Govt Sector

8/17/2019 Govt Sector

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Copyright (c) 2000 by Harcourt Inc.All rights reserved.

The entity that has a monopoly over the legitimateuse of force to modify the actions of adults.

An institutional process through which individuals

collectively make choices and carry out activities.

Differences and Similarities in Public and PrivateDecision-Making

•

Competitive behavior is present in both the market and publicsectors.•rivate sector action is based on voluntary choice! public

sector is based on ma"ority rule


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The most fundamental function of government is the

protection of individuals and their property against acts ofaggression.

Involves the provision of a limited set of goods that aredicult to supply through the market

Involves the maintenance o# a legal structure within which people interact peace#ully and provision o# a mechanism #or

the settlement o# disputes while maintaining a competitive

market.

May Fail to Allocate ResourcesEciently:$. %onopoly

2.&'ternalities

. ublic oods

*. Asymetric In#ormation


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Q

P

D

MR

S = MC

Pc

Pm

QcQm

An

industry in pure competition

sells where supply and

demand are equal

INEFFICIENCY OF P!E MONOPO"Y

At MR=MC

A monopolist

will sell less

units at ahigher price

than in

competition

ellersmay gain!y

restricting outputandraisingprice. Too

fe" units"ill !eproduced


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E#ternalities e#ist "hen the market fails toregister fully costs and !ene$ts.

&'ternal Costs+

resent when the actions o# an individual or group harmthe property o# others without their consent. ,he roblem arises because property rights are

imper#ectly de#ined and-or en#orced. &'ternal ene#its+

resent when the actions o# an individual or groupgenerate bene#its #or nonparticipating parties.


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ecause costs are not #ully registered/ the supplycurve understates the true cost o# production.

nits may be produced that are valued less thantheir cost.

1rom the viewpoint o# e##iciency/ too many unitsare produced.

ollution problems are o#ten a side e##ect.


7/45Copyright (c) 2000 by Harcourt Inc.

All rights reserved.

• I#/ though/ all costs are #ullyidenti#ied and measured . . .

,hen the new supply curve ( S 2 )would result in an output o# Q2 (

Q1) and a price P 2 ( 3 P 1).

Price

Quantity / Time

4 Consider the market to the right.

nder initial supply and demandconditions an output o# Q1 and a

price o# P 1 e'ist.

4 ,he result o# an externality withe'ternal costs (a negative

externality) is that too many units

are produced at a price below that

which would prevail i# all thecosts o# the production/ provision/

and consumption o# the good wereidenti#ied and #actored into it.

D

(includesexternal costs) S #

S $

Q2

P 2

P 1

Q1

Idealout%ut

&ctual

%rice andout%ut




5emand curve understates total valueo# output.

nits that are more highly valued thancosts may not be produced. 1rom the viewpoint o# e##iciency/ too

#ew units may be produced.




D2(includesexternal benefits)

thenthe new demand curve ( D2 ) would

result in an output o# Q2 ( 3 Q1)and a price P 2 ( 3 P 1).

Price

Quantity / Time

4 Consider the market to the right.

nder present supply and demandconditions an output o# Q1 and a

price o# P 1 e'ist.

4 ,he result o# an externality withe'ternal bene#its (a positive

externality) is that too #ew unitsare produced at a price below that

which would prevail i# all the bene#its o# the good wereidenti#ied and #actored into it.

S

Q2

P 2

P 1

Q1

Idealout%ut

4 I#/ though/ all bene#its are #ullyidenti#ied and measured . . .

D1

&ctual

%rice andout%ut


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%oods that are : jointly consumed

Individuals can simultaneously en"oy

consumption o# same product or service non-excludable

Consumption o# the good cannot be

restricted to the customers who pay #or it


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I# a public good is made available to one person/ it is simultaneously made available to

others.

ecause those who do not pay cannot be

e'cluded/ no one has much incentive to help pay #or such goods. &ach has an incentive to

become a free rider

a person who receives the bene#its o# the good

without helping to pay #or its cost. ut/ when a lot o# people become #ree riders/

too little is produced.


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It is the characteristics o# the good/ not the sector inwhich it is produced/ that distinguishes a public good.

