Recap: session 5

The role of Government:

Fiscal Policy
Presented by Hardi & Heyuan
Why do we need
public sector ?
To provide esssential public goods and services; like national defense,
Law enforcement, Education etc.
To stabilise the Economy
To protect consumers from fraud & unfair practies; set safety
standards.
To provide social safety nets for people who are unable to provide for
themselves. Eg, unemployment insurance, subsidy etc.
 Government Spending
Current: purchase of Goods
and services by government

Collective Individual
Concumption Consumption
Consumed by whole consumed by individuals or
society or large specific groups of
segment of it. people/households.

Eg. national defense Eg. health care, education

 Government Spending

Infrastructure Transfer Payments Financial Spending

To make social safety Interest on debt.
Expenditures on long-
nets. Unemployment and PS= T-(G+Tr.)
term assets that enhance
sickness benefit,
the productivity and
Old Age Pension.
efficiency of the
economy, such as roads
and bridges,.
what the state spends
our money on?
As per analysis, the state spends highest
on social protection which included
unemployment insurance, subsidies and
other transfers.
classification of functions of government.
Financing: G= Taxes + Deficit
Taxes: Discourage consumption of
products with negative effects
Deficit: Borrowing
Public Revenue: Fairs and Taxes
Flow variable: government spending,
investment and consumption
Stock variable (stock of debt):
government debt, wealth and
inventory
For example, government spending is
a flow variable that can influence the
level of GDP, which is a stock variable.
 Pareto Efficiency

Arguments
Against
Government
Taxation produces distortions

Spending Prices
 Definition: when an economy has its
resources and goods allocated to the
maximum level of efficiency, and no change

Pareto
can be made without making someone worse
off.

Efficiency
a.k.a: Market is good
 Taxation produces distortions:
alters economic behavior.

Other
Arguments
Prices: signal the fair value of goods
and services to companies and
consumers.
Taxing Wages
Social security contribution: paid by workers and
employees
Total labor cost: wages + social contribution + tax paid by
the companies
Tax wedges: difference between labor costs of employer and
net home-pay of employees
Latest OECD average tax wedge: 34.6% (2020)
Countries do not charge
social security (Denmark,
New Zealand)
Income tax is offsetting
the lack of social
security contributions
Tragedy of the Commons

Definition: The tragedy of the commons occurs when

individuals over-consume a resource at the expense of
society.
When a common resource, such as water or land, is
rivalrous in consumption, non-excludable, scarce, and a
common-pool resource, the tragedy of the commons
occurs.
Thank You!