What is Public Finance? How the gov’t raise money? How that money is spent? How those activities affects on economy and society? Chapter 1 Introduction to Public Finance 1 In Em, M. Sc. in Economics
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What is Public Finance?How the gov’t raise money?How that money is spent?How those activities affects
on economy and society?
Chapter 1Introduction to Public Finance
1 In Em, M. Sc. in Economics
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slide 1: Introducing chapter 1. Today we start chapter 1 on the introduction to public finance. There three import questions you should consider in this first chapter, including: what is the public finance? How the government raise money? How that money is spent? And how those activities affect on economy and society?
Learning Objectives Brief review of Microeconomic
Introduction to Public Finance
Public Finance Definition and Concept
People’s Views of Public Finance: Organic and Mechanistic Views of the Government
Summary of the chapter
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Slide 2: Learning objectives The learning objectives of this first chapter are about brief review of microeconomics, introduction to public finance (mainly focus on definition and concept of public finance and the people’s view of the public finance, organically and mechanistically) and the last is summary of the chapter.
1. Brief review of Microeconomics
Supply,
Demand,
Equilibrium,
Utility, and
Budget constraints
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Slide 3: Brief review of microeconomics Now let’s start with the brief review of the microeconomics. Here we will focus only on five import points such as supply, demand, equilibrium, utility and budget constraints.
1. Supply and Demand
Supply, demand, and equilibrium
In equilibrium, the supply and demand curves intersect
When quantity supplied is higher than quantity demanded, then, there is a push for prices to go down
Excess supply or Supply surplus Price decrease
When quantity supplied is lower than quantity demanded,then, there is a push for prices to go up
Excess demand or Supply shortage Price increase
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Slide 4: Supply and Demand The key points here are supply, demand and equilibrium. What is equilibrium? How it relates to supply and demand? Definitely, equilibrium is the intersect point of supply of demand curve. Economically, the term equilibrium itself could refer to the price or quantity, namely equilibrium price or equilibrium quantity or amount or number of quantities demanded and supplied in the market. The relationship of price and quantities supplied and demanded are that when quantity supplied is higher than quantity demanded, then, there is a push for prices to go down. This situation will create excess supply or supply surplus, which results from the decrease in price. However, when quantity supplied is lower than quantity demanded, then, there is a push for prices to go up. This situation will create excess demand or supply shortage, which results from the increase in price.
1.2. Supply and Demand Curves
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Slide 5: Supply and Demand Curve Here is Demand and Supply Curves. It represents movements of quantities demanded and/or supplied as long as the level of price changes In other word, movements along the demand and/or supply curves cause by the change in price of goods and/or services in the market
1.3. Equilibrium: Price and Quantity
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State where the quantity demanded and quantity supplied are balanced is called “Equilibrium”.
Equilibrium quantity is a quantity buyers and sellers are able to trade with a reasonable price.
Equilibrium price is a price at which consumers are able to pay and sellers are willing to accept.
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Slide 6: Equilibrium price and quantity As I mention in the earlier slide Equilibrium refers to the state where the quantity demanded and quantity supplied are balanced. In this sense, the Equilibrium quantity is a quantity buyers and sellers are able to trade with a reasonable price, and the Equilibrium price is a price at which consumers are able to pay and sellers are willing to accept. Referring to the graphic plotted in this slide the equilibrium price is 6 and the equilibrium quantity is 4.
1.3.1. Example of excess demand
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Slide 7: Example of excess demand In this slide, we observe an example of the excess demand. What is excess demand? Excess demand is a situation that consumers have ability to pay and willing to buy goods and/or services at specific price but firms cannot have enough supply. In other word, when the excess demand existed, a quantity demanded is larger than a quantity supplied, which mathematically means that QD > QS or QS < QD. It can also be called “Shortage or supply shortage”, meaning that there is not enough supply in the market . This fact causes to increase in the price of goods and services, in short run and push the equilibrium point to move away from the original or normal point. But in the long run the market could be adjusted and the equilibrium point will move to the normal point.
