Chapter 9Chapter 9Government’s Role in the Government’s Role in the

EconomyEconomy

Section ASection APublic Goods and ServicesPublic Goods and Services

• Provided by govt. on an equal basisProvided by govt. on an equal basis• Examples?Examples?• Why doesn’t the private sector Why doesn’t the private sector

provide these goods?provide these goods?• Principle of ExclusionPrinciple of Exclusion

– Profit motiveProfit motive– Not available to everybodyNot available to everybody– ““Pay to play”Pay to play”

ExternalitiesExternalities

• Effects (both good and bad) for Effects (both good and bad) for resources being allocated incorrectly. resources being allocated incorrectly. “External” “External” costscosts (unseen) to society. (unseen) to society.

• Examples? Positive and NegativeExamples? Positive and Negative

Positive ExternalityPositive Externality

Negative ExternalityNegative Externality

• Where is the Where is the negative negative externality?externality?

• Dead Weight Loss?Dead Weight Loss?

Redistribution of IncomeRedistribution of Income

• How does govt. redistribute income?How does govt. redistribute income?

• How much support should be given How much support should be given to the poor?to the poor?

Examples of RedistributionExamples of Redistribution

• Transfer Payments: Cash benefitsTransfer Payments: Cash benefits• Transfer in Kind: (Non-cash)Transfer in Kind: (Non-cash)

– Food StampsFood Stamps– Medical careMedical care– Low-cost housingLow-cost housing

• Payments to IndividualsPayments to Individuals– What is the most important thing What is the most important thing

revealed by chart on pg. 242?revealed by chart on pg. 242?

Payments to IndividualsPayments to Individuals

• Largest portion of budgetLargest portion of budget

• How much did it grow between 1960-How much did it grow between 1960-1970?1970?

• 1970-1980?1970-1980?

• Should we be worried?Should we be worried?

Section BSection BTaxes and the EconomyTaxes and the Economy

• Why are taxes necessary?Why are taxes necessary?• Two basic principlesTwo basic principles

– Benefits ReceivedBenefits Received•Those who use it, pay itThose who use it, pay it•Ex. Gas taxEx. Gas tax

– Ability-to-PayAbility-to-Pay•Richest should pay higher burdenRichest should pay higher burden•Progressive tax (Income Tax)Progressive tax (Income Tax)•How much of total taxes do the richest pay?How much of total taxes do the richest pay?

• Productivity principleProductivity principle– Tax laws that encourage efficiency and Tax laws that encourage efficiency and

productivity (corp. tax deductions for productivity (corp. tax deductions for equip.)equip.)

• Least Likely to Offend PrincipleLeast Likely to Offend Principle– Who can I tax and not lose votes?Who can I tax and not lose votes?

Burden of TaxationBurden of Taxation

• ProgressiveProgressive•How much of total taxes do the richest pay?How much of total taxes do the richest pay?

• Regressive taxRegressive tax– Poor hit hardest as percent of incomePoor hit hardest as percent of income

•Sin TaxesSin Taxes

• Proportional TaxProportional Tax– Flat Tax proposalsFlat Tax proposals– Same percentage across the board.Same percentage across the board.

Federal, State, and Local Federal, State, and Local TaxesTaxes

• FederalFederal– Personal Income 5-36%Personal Income 5-36%– Social InsuranceSocial Insurance

•Medical, Social SecurityMedical, Social Security

– Corporate IncomeCorporate Income•Tax on profitsTax on profits

– OthersOthers•Estate, TariffsEstate, Tariffs

State and Local RevenuesState and Local Revenues

• Sales TaxSales Tax

• Property TaxProperty Tax– Usually funds educationUsually funds education

• Income TaxIncome Tax

• License FeesLicense Fees

• Intergovernmental RevenueIntergovernmental Revenue

Section C: Government Section C: Government SpendingSpending

• Public Decision MakingPublic Decision Making– ContradictionsContradictions

•Good for people vs. ReelectionGood for people vs. Reelection

•Good politically vs. Good economicallyGood politically vs. Good economically

– Public also to blamePublic also to blame•““What have you done for me lately”What have you done for me lately”

– Programs Hard to StopPrograms Hard to Stop• Inefficiencies can go on and on.Inefficiencies can go on and on.

Writing the BudgetWriting the Budget

• President drafts spending billPresident drafts spending bill

• Congress passes billCongress passes bill– Compromise usually needed between Compromise usually needed between

conservatives and liberalsconservatives and liberals

• Pork Barrel LegislationPork Barrel Legislation– Spending used to gain votes in your Spending used to gain votes in your

districtdistrict

Section D:Section D:The Problem of the National The Problem of the National DebtDebt• Good or Bad?Good or Bad?

• Bad: Used only for consumptionBad: Used only for consumption

• Good: Used for future growthGood: Used for future growth

National DebtNational Debt

How does this graph change How does this graph change the debt picture?the debt picture?