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Government II

Dr. Katherine Sauer A Citizens Guide to Economics ECO 1040

Overview: I. II. III. IV. V. Government and Efficiency Regulations The Optimal Size of Government Taxes US Government Deficit and Debt

There are 3 main roles for government: 1. make markets possible 2. deal market failures - externalities - public goods 3. do some wealth redistribution Keep in mind: There are things the government can do to make things better. There are things the government is likely to do under the influence of political incentives and constraints.

I. Government and Efficiency We do need some government. However, more government isnt necessarily better. Explain.

Governments are often described as being inefficient. They actually operate exactly as wed expect, given their incentives. -Government has a monopoly in many cases. DMV example Post Office example

Unless the market is failing, there is not a compelling reason to have the government provide the good. providing the good producing the good itself

When the government is controlling the allocation of resources, it is bureaucrats and politicians who are making the decision. - political considerations

When the market controls the allocation of resources, they go where theyll earn the highest return. - amoral - supply and demand

II. Regulations Some government regulations may be beneficial to some parties, but all regulations come with a cost. Why did Milton Friedman argue that more lawyers should be allowed into the practice? Why did many existing lawyers disagree?

Why did the workers in Delhi, India protest the regulation that was imposed in order to clean up pollution?

Some regulations are favored by people who have the luxury of caring. - DDT Example

Not all regulations are well-written. - striped bass example

Often times a certain group pushes for regulations in their industry to keep out competition. - interior design licenses

Sometimes the government acts like a helping hand and sometimes like a grabbing hand. Explain.

III. The Optimal Size of Government Economics can point out the tradeoffs, but youll have your own opinion. Framework for thinking about the role of the government in the economy:

1. Government has the potential to enhance the productive capacity of the economy and make us better off as a result. - legal framework - public goods - externalities

2. Some government activity shrinks the size of the pie, but still may be socially desirable. - technically inefficient to transfer wealth - many people want some sort of social safety net

3. Some government involvement in the economy is purely destructive. - good intentions arent enough - some regulations have costs that outweigh the benefits

IV. Taxes Even when the government is engaging in good activities, it must finance its spending through taxes. All taxes exert a cost on the economy.

The costs of taxes: - fiscal drag - deadweight loss - discourage investment

To minimize the costs of taxes, economists favor taxes that are: broad simple fair

V. US Government Spending, Deficit, and Debt

Bureau of Economic Analysis

How your taxes are spent 1. Federal

2. Colorado

To find the amount of the yearly deficit, take total receipts minus total expenditures. 3,982. 5 5,538.8 = -1,556.3

When the US government spends more than it collects in taxes, it issues bonds to make up the difference. A bond is like an IOU. - People who buy bonds are lending the government money now. - The government promises to pay them back later.

Issue price: $18.75 Maturity date: May 2008 Interest over 30 years: $87.92 Final value: $106.67

U.S. debt is now equal to economy By Richard Wolf USA Today 1/8/2012

From the CBO: Projected Outlays and Revenues as % of GDP

Summary Governments are often inefficient, due to incentives. Regulations can be helpful or harmful, they all come with costs, and good intentions are not enough. Economics gives a framework for considering the optimal size of government. Taxes are necessary but also impose costs. The government spends more than it collects. e/sim/budget_master.html

What did you learn today?

Please explain 2 concepts from todays class.