1.3.2. Example of excess supply
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Slide 8: Example of Excess Supply Here we look at the example of excess supply. What is excess supply? Excess supply is a situation that firms have ability to produce and sale more goods and/or services in the market at specific price but consumers do not have ability and willingness to buy at that price. In other word, a quantity demanded is lower than a quantity supplied, which bathetically means that QD < QS or QS > QD. This situation can also be called “Supply surplus”, which will cause to decrease in price of goods and services, in short run. Again, in the long run the market will be adjusted to the normal situation
1.3.3. Factors of demand
Price: Higher price lower quantity demanded Income: Most goods are normal Normal goods: Higher income means higher demand
Price of related goods: (complements, substitutes) Tastes and preferences: (sweet, smell ...) Information: (cholesterol, side affect...) Expectation : (future expectation of customers ... ) Market size change: (Increase in total population ...) Government policies & actions: tax rate, price control
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Slide 9: Factors of Demand Law of Demand: Demand curve has a downward slope, it means A drop in price results in an increase in quantity demanded (holding other factors constant).
1.3.4. Factors of supply Price: Higher price higher quantity supplied Price of inputs or costs products Government policies (rules and regulations ) Technology Weather
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Slide 10: Factors of Supply What happens to the quantity supplied as the price changes, holding all other factors constant? Supply curve is a concise summary of a movement of quantity supplied along the supply curve as price increases, (holding other variables constant) Supply curve is an upward slope. It means “Quantity supplied increases as result of increase in price” There is no law of supply. It means supply curve may be upward sloping, vertical (perfect competition), horizontal (with subsidy) or downward sloping (monopoly?)
1.3.5. Shift in demand;movement along supply curve
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Slide 11: Shift in demand Affect of factors other than price causes a shift of “Demand Curve” along the supply curve These factors include: income level, price of related goods (substitute goods and complement goods), taste and preference, government action, information
1.3.6. Shift in supply; movement along demand curve
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Slide 12: Shift in supply Affect of factors other than price causes a shift of “Supply Curve” along the demand curve These factors include: Price of inputs or costs products Government policies (rules and regulations ) Technology Weather Government policies refers to: Ceiling price: price controls, usury laws, rent control Floor price: minimum wage Quotas : (restriction on supply) Taxes and tariffs: (tax on imports only)
1.4. Utility Utility is a level of satisfaction or happiness or amount
of happiness of consuming goods or services Utilities properties: sign matters: (positive and negative numbers) bigger is better: (The greater the positive utility number,
the more happiness the consumer receives and conversely for the negative utility number)
ordinal but not cardinal: (Utility numbers can be compared, but not countable. i. e., a utility of 6 is better than a utility of 3, it is not necessarily to calculate)
Total utility = real utility + transaction utility
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Slide 13: Utility Utility properties: sign matters: positive utility numbers (i.e. numbers greater than zero) indicate that consuming a good makes the consumer happier. Conversely, negative utility numbers (i.e. numbers less than zero) indicate that consuming a good makes the consumer less happy. bigger is better: The greater the utility number, the more happiness the consumer receives from consuming an item. (Note that this is consistent with the first point, since large negative numbers are smaller, i.e. less than, small negative numbers.) ordinal but not cardinal properties: Utility numbers can be compared, but it doesn't necessarily make sense to perform calculations with them. In other words, while it is the case that a utility of 6 is better than a utility of 3, it is not necessarily the case that a utility of 6 is twice as good as a utility of 3. Similarly, it's not necessarily the case that a utility of 2 and a utility of 3 would add to a utility of 5.
1.4.1.Types of Utility Total utility: is a full of happiness or satisfaction
achieved from consumption of specific goods or services Total utility = real utility + transaction utility
Average utility (AU): refers to level of utility get from a unit of goods or service consumed AU(c) = U(c)/c, for single goods and c is quantity used AU(c1, c2, ...) = U(c1, c2, ... )/(c1+c2+ ...), for multiple goods
Marginal utility (MU): refers to additional satisfactionof utility gained from an extra unit of consumption MU(c) = ∆U(c)/ ∆c
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Slide 14: Types of Utility Total utility is a sum of real utility and transaction utility Real utility refers to what you really get from consuming thing (goods or service): e. g. Get one ice cream cone free after one hour waiting in line. Transaction utility refers to what you feel of the thing you get from consuming thing (goods or service): e. g. Your feeling of getting one ice cream cone free. Total utility increases as quantity of goods or services consumed increases. Total utility curve has a upward slope Marginal utility decreases as quantity of goods or services consumed increases, meaning that it has downward slope in a diminishing law
Example: bananas and utility
Notice this example, where the utility level is a function of the number of bananas consumedCommon unit of utility
is called a “utils”Typically assume non-
satiation or not full eating.