&'amples o# public goods+

national de#ense

radio and television broadcast signals

clean air.

%arkets o#ten develop ways o# providing public

goods (e.g. use o# advertising to support provision

o# radio and television). 6onetheless/ public goodso#ten cause a breakdown in the harmony between

sel#7interest and the public interest.


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Either the potential !uyer or potentialseller has important information thatthe other side does not have.

%a"or problems o# con#licting interests andunhappy customers can arise when goods

are either

di##icult to evaluate on inspection and

seldom repeatedly purchased #rom the same producer/ or/

potentially capable o# serious and lasting

harm#ul side e##ects that cannot be predicted

by a lay person.


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The consumer&sinformation pro!lem is

minimal if the item ispurchased regularly. 'rand names( franchises(

and product "arranties are

helpful "ays of dealing"ith information pro!lems


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The Relative i)eand E#tent of

%overnment


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' #'

S(eden

Denmark

Net)erlands

*erman+

France

,elgium

Ital+

&ustria

*reece

Canada

nited ingdom

Ireland

&ustralia

.a%an

nited States

Singa%ore

Sout) orea

/)ailand

0ong ong

1' 2' 3'

overnment !xpendituresas a " of DP (1##$)

224$

2'43

534$

524'5146

5#46

5#46

1741

1241

1846

8646

8645

8247

8141

#846

##43

#'48

$642

5145

,he 8i9e o# overnment

4 ,he .8. spends about a third o# 5 on local/ state/ and #ederal government.

,his is times what it was in $:0/ but not as much as many o# its trade partners.


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$'41

148

245248

346

542

$48$846

248

$$43

54'

$$41

843

34$

#46

'$72' $776$77'$73'$76'

9a: Defense e;%enditures as a < of *DP

#'

$5

$'

5

9b: E;%enditures as a < of *DP

$72' $776$77'$73'$76'

'

#'

$5

$'

5

Income /ransfers

0ealt) Care

4 5e#ense spending as a ; o# 5 has declined sharply since $:


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1##% 1##&

Social Securit+

#8< Education

#3<Public (elfare

and )ealt)

##<

&dministrative

and ot)er

e;%enditures

#$<

Income

securit+

$1<

Medicareand )ealt)

#'<

Defensea

$3<

Net interest

$5<

0ig)(a+s

8<

Federal spending: =$>?2 billion

Ot)er

6<

Insurancetrusts

3<

Interest on debt1<

tilities and

li=uor stores6<

0ig)(a+s

2<

Police

and fire

%rotection

1<

State & local spending: =:@ billion

How overnment 8pends+

4 ,he way that the respective levels o# government spend money di##ers signi#icantly.


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1##% 1##&

Federal taxes: State & local taxes:

How overnment ,a'es+

4 ,he way that the respective levels o# government ta' di##ers signi#icantly.

Cor%orate

income

$#<

E;cise ta;es1<

Customsduties $<

Cor%orate

income

#<

Ot)er

1<

Ot)er

8<

Pro%ert+

$5<

Pa+roll

$#<

Personalincome

$'<

ser c)arges a

#1<

Sales and

e;cise

$6<From

federalgovernment

$2<

Pa+roll

81<

Personal

income

12<


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Ta#es*rogressive

*roportionalRegressive


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A!ility to *ay 'ene$ts Received


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The +pportunity ,ost of

%overnment


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+pportunity cost of resourcesused to produce goods suppliedthrough the pu!lic sector.

Cost o# resources e'pended in thecollection o# ta'es and the

en#orcement o# government mandates.

&'cess burden (deadweight loss) o#

ta'ation.


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+vervie"of ,ollective

-ecisionMaking


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-- applies the tools of economics to the political process in order to provide insight concerninghow the process works.

8el#7interested behavior is present in both market and

political sectors. olitical process can be viewed as a comple' e'change

process involving+

voter7ta'payers

politicians bureaucrats


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,he oter7Consumer+ oters will tend to support those candidates

whom they believe will provide them the most

government services and trans#er bene#its/ net o#

personal costs.

'ational gnorance !ffect +

77 Becogni9ing their vote is unlikely to be

decisive/ most voters have little incentive to

obtain in#ormation on issues and alternative

candidates. ecause o# the rational ignorance e##ect/ voters

will be unin#ormed on many issues! such issues

will not enter into their decision making process.


