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Role of Government &
Comparison of the sizes of
public sectors in various
countries.
Presented by Youri, Marshella,
Carolyn, Min, Azfar (Group 5)
Guidance of Efficiency
“A firm is said to be operating efficiently
when it produces a given quantity and
quality of goods at the lowest possible
cost” (101).
“One person cannot be made better off
without harming someone else, then
economic efficiency prevails” (101).
Group 5.Carolyn Chan
Information
Market Imperfections—information is
not perfect.
Group 5.Carolyn Chan
Information
Imperfect Market:
– Market for used cars.
• “Prospective buys cannot distinguish between
low-quality cars and high-quality cars. Although
a buyer can get some information about a
particular car by looking at the car and taking it
for a test drive, this information is not sufficient
to determine whether the car is a low- or highquality. In contrast, the seller knows from
experience” (Sullivan 317).
Group 5.Carolyn Chan
Price System
When the market price rises, buyers
know that the quantity demanded at the
prior equilibrium price exceeded the
quantity supplied.
Group 5.Carolyn Chan
Externalities
“The cost or benefits of a transaction
that are borne by someone not directly
involves in the transaction” (103).
– Government can use tuition subsidies to
increase the equilibrium number of college
degree.
Group 5.Carolyn Chan
Externalities
Group 5.Carolyn Chan
Public Goods
 Consumption of the good by one individual
does not reduce the amount of the good
available for consumption by others.
• Example: all sorts of goods and services,
including: streets, highways, education,
parks, and public safety, national defense,
and space exploration.
• For example, if one individual eats a cake,
there is no cake left for anyone else; but
breathing air or drinking water from a stream
does not significantly reduce the amount of
air or water available to others.
Group 5. Marshella
Private Property Right
 The limitation of ownership to an individual
Example : when a person buys a house, he/she
must pay a certain price to the seller before
getting the right to own it. Once the price is paid,
the house is that person’s possession and no
one else can enter or trespass without
permission by the owner.
Free Ride
The enjoyment of the benefits of a good by
a producer or consumer without having to
pay for the good.
Example: People enjoy the public radio
and television stations without having to
spend money on them. They get free rides
from people who donate money to them.
Group 5. Marshella
Monopoly
 Defined as a persistent
market situation where there is
only one provider of a product or service.
 It happens because :
- lack of economic competition for the good or
service.
- lack of viable substitute goods.
 Example: Microsoft has achieved market
dominance because Microsoft’s plan to charge
subscription fees for access and use. Microsoft
sees itself as a Global- Software Utility Company
in the future.
Group 5. Marshella
Business Cycle
The periodic but irregular
up-and-down movements in
economic activity, measured
by fluctuations in real GDP
and other microeconomics
variables.
A business cycle is identified as a
sequence of six phases :
•
•
•
•
•
•
Contraction
Trough
Expansion
Peak
Recession
Depression or slump
Group 5. Marshella
The Public Choice
Theory of Government
 Rent seeking : occurs when an individual,
organization, or firm seeks to make money by
manipulating the economic environment rather
than by making a profit through trade and
production of wealth.
 Such as by : Gaining control of land and other
pre-existing natural resources or by imposing
burdensome regulations or other government
decisions that may affect consumers or
businesses.
Group 5. Marshella
Public Choice Theory
 How individual decision- making results in policy
that conflicts with the overall desires of the
general public.
 For instance: Many special interest and pork
barrel projects are not the desire of the overall
democracy. However, it makes sense for
politicians to support these projects because it
will benefit them psychologically as they feel
more powerful and important. It also can benefit
them financially as it may open the door to future
wealth as lobbyist ( after they retire ).
Group 5. Marshella
Microeconomic Policy
1.
Provide the public goods that society requires
Government provides public goods avoid the free-rider
problem that would occur if private firms provided the goods
2.
Internalizing the externality
A wide range of government policies have been proposed to
deal with externalities
-regulation
-taxes and subsidies
-market-based regulation
3.
Promoting Competition
Government regulates industries where free market competition may not
exist and policies other industries to promote competition.
Ex) Justice Department , Federal Trade Commission
Group 5. Yuri
Macroeconomic Policy
1. Monetary Policy
 Monetary policy is policy directed toward control of money
and credit.
Major player is the Federal Reserve
 The Federal Reserve controls the three tools of monetary
policyopen market operations, the discount rate, and
reserve requirements
 Two basic goals: to promote "maximum" sustainable output
and employment and to promote "stable" prices
Group 5. Yuri
2. Fiscal policy
 Policy directed toward government spending and taxation.
 Fiscal policy is determined by laws that are passed by Congress and
signed by the president.
 Government has the responsibility of minimizing the damage from
business cycles.
Inflation is too strong
government can use fiscal policy increase taxes
increase taxes
decrease in government spending
decrease the money in circulation
Group 5. Yuri
3. Government Spending
2007
 Budget surplus
When government spending is
less than revenue
 Budget deficit
When government spending is
greater than revenue
 Current situation
 U,S . Budget deficit 2007 is
$400 billion
Group 5. Yuri
Group 5. Yuri
Government expenditures as
Percent of total output
100
North Korea
Cuba
75
Vietnam
Sweden
50
Germany
25
Canada
United Kingdom
Japan
United
States
Market
Centrally Planned
Types of economy
Group 5. Azfar
Centrally planned economy
• An economic system where government has
control over the goods and services
produced and the control of prices that they
are sold to the citizens.
• Ex) Cuba, North Korea
Group 5. Azfar
Market economy
When the government plays a small role
in control of goods and services plus
the control of the economy
• Ex) United States, Canada
Group 5. Azfar