Banana quantity
(bananas)
Total utility (utils)
0 0
1 70
2 120
3 150
4 160
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Slide 15: Example of Utility Level of Utility is a function quantity of goods or services consumed: Utility=U(C) Total utility from one goods consumption is TU=U(c) Total utility from multiple goods consumption is: TU=U(c1, c2, ...)
Example: total and marginal utility
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Slide 16: Example of total and marginal utility Level of Utility is a function quantity of goods or services consumed: Utility=U(C) Total utility from one goods consumption is TU=U(c) Total utility from multiple goods consumption is: TU=U(c1, c2, ...)
1.4.2. Two goods and utility
An indifference curve that is further from the origin has higher utility U2 > U1 > U0
Increasing utility U0
U1
U2
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1.5. Budget constraints Assume that each person has wants that are above the
resources available to her/his consumption Consumption must be made from resources available A consumption choice set is the collection of all
consumption choices available to the consumer. What constrains consumption choice?Budget, time, and other resource limitations.
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Slide 18: Budget constraints Budget constraint is the upper boundary of the consumers’ budget set. Consumer’s budget set is the set of all affordable bundles; which mathematically stated as B(p1, … , pn, m) = {(x1, … , xn)|x1 ≥ 0, … , xn ≥ 0 and p1x1 + … + pnxn ≤ m } and m is consumer disposable income, which represents amount of budget available.
1.5.1. Budget constraints for 2 goods
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1.5.2. Budget constraints: slope
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1.5.3. Substitution and income effects
When the price of a good changes, there are two things happen: Income effect: change in quantity due to level
of income Substitution effect: change in quantity due to
change in relative prices or price of related goods or service
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1.5.3. Substitution and income effects
Income effect E1 to Ec
Substitution effect Ec to E2
Note that budget lines to calculate income effect are parallel
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Slide 22: Substitution and income effects Definition of “Substitution Effect” The idea is that as prices rise (or incomes decrease) consumers will replace more expensive items with less costly alternatives. Definition of “Income Effect” The idea is that as the wealth of individuals or income increases, the quantities demanded of goods or services also increases and lower-priced or inferior commodities are eschewed or replaced for more expensive, higher-quality goods and services.
1.5.4. Consumer surplus
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Slide 23: Consumer surplus Definition of “Consumer Surplus” Is an economic measure of consumer satisfaction, which is calculated by analyzing the difference between what consumers are willing to pay for a good or service relative to its market price. CS=1/2QE× (a-PE) or CS=1/2Q1×(a-P1), where: QE=Q1 is equilibrium quantity, PE=P1 is equilibrium price and “a” is intersect of demand curve and price axe. A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price. For example, assume a consumer goes out shopping for a CD player and he or she is willing to spend $250. When this individual finds that the player is on sale for $150, economists would say that this person has a consumer surplus of $100.
1.5.5. Producer surplus The producer surplus is shown
by area above the supply curveand below the market price.
When P = 25 per unit, shaded area is approximate producer surplus
Area is a triangle, one-half times length times height 1/2 10 25 = 125
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Producer surplus Definition of “Producer Surplus” Is an economic measure of the difference between the amount that producer of a good receives and the minimum amount that he would be willing to accept for the good. PS=1/2QE×(PE-c), where PS is Producer surplus, QE is equilibrium quantity and PE is equilibrium price and “c” is the intersect of the price axe and supply curve. The difference or surplus amount, is the benefit that the producer receives for selling the good in the market. For example, say a producer is willing to sell 500 widgets at $5 a piece and consumers are willing to purchase these widgets for $8 per widget. If the producer sells all of the widgets to consumers for $8, it will receive $4,000. To calculate the producer surplus, you subtract the amount the producer received by the amount it was willing to accept, (in this case $2,500), and you find a producer surplus of $1,500 ($4,000 - $2,500).
