4.

Public Sector

MARKET MACHANISMS – An exchange mechanism that brings together sellers and buyers of a
product, factor or production.

PUBLIC GOODS – Goods and services provided by a government for the benefit of all or most of the
populace.

ALLOCATE – The choosing of the particular use to which a scarce resource (means of production) is
put, e.g. whether to use water for electric power or crops

RESOURCES / MEANS OF PRODUCTION – Raw materials and means of labour (tools, machines, etc.)
employed in the production process

STANDARDIZED GOODS – Products that are the same because they satisfy the same technical
requirements.

JUDICIARY – The branch of government that includes courts of law and judges

MARKET IMPERFECTIONS – The inability of markets to deliver goods or services.

STANDARD OF LIVING – The level of wealth, comfort, material goods and necessities available to a
certain socioeconomic class in a certain geographic area.

ECONOMIC SYSTEM – An organized way in which a state or nation allocates its resources and
apportions goods and services in the national community.

The government:

- ALLOCATES resources in a planned economy.

- PASSES laws in all three types of economies.
- only PROVIDES essential goods and services in a market economy.
- ENSURES fair competition in a market economy.
- PLANS, ORGANIZES, CO-ORDINATES the production process in a planned economy.
- DISTRIBUTES income more equally in a planned economy

SYNONYMS
market economy: capitalist economy
planned economy: command economy
forces of supply and demand: marked mechanism
means of production: resources
rivalry: competition
level playing field: fair competition
insufficient, limited: scarce
 1.) What is the public sector?

The public sector is made up of organizations which are, directly or indirectly, owned or controlled by central
or local government. They are funded by the government and in some cases from their own trading “surplus”
of profit.

2.) What does the public sector contain?

The public sector consists of state-owned enterprises, which are businesses that are owned by the government.
Some of these are very large, they are called public corporations and include some public utilities (e.g.
electricity), nationalized industries, local authority services (e.g. municipal services), central government
departments, government agencies etc. The public sector has an important role to play in certain areas of
business activity yet, for various reasons, some public sector businesses have been privatized, i.e., transferred
from the public to the private sector.

3.) Public goods

Certain public goods and merit goods are provided by the public sector. Public goods are goods where
consumption by one person does not reduce the amount available to others and, once provided, all individuals
will benefit (e.g. street lighting).

4.) Merit goods

It is sometimes argued that the public sector should also provide merit goods. Examples include education,
health and libraries, in other words, services that may not be available to all individuals if not provided by the
state. If the individual is left to decide whether or not to pay for these goods, some would choose not to or may
not be able to. The provision of merit goods is said to raise society’s standard of living.

NATIONALIZED COMPANIES – Companies previously owned by private owners which were taken
into public ownership.

MERIT GOODS – Goods which are underprovided by the private sector and are sometimes supplied
by the state.

UTILITIES – A business enterprise, such as a public service corporation, performing an essential public
service (e.g. electricity, railroads) and regulated by the central or local government.
 PUBLIC GOODS

– are goods and services provided by the state that can be consumed by everybody in a society. They
are both non-rival and non-excludable.

NON-RIVAL – Public goods that does not reduce the amount available to others.

NON-EXCLUDABLE – all individuals will benefit (e.g. street lighting).

Most public goods are MANAGED by the government and are provided FREE at the point of use and
then paid for out of general TAXATION or another general form of charge such as a license FEE. Some
public goods are managed by private firms (such as sanitation infrastructure). Because public goods
are non-excludable, firms cannot charge people to use them, which means that such management of
public goods is a COOPERATION between the government and the private sector.

MERIT GOODS

Goods or services provided free or cheaply for the benefit of the entire society by a government.
Governments SUBSIDIZE these goods and services or provide them FREE at the point of use because
they would be too EXPENSIVE and therefore under-consumed if left to the MARKET forces.
Consumption of merit goods is believed to generate positive externalities- where the SOCIAL benefit
from consumption exceeds the PRIVATE benefit, e.g.: compulsory vaccination of children,
SUBSIDIZED housing, higher education, the opera.

