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Section 3
The Economics of Markets
and Government
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Political Vs. Market Choice
There is usually a huge difference between
the value created by goods and services
provided through the government and
those obtained through the market.
Lets do an activity to examine this difference!
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The Four Ways to Spend Money!
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The Four Ways to Spend Money!
You spend your own
money on yourself
You spend somebody
else’s money on yourself
You spend your own
money on somebody
else
You spend somebody
else’s money on
somebody else
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The Political Process
Voters
Bureaucrats
Legislators
The Problems with Collective
Decision Making
1.
2.
3.
4.
Rational Ignorance Effect
Special Interest Effect
The Short Sightedness Effect
The Absence of the Profit Motive
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Rational Ignorance Effect
Rational ignorance effect: a rational
individual has little or no incentive to
acquire information needed to cast an
informed vote.
Special Interest Effect
1. Special interest effect: An issue that
generates substantial benefits for a small
group by generating minimal costs to a
large group. (in aggregate, losses may
exceed benefits).
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The Short-Sightedness Effect and
Debt
Politicians tend to favor policies that have
current and visible benefits as long as the
costs are hard to identify and far out into
the future (even if the costs outweigh the
benefits):
This can lead to the accumulation of
significant amounts of debt:
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70%
60%
50%
40%
30%
20%
Net
Federal Debt as a Percent of GDP
Net Federal Debt as a Percent
of GDP
90%
80%
10%
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0%
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The Short-Sightedness Effect and
Debt
http://www.usdebtclock.org/
The Absence of the Profit Motive
The market has a way of channeling
resources into the most profitable and
wealth enhancing activities….
But nothing like this exists in the government
sector
End of Section 3….Any Questions?
Thank You!
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