Summary: Microeconomics review
Many microeconomic tools are needed to do with the public finance
Some of the tools that we will use are based on: supply, demand, utility, and budget constraints
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2. Introduction to Public finance
Topics should be considered in public finance Definition and concept of public finance People’s view of the public finance
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Slide 26: Introduction to public finance There are 3 critical points, I wish to share with your with regard the introduction to public finance in this part. The first is “relevant topics including in study public finance” The second is “definition and concepts of the public finance” The third is “the people view of public finance”
2.1 Topics including in public finance
We will study topics in which many argue that government intervention is justifiedPublic revenues generationPublic goods and markets with externalities Subsidized educationHealth care, Social Security, and Income redistribution
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Slide 27: Topics including in public finance Public finance is about how the government raises funds and spends the money on various kinds of services for the economy and society. In this sense, it shows off the government action in the market, which is normally know as “government intervention” Therefore, the relevant topics including in the public finance are those of: public revenues generation or tax collection, public goods and markets with externalities, subsidized education, public health or health care, social security and income redistribution
2.2. Definition and Concepts of PF What is public finance? public economics on how money is raised, spent, and
it effects on economy and society. Why public finance is need? to support provision of public goods and services to intervent market failure to assure social welfare public revenue and expense enable implementation
of the above 3 roles mentioned, How public finance affect the economy? overall performance of economy economic growth and employment
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Slide 28: Definition and concept of public finance What is Public Finance? Public Finance, field of economics concerned with how gov’t raises money, how that money is spent, and the effects of these activities on the economy and on society. Public Finance studies how gov’t at all level--national, state, and local--provide the public services desired and how they secure the financial resources to pay for these services delivery. As evidence, in many industrialized countries, spending and taxation by the gov’t form a large portion of the nation’s total economic activities. For example, total gov’t spending in the United States equals to about 40% of the nation’s GDP. Why Public Finance is needed? Gov’t provides public goods--gov’t financed goods and services such as roads, military forces, education, health care, social welfare, lighthouses, and street lights, etc. because the private citizens would not voluntarily pay for these services, as the business companies have no incentive to produce them. Public finance also enables gov’t to correct offset undesirable side effects of a market economy. These side effects are called “spillovers or externalities”. Example: households and industries may generate pollution and release it into the environment without considering the adverse effect of pollution has on others. Pollution is a spillover because it affects people who are not responsible for it. To correct spillover, gov’t can encourage or restrict certain activities. For example, governments can sponsor recycling programs to encourage less pollution, pass laws that restrict pollution, or impose charges or taxes on activities that cause pollution. Public finance provides gov’t programs that moderate the income of the wealthy and the poor. These programs include social security, welfare, and social programs. For example, some elderly people or people with disabilities require financial assistance because they cannot work. Gov’t redistributes income by collecting taxes from their wealthier citizens to provide resources for their needy ones. The taxes fund programs that help support people with low income. Public Spending Each year national, provincial, and local gov’t creates a budget to determine how much money they will spend during the upcoming year. The budget determines which public goods to produce, which spillovers to correct and how assistance to provide to financially disadvantaged people. The chief administrator of gov’t--such as the prime minister, the governor, or the mayor--proposes the budget. The legislature--such as the parliament, provincial council, municipality council, district council, or commune council--ultimately must pass the budget. The legislature often changes the size and composition of the budget, but it must not make change that the chief administrator will reject and veto. Gov’t spending can take two form: Exhaustive spending and Transfer spending Exhaustive spending: Refers to purchases made by a gov’t for the production and/or creation of public goods or services For example, to construct a new harbor, the gov’t buys and uses resources from the economy, such as labor and raw materials. Transfer spending: Refers to a type of spending when the gov’t transfers income to people to help them support themselves (subsidy). Transfers can be taken in one of two kinds: in cash or in-kind Cash transfers are cash payments, such as social security checks and welfare payments, health care coupon for the poor, for example. In-kind transfers involve no cash payments but instead transfer goods or services to recipients. Example of in-kind transfers includes food stamp coupons and Medicare. Public Revenues Gov’t must have funds or revenues to pay for their activities. Gov’t generates some revenues by charging fees for the services they provide, such as entrance fees at national parks, national museum, or tolls for using a highway. However, most gov’t revenues come from taxes, such as income taxes, capital taxes, and sales and excise taxes. An important source of tax revenues in most industrialized countries is the income or payroll tax, which is also known as the “personal income tax”. Income taxes are imposed on labor or activities that generate income, such wages or salaries. As evidence, in the United States, income taxes account for about half of the total revenues of local, state, and federal gov’t combined. Another important source of gov’t revenue is the capital tax. Capital includes items or facilities that generate profits, such as factories, business machinery, and real estate. Some types of capital