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,he olitician78upplier+

olitical o##icials are interested in winningelections. ust as pro#its are the li#eblood o# themarket entrepreneur/ votes are the li#eblood o#the politician.

Bationally unin#ormed voters o#ten must beconvinced to DwantE a candidate.

Fegislative bodies are something like a oardo# 5irectors


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Civil 8ervants (Government Bureaucrats) as olitical articipants+

ureaucrats (persons that handle day7to7day operations o#government) seek promotions/ "ob security/ power/ etc.

,he interests o# bureaucrats are o#ten complementary withthose o# interest groups they serve. ,his is called theCA,B& problem.

ureaucrats can usually e'pand their own interests/ as wellas that o# their constituents/ by working #or larger budgets

and program e'pansion.


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+ther things constant( legislators "ill have a strongincentive to support political actions that providevoters "ith large total !ene$ts relative to costs.

I# a government pro"ect is really productive/ it will always be

possible to allocate the pro"ectGs cost so that all voters will gain. hen voters pay in proportion to bene#its received/ all voters will

gain i# the government action is productive (and all will lose i# it is

unproductive.) nder these circumstances/ there is a harmony

between good politics and economic e##iciency.

>)en ?oting >orks >ell

d b


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?oter

&dams

C)an

*reen

"ee

Dia@

/otal

/&A P&YMEN/,enefits

!eceived9$:

B#'

$#

1

#

#

B1'

Plan A 9#:

B 5

5

5

5

5

B#5

Plan B 98:

B$#45'

645'

#45'

$4#5

$4#5

B#54''

4 Consider the government program above. As with many such programs/ individuals receive varying levels o# bene#its.

4 I# ta' plan is adopted to #und this program/ it may be simple and

seem #air/ but even as Adams is getting a real deal (values the program at =20 and only pays =?) reen/ Fee/ and 5ia9 do not evenreceive the value o# their ta'es paid in bene#its.

4 hen each voter pays in proportion to bene#its received (ta' plan *)/each receives more in bene#its than it costs them in ta'es. I# ta' plan

* is used/ all voters gain and the program would pass unanimously.,his e'ample shows that harmony between good politics and economic

e##iciency can e'ist.

Beneits !erived by "oters rom #ypot$etical %oad onstruction 'roject


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hen /oting ,on0icts "ith Economic Eciency


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pecial Interest E1ect

- generates substantial personal beneits or a

small number o constituents $ile imposing a

small individual cost on a large number o ot$er

voters.

Interest group members will #eel strongly about

an issue that provides them with substantial

personal bene#its. 8uch issues will dominate

their political choices.

oliticians have a strong incentive to #avorspecial interest even i# action is ine##icient.

+ogrolling and por,-barrel legislationstrengthen the special interest e##ect.

>)en ?oting Conflicts(it) Economic Efficienc+

"ote rading and 'assing


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4 In total/ / */and . voters come out ahead despite the costs involved in paying

ta'es #or activities in other districts i# they agree to vote together.

4 In total/ the sum o# bene#its #or the group o# all voters come outnegative despite the positive bene#its #or district / */ and . voters.

4 ,he bene#its to / */ and . voters vary by pro"ect.

4 Consider a composite bill in Congress that would build a post o##icein district / dredge a harbor in */ and construct a military base in . .

"ote rading and 'assingounterproductive *egislation

Construction ofPost Office

In A

Dredging0arbor

In B

?oters of

District

&

,

C

D

E

/otal

Net ,enefits 9: or Costs 9-: /o Eac) ?oter in District

B$' - B'8 - B'8

- B'8 B$' - B'8

- B'8 - B'8 B$'

- B'8 - B'8 - B'8

- B'8 - B'8 - B'8

Construction of Militar+ ,ase

In

B1

B1

B1

- B7

- B7

- B'# - B'# - B'# - B2

/otal

0e assume te districts are of eual si3e4

4 ith this bill/ there are no direct bene#its to district D and ! voters.

4 In a ma"ority rule voting system/ the ma"ority can pass counterproductivelegislation bene#iting themselves but creating negative net bene#its #or

the whole.