THE ROLE OF GOVERNMENT

MILTON FRIEDMAN J. K. GALBRAITH

 advocates freedom to choose how to
use/spend our income
 believes in the very limited role of
government
 claims that society should eliminate
restrictions on economic freedom
 thinks that government intervention in the
economy is necessary
 supports the idea that the state should
regulate the provision of certain essential
services (e.g. low-cost housing, healthcare,
police, science, environmental protection)

ECONOMIC FREEDOM: freedom to choose how to
use our income and freedom to use the resources
we possess in accordance with our own values –
freedom to enter any occupation, engage in any
business enterprise, buy from or sell to anyone
else…..but freedom cannot be absolute
Health care as a public responsibility in all civilized
land, attention to a range of activities that are
beyond the time horizon of the market economy.
To support science. The important industrial
achievements have depended on public
investment. Investment in the environment…low-
cost housing health care, parks, recreational
facilities, police, libraries, etc.
What is the relationship between economic freedom and human freedom?

- “laissez-faire could produce over-mighty individuals, Friedman thought. The goal should
not be laissez-faire, but market competition: this, he said, would protect men from each
other.”
- “Neoliberals like Friedman saw economic liberty as the safeguard of all freedoms; a
swelling state was the road to tyranny.”

Welfare state

Advantages

- Minimum standard of living provided for everyone (including the underclass)

- Social protection
- Support of scientific research that doesn’t promise short-run profit
- Protection of the environment

Disadvantages

- No “freedom to choose how to use our income”

- High taxes
- No “freedom to use the resources we possess in accordance with our own values”
- Government intrusion in personal life, decision-making

TAXATION

- A means by which governments finance their expenditure by imposing charges on

citizens and corporate entities

Government - file a tax return

- avoid a tax
- levy (levies, levying, levied) a tax
- pay a tax on their income
- impose a tax
- collect a tax
- raise revenue through taxation

People or companies

- be liable to pay a tax

- evade a tax
INCOME TAX (POREZ NA DOHODAK)– the tax people pay on their wages and salaries
DIRECT TAX – a tax on wages and salaries or on company profits
PROGRESSIVE TAX – a tax levies at a higher incomes
INDIRECT TAX – a tax paid on property, sales transactions, imports and so on
VALUE-ADDED TAX (POREZ NA DODANU VRIJEDNOST)– a tax collected at each stage of production,
excluding the already-taxed costs from previous stager
CAPITAL GAINS TAX – profits made by selling assets are
INERITANCE TAX (POREZ NA NASLJEĐE)– gifts to family members over a certain value
WEALTH TAX (POREZ NA BOGATSTVO)– the annual tax imposed on people's fortunes (in some
countries)
TAX EVASION (ILEGALNO)– making false declarations to the tax authorities
TAX AVOIDANCE (LEGALNO)– reducing the amount of tax you pay to a legal minimum
TAX HAVENS – countries where taxes are low, where multinational companies often set up their
head offices
A LOOPHOLE – a small mistake or exception in a tax law, which allows you to avoid paying
something.

People pay an income tax on their wages. Certain profits are liable to a capital gains tax. Customs
duties are imposed on imports. The government imposed a tax on inheritances. It is called an
inheritance tax. The government accused Nokia of evading tax, but the company disputed the claim.
I forgot to file my tax return! I’m afraid I’ll be fined by the Tax Office. To avoid a tax, it is usually not
enough to simply move one's assets to a tax haven.

DEPENDING ON WHO OR WHAT IS BEING

DEPENDING ON THE TAX RATE
TAXED

PROGRESSIVE TAX – A tax levied (naplaćen) at a
higher rate on higher income.
REGRESSIVE TAX – A tax that takes a larger
percentage of income from low-income people than
from high-income people. It is generally a tax that is
applied uniformly. This means that it hits lower-
income individuals harder. e.g. VAT – value added
tax (hrv. PDV)
DIRECT TAX – A tax placed directly on an
individual or business. e.g. income tax,
capital gains tax, inheritance tax, wealth
tax, national insurance
INDIRECT TAXES – are levied on the
production or consumption of goods and
services or on transactions, including
imports and exports. e.g. value-added tax
(VAT), sales tax, customs duty

PROPORTIONAL (FLAT) TAX – A system that taxes

everyone at the same rate, regardless of their
income bracket. Supporters of this type of tax argue
that it gives people incentive to earn more, because
they are not penalized by moving up to a higher tax
bracket (as they would in a progressive rate system).
- Assets (imovina)– property that makes profit
- a gain = an increase in amount
- to levy a tax (naplatiti porez) = to collect a tax on something
- haven (utočište/oaza) = Harbour for ships to seek shelter in stormy weather ≠ HEAVEN
(nije raj)