taxes are known as “Profits” taxes. One kind of capital tax used by the federal gov’t in the United States is the corporate income tax. A property tax is a capital tax used by states and local gov’t. Property taxes are levied on items such as houses or boats. Sales and excise taxes are also a major source of government tax revenues. Many state and local gov’t levy a sales tax on the purchase of certain items. Consumers usually pay a percentage of the sale price taxes are used by levels of government. An excise tax is levied on a specific product, such as alcohol, cigarettes, or gasoline. In Canada and many European, South American, and Asian countries, a value-added tax (VAT) provides significant revenues. The VAT is levied on the value added to product during production as its components are assembled into final goods. For example, a clothing manufacturer might spend $ 500 on fabric, thread, zippers, and other goods required to make dresses. The manufacturer then adds $1000 to cover the cost of labor and the use of the machines and equipment and sells the dresses for a total cost of $1500. The value-added tax is paid on this $1000. How Public Finance Affects the Economy? Gov’t spending and taxation directly affect the overall performance of the economy. For example, if the gov’t increases spending to build a new highway, then the construction of the highway will create jobs. Jobs create income that people spend on purchase, and then the economy tends to grow. The opposite happens when the government increases taxes. Households and business have less of their income to spend, they purchase fewer goods, and economy tends to shrink. Fiscal Policy A government’s fiscal policy is the way the gov’t spends and taxes to influence the performance of the economy. Government Deficits When the gov’t spends more than it receives, it runs a deficit. Gov’t finances deficits by borrowing money, which is also called “deficit spending”. Deficit spending refers to spending funds which is obtained by borrowing instead of taxation. Deficit spending can be helpful for the economy. Example: When unemployment is high, the gov’t can undertake projects that use workers who would otherwise be idle. The economy will then expand because more money is being pumped into it. However, deficit spending also can harm the economy. When unemployment is low, a deficit may result in rising prices, or inflation. The additional gov’t spending creates more competition for scare workers and resources and this inflates wages and prices.
2.2. Definition and Concepts of PF
There are at least two other terms that mean the same thing as “Public Finance”:Public sector economicsPublic economics
All these are of the “Government” The three terms are interchangeably used to mean
the same thing I will usually use the term “public finance”
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Slide 29: Definition and concept of public finance (continued) Public finance is a subject that study on the way in which the government is normally used to raise funds and how they spend those money on various kinds of services for the economy and society, or in other word for public service delivery. So public finance is concerned with The revenue and expenditure of the government. What is the government? The government is referred to as public sector or a collection of all household family and other in a countries. In economics, how large or small the government or the public sector’s size is measured in comparison to as percentage of the amount of public expenditure to GDP.
Review concept of Public Finance
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Public FinancePublic Economics
Public Sector Economics
Government Functions and Roles
Provision of Public Goods and Services• Revenues Collection• Expenditures Allocation• Market Intervention
People’s View on Public Finance
In Em, M. Sc. in Economics31
Public Finance orGovernment
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Mec
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• Plato• Adam Smith• Lenin• Adolf Hitler
2.3. People’s views on Public Finance
Different people have different views about the Public Finance with regard the relationship betweenthe individual and the state.Organic view of governmentMechanistic view of government
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Slide 30: People view on public finance Different people have different point of views. Therefore, we can view the same thing in different way. It is the same for the view of Public Finance or Government. In other word, the views of how government should function in the economic sphere are influenced by ideological views concerning the relationship between the individual and the state. In the sense, political philosophers have distinguished two major approaches, which is called “Organic view of government and Mechanistic view of government” These two ideological approaches have influenced the people’s view on the “Public Finance or Government”. 1. Plato, Philosopher Plato was a philosopher in Classical Greece, born in 427 BC and died in 347 BC in Athens of Greece. He was also a mathematician, student of Socrates, writer of philosophical dialogues, and founder of the Academy in Athens, the first institution of higher learning in the Western world. (Wikipedia) 2. Adam Smith, Philosopher Adam Smith was a Scottish moral philosopher and a pioneer of political economy, born in 1723 in Kirkcaldy and died in 1790 in Edinburgh of UK. One of the key figures of the Scottish Enlightenment, Adam Smith is best known for two classic works: The Theory of Moral Sentiments (1759), and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter, usually abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. Smith is cited as the "father of modern economics" and is still among the most influential thinkers in the field of economics today. (Wikipedia) 3. Vladimir Lenin, Revolutionary Vladimir Ilyich Lenin was a Russian communist revolutionary, politician and political theorist, born in 1870 in Ulyanovsk of Russia and died in 1924 in Gorki Leninskiye, Russia. He served as the leader of the Russian SFSR from 1917, and then concurrently as Premier of the Soviet Union from 1922, until his death. (Wikipedia) 4. Adolf Hitler, Former Chancellor of Germany Adolf Hitler was an Austrian-born German politician and the leader of the Nazi Party, born in 1889 in Braunau am Inn, Austria and died in 1945, Berlin, Germany. He was chancellor of Germany from 1933 to 1945 and dictator of Nazi Germany from 1934 to 1945. (Wikipedia) These four famous people have much ideological influence on the way of people viewing or thinking of the “government or public finance” since they were alive and even at present world.