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hortsightedness E1ect 22 Issues that yield clearly dened current benets

at the expense of future costs that are dicult-to- identify.

olitical process is biased toward the

adoption o# such proposals even when theyare ine##icient.



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Rent eeking -- Actions by individuals and interest groups designed torestructure public policy in a manner that will eitherdirectly or indirectly redistribute more income tothemselves.

idespread use o# the ta'ing/ spending/ andregulatory powers o# government that #avor some atthe e'pense o# others will encourage rent seeking.

'ent see,ing moves resources away #rom productiveactivities. ,he output o# economies with substantialamounts o# rent see+ing will #all below their

potential.


>) ? ti C fli t


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3ack of Incentive for +perational Eciency

In the public sector/ the absence o# the pro#it motivereduces the incentive o# producers to keep costs low.

6either is there a bankruptcy process capable o#weeding out ine##icient producers.

ublic7sector managers are seldom in a position togain personally #rom measures that reduce costs.

ecause public o##icials and bureau managers spendother peopleGs money/ they are likely to be less

conscious o# cost than they would be with their ownresources.



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There is nothing in positive economics thatindicates one distri!ution of income is!etter than another.

A large and growing part o# government isdevoted to trans#erring income.


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There are three ma4or reasons "hylarge2scale redistri!ution "ill reducethe si)e of the economic pie:

hen ta'es take a larger share o# oneGs income/ the

individual reward derived #rom hard work and productive service is reduced.

As public policy redistributes a larger share o# income/more resources will #low into waste#ul rent seekingactivities.

Higher ta'es to #inance income redistribution and ane'pansion in rent7seeking will induce ta'payers to #ocusless on income7producing activities/ and more onactions to protect their income.


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&'ternal costs and bene#its

Fack o# competition ublic goods

oor in#ormation

*u!lic ector /s. Market ector: A Summary


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The po"er of special interests

,he shortsightedness e##ect

Bent seeking costs Fack o# signals and incentives to

promote operational e##iciency


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'oth !ad ne"s and good ne"s 0o"from pu!lic2choice analysis:

,he bad news+

For certain classes o economic activity,

unconstrained democratic government ill predictably be a source o economic aste and

ineiciency

,he good news+

'roperly structured constitutional rules canimprove t$e expected result rom government

Im%lications of Public C)oice etting 5ore 6rom overnment

Structure of Budget & Accounts:


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Structure of Budget & Accounts:

*overnment &ccount

Consolidated 1und o# India Contingency 1und o# India ublic Account o# India

8mall savings

5eposits

Advances

Beserve 1unds

8uspense

%isc.

Bemittances

Cash alance

Bevenue Account Capital Account

Beceipts Beceipts &'penditure

eneral 8ervices

8ocial services

&conomic 8ervices

rants7in7aid Contributions

ublic 5ebt

Foans Advances

,a' Bevenue

6on7,a' Bevenue

rants7in7aid

Contributions

&'penditure

eneral services

8ocial 8ervices

&conomic 8ervices

rants7in7aid Contributions


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5ead In ,rore of Rupees Ta# Revenue 6(67(896.; ;.6

,apital Receipts ?(86(@??.?; Grand Total1 6,65,297.32


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5ead In ,rore of Rupees

Interest Receipts =9(9?7.@

-ividends and *ro$ts 9(6??.?

Fiscal ervices 69.6;

%eneral ervices =;(;>7.9=

ocial ervices ;(?67.7;

Economic ervices ?;(@9;.?7

%rants =7>?.=

.@=

Grand Total 172252.38



45/45

e have !een talking a!out de$cit for some time here( andif you look at these num!ers a!ove B ?.?C of the totalrevenues are capital receipts( and 68C of those capitalreceipts are !orro"ings. o( e1ectively "e !orro" ;@.C of"hat "e have to spend. That&s 4ust too high( and has to !e!rought under control. hen you look at it from this conte#t("idening the ta# !ase and !etter compliance is inevita!le ifyou have to get this num!er under control.


Recoveries of3oans D Advances

=8(?>7.88

Misc. ,apitalReceipts

>>(6=7.88

Govt Sector

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