Public Finance Gruber 3rd Edition Lecture 1

7/27/2019 Public Finance Gruber 3rd Edition Lecture 1

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Chapter1WhyStudy

PublicFinance?

2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber

Why Study Public Finance?


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Chapter1WhyStudy

PublicFinance?

2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 2 of 28

Why Study Public Finance?

Controversies about the proper

role of the government raise the

fundamental questions addressed

by the branch of economics known

aspublic finance.

The goal of public finance is to

understand the proper role of the

government in the economy.


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The Four Questions of Public Finance

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public finance The study of

the role of the government in

the economy.

four questions of public finance When shouldthe 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?


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market failure Problem that

causes the market economy to

deliver an outcome that does notmaximize efficiency.

When Should the Government Intervene in the Economy?

Market Failures

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The Measles Epidemic of 19891991

A P P L I C A T I O N

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 otherchildren who had received their immunizations but for whom immunizationmay 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.


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redistribution The shifting of

resources from some groups in

society to others.

When Should the Government Intervene in the Economy?

Redistribution

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How Might the Government Intervene?

Tax or Subsidize Private Sale or Purchase

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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.


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.


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How Might the Government Intervene?

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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.

Introduce Regulation

Governments may want to influence the working of the markets

through regulations and legislations.


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What Are the Effects of Alternative Interventions?

Direct Effects

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direct effects The effects of

government interventions that

would be predicted if individuals

did not change their behavior inresponse 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.


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The Congressional Budget Office:

Government Scorekeepers

A P P L I C A T I O N

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 administrations plan to reform health care in the United

States in 1994 is often cited as a key factor in the defeat of that proposal.


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Why Do Governments Do What They Do?

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political economy The theory

of how the political process

produces decisions that affect

individuals and the economy.


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The Size and Growth of Government

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Why Study Public Finance? Facts on Government in

the United States and Around the World


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The Size and Growth of Government

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Decentralization

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A key feature of governments is the degree of centralization across

local and national government unitsthat is, the extent to which

spending is concentrated at higher (federal) levels or lower (state and

local) levels.


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Spending, Taxes, Deficits, and Debts

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Distribution of Spending

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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 eventsto address failures in the private

insurance market.

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Distribution of Revenue Sources

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Distribution of Revenue Sources

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Regulatory Role of the Government

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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.

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Social Security

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Why Study Public Finance Now? Policy Debates over

Social Security, Health Care, and Education

Social Security is the single largest government expenditure program. The

financing structure of this program is basically that todays young workers

pay the retirement benefits of todays old.

Health CareThere 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.

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.

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It 1980

55%

7%4%

34%

0%

Pension Family benefit Labour market Health Housing

It 2003

62%5%

5%

28%0%


US 2003

44%

5%5%

46%

0%


US 1980

53%

7%8%

32%

0%


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Social Security, Health Care, and EducationInvecchiamento della Popolazione

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

US

LUXEMBURG

DENMARK

IRELAND

NETHERLAND

UK

PORTUGAL

SWEDEN

FINLAND

BELGIUM

FRANCE

GERMANY

AUSTRIA

GREECE

SPAIN

ITALY

Percentuale

diultrasessantenni

2000 2050

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Education

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There is an enormous

dissatisfaction with our current

educational system, highlighted by

the dismal performance of U.S.

students on international tests.

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Education

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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 theremainder of this book.

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Public Finance Gruber 3rd Edition Lecture 1