Keu Neg Teori 2

Econ 344 Public Finance
Prof. Daniel Otto Why Study Public

Chapter 1 - Introduction Finance?
Chapter 1 Why Study Public Finance?
© 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 1 of 28
Public Finance and Public Jonathan
Policy, 2/e Gruber
Why Study Public Finance?
Public Finance 1
Prepared by:
FERNANDO QUIJANO, YVONN
QUIJANO,
KYLE THIEL & APARNA
SUBRAMANIAN
© 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
Public Finance Defined
Public finance is about the taxing and spending

activities of the government.
Also known as “public sector economics” or “public
economics.”
Focus is on microeconomic functions of government
– polices that affect overall unemployment or
price levels are left for macroeconomics.
Scope of public finance wide-ranging – government
has role in many activities, but focus will be on
taxes and spending.
Public Finance and Ideology
How should a government function in an economic

sphere?
Mechanistic view – government is a contrivance created

by individuals to better achieve their individual goals.
Individual, not group, is at center stage.
This is the traditional viewpoint taken by modern public

finance.
The Legal Framework
The Legal Framework
Why Study Public Finance?
1.1 The Four Questions of Controversies about the proper

Public Finance role of the government raise the
1.2 Why Study Public fundamental questions addressed
Finance? Facts on by the branch of economics known
Government in the United
States and Around the World
as public finance.
1.3 Why Study Public Finance The goal of public finance is to

Now? Policy Debates over
Social Security, Health Care,
understand the proper role of the
and Education government in the economy.
1.1
The Four Questions of Public Finance
Four questions of public finance
When should the government intervene in the economy?

How might the government intervene?
What is the effect of those interventions on economic outcomes?
Why do governments choose to intervene in the way that they
do?
1.1
A. When Should the Government Intervene in the Economy?

Market Failures
market failure Problem that

causes the market economy to deliver an outcome
that does not maximize efficiency.
 APPLICATION
The Measles Epidemic of 1989–1991

 After the measles vaccine was introduced in 1963, measles cases had become
relatively rare in the U.S. by the 1980s. Over the period from 1989 to 1991,
however, there was a huge resurgence in measles.
 It is clear that this outbreak resulted from very low immunization rates among
disadvantaged inner-city youths.
 These unimmunized children were imposing a negative externality on other
children who had received their immunizations but for whom immunization
may have worn off.
 The federal government responded to this health crisis in the early 1990s:
 The government publicly encouraged parents to get their children
immunized.
 The government also paid for the vaccines for low-income families.
The result was impressive. Immunization rates, which had never been above 70%
before the epidemic, rose to 90% by 1995. Government intervention clearly reduced
this negative externality.
1.1
A. When Should the Government Intervene in the Economy?

Redistribution
redistribution The shifting of

resources from some groups in
society to others.
1.1
B. How Might the Government Intervene?

Tax or Subsidize Private Sale or Purchase
One way that the government can try to address failures in the
private market is to use the price mechanism, whereby
government policy is used to change the price of a good in one
of two ways:
1. Through taxes, which raise the price for private sales or
purchases of goods that are overproduced, or
2. Through subsidies, which lower the price for private sales
or purchases of goods that are underproduced.
1.1
How Might the Government Intervene?

Restrict or Mandate Private Sale or Purchase
The government can directly restrict the private sale or purchase of
goods that are overproduced, or mandate the private purchase of
goods that are underproduced and force individuals to buy that good.
Public Provision
The government can provide the good directly, in order to potentially
attain the level of consumption that maximizes social welfare.
Public Financing of Private Provision

Governments may want to influence the level of consumption but
may not want to directly involve themselves in the provision of a
good.
1.1
C. What Are the Effects of Alternative Interventions?

Direct Effects
direct effects The effects of

government interventions that
would be predicted if individuals
did not change their behavior in
response to the interventions.
Indirect Effects
indirect effects The effects of

government interventions that
arise only because individuals
change their behavior in
response to the interventions.
 APPLICATION
The Congressional Budget Office:

