Kinh tế học - Chapter 6: Government and the economy

Chapter 6Government and the EconomyMcGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Learning ObjectivesDiscuss the changes in the economic role of the government over time, including the New Deal and deregulation.Explain the benefits of government action.Describe the limits and downsides of government action.List and illustrate circumstances in which government intervention in the economy may be useful.6-2Private versus Public SectorsEconomists generally believe that providing goods and services through the private sector is preferable to having it supplied by the government. Private sector includes privately owned businesses and shareholder-owned corporations.Public sector includes the federal, state, and local government.The public sector provides goods and services, collects taxes, and regulates industry.6-3Private versus Public SectorsHow large the public sector should be and what goods and services it should provide are the subject of heated debate among economists.Controversial questions include:Should the government or the private sector be the main provider of health care?Should the government regulate the gas mileage of automobiles?Should passenger trains be funded and operated by the government?6-4The Changing Role of GovernmentToday, the government plays a large role in the economy.But 80 years ago, the role of the government was much smaller.The change in the government’s role occurred during the Great Depression, beginning in 1929.Economic conditions were so bad that people began to look to the government for help. 6-5The Great Depression and the New DealBecause of the Great Depression, businesses and voters demanded that the federal government do something to stimulate the economy.The Roosevelt Administration proposed a series of programs called the New Deal.Many of the New Deal programs are still with us today.6-6Programs Created During the New DealProgramWhat it Does TodaySocial SecurityFinancial support for elderlyUnemployment insuranceFinancial support for the unemployedSecurities and Exchange CommissionProtection for stock market investorsFederal Deposit Insurance CorporationProtection for bank depositors from bank failuresFederal minimum wageMinimum wage for workersBan on Child LaborTight restrictions on children being forced to workWelfare for dependent mothers and children Financial support for poor families6-7Era of Government GrowthAfter World War II and during the decades of the 1950s, 1960s, and 1970s the role of government gradually expanded.This occurred during both Democratic and Republican administrations.The Interstate highway program was started during the term of President Eisenhower.The space program was started during the term of President Kennedy.6-8Era of DeregulationBeginning in the mid-1970s, the public began to feel the role played by government in the economy had grown too far.The mid-1970s was the start of the era of deregulation, when the role of government in the economy was reduced. Deregulation is defined as the reduction of government control over particular industries.6-9Era of DeregulationPresident Carter began the move toward deregulation when he rolled back government oversight of the airline and trucking industries. The deregulation movement got into full swing during the term of President Reagan.The goal of the deregulation movement was to restrict the role of the government in the economy and reduce government spending and employment.6-10Era of DeregulationThe philosophy under the Reagan Administration shifted to the less government, the better.Despite the anti-government movement, the role of the public sector in today’s economy remains very significant, and much higher than the pre-Depression level.6-11Comparing Government Spending in Different Countries (2009)In comparison to other countries, role of the public sector in the US economy is relatively small.0102030405060KoreaJapanUnited StatesCanadaSpainGermanyUnited KingdomFrance SwedenGovernment 2009 outlays as percent of GDP6-12The Benefits of Government ActionThe role of government is to protect against external threats.The goal of giving everyone at least a high school education (through public schools) is achieved by government action.Government plays key role in encouraging technological change by funding basic research.6-13The Benefits of Government ActionGovernment plays a key role in managing global trade by establishing trade agreements.Government plays a key role in supervising and regulating the financial markets.Government action is required when there are deficiencies in private markets (market failure).An example of a market failure is pollution.6-14Downsides of Government ActionThere are several problems with government intervention in the economy.First, public sector managers face an incentive problem, since there isn’t a need to make a profit.Second, government often suffers from a lack of flexibility and innovation.6-15Downsides of Government ActionThird, the bigger the role that the government plays in the economy, the more it pays for businesses and individuals to lobby public officials. Lobbying is what economists call rent-seeking behavior.Rent-seeking behavior means that companies spend money trying to influence the government, rather than cutting costs or improving products. 6-16Downsides of Government ActionFinally, the main argument against government intervention has to do with the inefficiency of taxation.The imposition of a tax means the seller receives less than the buyer pays.Since sellers receive less than they would in a competitive market, they reduce their quantity supplied.Buyers also reduce their quantity demanded, since they pay more.6-17Common TaxesSome of the common taxes include:IncomeSalesExcisePayroll Corporate EstateProperty or wealthCapital gainsCarbon tax6-18Inefficiency of Taxes Market demand curvePre-tax quantityPre-tax price paid by buyers and received by sellersPrice of chairsAfter-tax quantityQuantity of chairsMarket supply curveAfter-tax price paid by buyersAfter-tax price received by sellersTax of $20 per chairABC6-19The Right Role for Government Economic PolicyIn cases of market failures and where the pluses of government actions are greater than the minuses, there is a role for government intervention.One can justify government intervention in the following circumstances:Public good provision, market regulation, externalities, and income redistribution. 6-20Public Goods ProvisionPublic goods benefit many people in a city, region, or country to some degree.In contrast, private goods only benefit the buyer and his or her family.Public goods include national defense, police and fire protection, the road system, primary and secondary education, and public health efforts such as clean water. 6-21Public Goods ProvisionPublic goods face the free rider problem.People benefit from public goods even if they don’t pay for them. Thus, they get a free ride from everyone else’s contribution.Government can solve the free rider problem by forcing everyone to pay through taxes. One of the most important public goods provided by government is basic research.6-22Market RegulationGovernment sets the rules for market competition.While markets, in theory, can set their own rules, it is easier and more workable for the government to set them.Government regulators monitor the safety of products from autos to drugs, protect consumers against defective products, watch the financial system, etc.6-23Example of Government AgenciesThe Federal Trade Commission (FTC) and Department of Justice (DOJ) are responsible for enforcing antitrust laws.Antitrust laws make sure companies don’t unfairly try to get market power or reduce the amount of competition in a market or industry. They must approve mergers and acquisitions that companies make, and watch for signs of price-fixing.6-24ExternalitiesAn externality is the secondary impact that market transactions can have on others.With externalities, the benefit achieved from a market economy may break down (market failure).Externalities can be either positive or negative.6-25ExternalitiesAn example of a negative externality is pollution.A factory that emits dangerous fumes is imposing a negative externality on the nearby community.Positive externalities come about when your actions benefit other people.A network externality means that your decision to use a network affects the value of that network to other people. 6-26Income RedistributionAn important economic function of government is income redistribution - the shifting of money from rich to poor in order to narrow big income differences. This is accomplished through the tax system and through government programs such as Medicare.The role that government should play in helping the poor is a controversial economic policy issue.6-27