• Public school, Highways
5) GOVERNMENT REDISTRIBUTION OF INCOME
• taking money away from individuals X
redistributing
2 MAJOR CATEGORIES of explicit redistribution
programs:
GOVERNMENT REVENUES
• When the revenues that it receives from taxes are
less than its planned expenditures
A) cut back expenditures
B) Borrow the difference (loan)

a) PUBLIC ASSISTANCE PROGRAMS (poor)

MACROECONOMICS
b) SOCIAL INSURANCE (retired, PWD)
• is the study of economy wide phenomena
transfer payment including inflation, unemployment, and economic
• PUBLIC ASSISTANCE PROGRAMS growth.
✓ CASH • In macro we study economic events at the national
✓ IN-KIND BENEFITS (specific services) (aggregate) level (multiude of economic subjects
✓ 4Ps that share some common features
✓ DSWD
MIXED ECONOMY DEFICIT FINANCING

• While many economic activities are undertaken by • Deficit - tax revenues in sufficient to pay for
private firms, others are undertaken by the expenditures
government. • is financed by borrowing. (Loans)
• government alters the behavior of the private
sector through a variety of regulations, taxes and
subsidies KEY CONCEPTS:
• A system that combines aspects of both capitalism
and socialism ✓ transfer payments
✓ excise tax
• A mixed economic system protects private
✓ Nationalization
property and allows a level of economic freedom
✓ custom tax
in the use of capital, but also allows for
✓ In-Kind benefit
governments to interfere in economic activities in
✓ value added tax
order to achieve social aims.
✓ Social Insurance
• Combination of free market and command
✓ Deficit
economy
✓ Middle-class entitlement programs
✓ Income tax
CAPITALISM ✓ Social Security (payroll) tax
✓ Corporate income tax
• Economic system in which private individuals or
businesses own capital goods.
• Production of goods & services under capitalism is
free market or laissez-faire capitalism (private
sector is unrestricted) - market economy

TAXES IMPOSED

✓ income tax
✓ corporate income taxes (finance / total)
✓ excise taxes (specific commodities)
✓ Payroll taxes
✓ custom taxes

VAT - Value added tax

• tax imposed on the value of the output of a firm

less the value of goods & services purchased from
other firms