Government Scorekeepers
 The methods and results derived from empirical economics
are central to the development of public policy at all levels
of government.
 The Congressional Budget Office (CBO) provides Congress
with the objective, timely, nonpartisan analyses needed for economic and budget
decisions.
 The CBO increasingly plays a critical role as a “scorekeeper” for government
policy debates.
 Legislative spending proposals that are to become law must first have their costs
estimated by the analysts at the CBO.
It is not an overstatement to say that the economists who work at the CBO frequently
hold the fate of a legislative proposal in their hands. The large price tag that the CBO
assigned to the Clinton administration’s plan to reform health care in the United
States in 1994 is often cited as a key factor in the defeat of that proposal.
1.1
D. Why Do Governments Do What They Do?
political economy The theory

of how the political process produces decisions
that affect individuals and the economy.
1.2
Why Study Public Finance? Facts on Government in
the United States and Around the World
Spending, Taxes, Deficits, and Debts
1.2
The Size and Growth of Government
1.2
1.2
1.2
1.2
State and Local Spending, Taxes, Deficits, and Debts
1.2
Decentralization
A key feature of governments is the degree of centralization across
local and national government units—that is, the extent to which
spending is concentrated at higher (federal) levels or lower (state and
local) levels.
1.2
Distribution of Spending
1.2
Distribution of Spending---Federal and State
1.2
Distribution of Spending
public goods Goods for which

the investment of any one
individual benefits everyone in a
larger group.
social insurance programs

Government provision of
insurance against adverse events
to address failures in the private
insurance market.
1.2
Distribution of Revenue Sources
1.2
Distribution of Revenue Sources---State/local
1.2
Regulatory Role of the Government

Another critical role the government plays in all nations is that of
regulating economic and social activities.
 The Food and Drug Administration (FDA) regulates the labeling and
safety of nearly all food products and bottled water, tests cosmetics to
ensure their safety, and approves drugs and medical devices to be sold
to the public.
 The Occupational Safety and Health Administration (OSHA) is charged
with regulating the workplace safety of the 115 million Americans
employed at 7.2 million job sites.
 The Federal Communications Commission (FCC) regulates interstate
and international communications by radio, television, wire, satellite,
and cable.
 The Environmental Protection Agency (EPA) is charged with
minimizing dangerous pollutants in the air, water, and food supplies.
1.3
Why Study Public Finance Now? Policy Debates over
Social Security, Health Care, and Education
Social Security, health care, and education are each the subject of debate,
with both the “liberal” and “conservative” positions holding differing views
in their approach to each problem.
Social Security
Social Security is the single largest government expenditure program. The
financing structure of this program is basically that today’s young workers
pay the retirement benefits of today’s old.
Health Care
There are currently 45.8 million Americans without any health insurance,
about 18% of the non-elderly U.S. population. Projections suggest that
health care will consume almost half of our GDP within the next century.
1.3
Why Study Public Finance Now? Policy Debates over
Social Security, Health Care, and Education
Education
There is an enormous
dissatisfaction with our current
educational system, highlighted by
the dismal performance of U.S.
students on international tests.
1.4
Conclusion
It is clear from the facts presented here that the government plays a central
role in the lives of all Americans.
It is also clear that there is ongoing disagreement about whether that role
should expand, stay the same, or contract.
The facts and arguments raised in this chapter provide a backdrop for
thinking about the set of public finance issues that we explore in the
remainder of this book.

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Econ 344 Public Finance

Prof. Daniel Otto Why Study Public

Why Study Public Finance?

Public finance is about the taxing and spending

How should a government function in an economic

Mechanistic view – government is a contrivance created

This is the traditional viewpoint taken by modern public

1.1 The Four Questions of Controversies about the proper

1.3 Why Study Public Finance The goal of public finance is to

Four questions of public finance

When should the government intervene in the economy?

A. When Should the Government Intervene in the Economy?

market failure Problem that

The Measles Epidemic of 1989–1991

A. When Should the Government Intervene in the Economy?

redistribution The shifting of

B. How Might the Government Intervene?

How Might the Government Intervene?

Public Financing of Private Provision

C. What Are the Effects of Alternative Interventions?

direct effects The effects of

indirect effects The effects of

The Congressional Budget Office:

D. Why Do Governments Do What They Do?

political economy The theory

Spending, Taxes, Deficits, and Debts

The Size and Growth of Government

Spending, Taxes, Deficits, and Debts

Spending, Taxes, Deficits, and Debts

Spending, Taxes, Deficits, and Debts

State and Local Spending, Taxes, Deficits, and Debts

Distribution of Spending---Federal and State

public goods Goods for which

social insurance programs

Distribution of Revenue Sources

Distribution of Revenue Sources---State/local

Regulatory Role of the Government

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