Download Figure 1.1 A Production-Possibility Frontier

Chapter 1
Individuals and Government
1
Public Finance

Public finance is the field of economics
that studies government activities and the
alternative means of financing government
expenditures.
2
Government

Governments are organizations formed to
exercise authority over the actions of
persons who live together in a society and
to provide and finance essential services.
3
Political Institutions

Political Institutions are rules and generally
accepted procedures that evolve for
determining what government does and
how government outlays are financed.
4
Examples of Political Institutions


Majority rule
Representative government
5
The Allocation between Private
and Government Resources

Private





Food
Housing
Cars
Clothing
Government



National Defense
Public Schools
Police
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Government Goods and
Services per Year
Figure 1.1 A Production-Possibility Frontier
C
G2
G1
B
A
M
X2
X1
0
Private Goods and Services per Year
7
Distribution of Government
Goods and Services

Nonmarket rationing:

Prices and willingness to pay those prices are
not applicable to goods like national defense.
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The Mixed Economy: Markets
and Politics

Pure Market Economy



Virtually all goods and services are supplied by forprofit private firms.
Supply and demand determine price.
Mixed Economy

A mixed economy is one in which government
supplies a considerable amount of goods and services
and regulates private economic activity.
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Figure 1.2 Circular Flow in the Mixed Economy
Goods & Services
Output
Market
Dollars
Households
Income Support
& Subsidies
Taxes, fees, charges
Government Services
Dollars
Resources
Goods & Services
Dollars
Government
Input
Market
Subsidies
Taxes, fees, charges
Government Services
Firms
Dollars
Resources
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Government Expenditures in the
United States

Government purchases of




labor
land
capital
Government Transfer Payments


Welfare
Social Security
11
Growth in Government Expenditures
Table 1.1 (abbreviated)
Year
GDP
Federal
Government
State
and Local
Government
Total
Government
Percentage
of GDP
Total
1930
91.3
2.5
7.5
10.0
10.95
1945
223.0
84.7
8.5
93.2
41.79
1960
527.4
85.8
34.1
119.9
22.73
1975
1635.2
345.4
152.1
497.5
30.42
2002
10442.1
2073.9
1050.9
3124.8
29.93
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International Comparisons
Country
Government Current Expenditures
as a Percentage of GDP 2001
Denmark
49.1
France
48.8
Germany
45.1
United Kingdom
39.4
Japan
38.1
Canada
36.7
United States
31.9
13
Figure 1.3 Total Government Expenditure as a
Percentage of GDP 1929-2002
14
Structure of Federal Government
Expenditures




Purchases of Goods and Services
Transfer Payments
Grants in Aid to State and Local
Governments
Net Interest Paid
15
Federal Expenditure by Category,
2002
Table 1.2
Category
Percentage of Total Federal
Expenditures
Transfer Payments
44.9
Purchases
28.2
Interest
14.7
Grants to State and Local
10.0
Other
2.2
16
Figure 1.4 The Distribution of Federal Expenditure,
1966-2002
17
Federal Government Expenditures by Function
18
The Structure of State and Local Government
Expenditures in the United States

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Education
Civilian Safety
Transportation
Executive, Legislative, and Judicial
Income Security
Health and Hospitals
Recreational and Cultural Activities
19
State and Local Government Expenditures
20
Financing Government
Expenditures in the US

Taxes:




Income (Corporate and Personal)
Payroll
Excise
Customs
21
Federal Revenues
22
State and Local Government Revenues
23
State Budget Crunch of 2002



37 states were forced to reduce their budgets.
Revenues were typically 10% less than
anticipated.
States with the most severe deficits:


AK, AZ, CA, NY, NC, OK, OR, VA, and WA
Causes



Cuts in taxes on business and individuals in the
1990s
No sales tax collections on services
Growth in costs of Medicaid
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Implications of a
Graying America

Social Security



Medicare


In 2008 baby-boomers start to retire and collect
The ratio of workers to retiree falls
Health care inflation is substantially higher than
overall inflation
Medicaid

Increased use of long-term care for baby-boomers
25
How Much Government is
Enough?

The question of how much government is
enough is an important one in any society.
It is the tradeoff between public and private
goods. When government gets bigger, its
increased involvement comes at the
expense of less private consumption.
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