2.3.1. Organic view of government Government treats an entire society as a natural organism Each individual is part of the organism The government is the heart Individual, valued only by contribution to realize social goals
Social goals are different and set by the government The problem is “who is to represent government? and
how to choose the objectives of the society?”• Plato: realization of perfect rationality.• Hitler: realization of racial purity.• Lenin: realization of socialism
In spite of the many philosophers, it’s sill not clear what is natural for fulfilling the society.
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Slide 31: Organic view of government What is the organic view of government—public finance? Organic view of government is the idea of conceiving the gov’t form in comparison to an organism or body of human being. Society is a natural organism, each individual is part of the organism, and the government is the heart of the organism. In this case, in an organic view of government, individuals are valued only by their contribution to realize the social goals, which are determined by the government. It means that individuals are important only as part of the society, and the good of the individual is subordinate to the good of society. Meaning that society or community is more important than individual. The problem with this approach of view is that “who is to represent the government”. In this regard, there are three kinds of choices for the form of government or public finance to be considered: • Plato: realization of perfect rationality (libertarian or liberty). • Hitler: realization of racial purity (dictatorship). • Lenin: realization of socialism (socialism or communism). Social objectives can be distinguished, and the most important thing is how to choose the objectives of the society. Still, in spite of there are many philosophers, it is not clear what is natural for fulfilling a whole society.
2.3.2 Mechanistic view of government Government is needed for individuals to pursue
their individual goals “Invisible hand” (Adam Smith)Efficient markets under certain sets of conditionsProperty rights and lack of violence needed to
have efficient markets How much government beyond this, is debatableLibertarian: Small government needed Social democrats: Larger government needed
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Slide 32: Mechanistic view of government And what is the mechanistic view of government—public finance? Mechanistic view is another ideological approach of viewing government or public finance. In this approach, government is not an organic part of society. Rather, it is a contrivance (plan or framework) created by individuals to better achieve their individual goals. The point here is that, government is a contrivance (plan or framework) erected or created to further (advance) individual goals. In this sense, it is not yet clear how the government can reconcile and sometimes there is even conflicts of individual goals. However, at the center, attention here is the individual, not the group, not the society. It means that “the individual rather than the group is at center stage”. Therefore, the government exists for the good of the nation, but the problem is that “what is good and how government should achieve it”. The effort is that “ the government is trust, the state servants are trustees, and trust and trustees have been created for the wellbeing welfare of the nation”. The general consensus here is that: it is good for individuals when the government protects them from violence, for which reason it must have the power of coercion (enforce or command), otherwise there will be anarchy. In this regard, there are many debates and arguments along with this mechanistic view of government. Government is needed for individuals to pursue their individual goals. Those goals are to have “Efficient markets”. It means property rights and lack of violence is needed to have efficient markets (see Adam Smith “Invisible hand”) Adam Smith in his work called Wealth of Nations published in 1776 claimed that “government should protect a society against violence and the assaults (invade) of other independent societies… and every member of the society against injustice and oppression (abuse or misery) from any other member of the society.” However, J. S. Mill held (raised) that “the only reason for which a government should use its power to coerce any member of society against his will is to prevent him from injuring others.” But the point is that: “what is injury to others, and how great must this injury be to justify the use of state coercion?” The answer is that: the minimum that government should provide is protection and infrastructure necessary for the life of society. For example, lighthouses, roads, bridges, and the sewers ... etc. must be made available. Beyond this, how much government should do? Debatable!!! Within mechanistic view they distinguish into two forms “libertarian and social democrats”. Liberals, libertarians – those who believe in a very limited government and they argue against any further economic role for government. In classic liberals - government is legitimate (lawful or legal), but it oversteps (performs beyond) its boundaries and hence we must be watchful (careful) over what government is doing. In the eyes of libertarians – government is not a servant of society that sometimes errs, rather it acts as enemy to society. In the sense, classic liberals argue for a limited government, for laissez faire in combination with a limited but still active government. In American point of view, liberals are on the whole into race and gender orientation and abortion, while British liberals are really social democrats. Adam Smith exclaim that “Every man, as long as he does not violate the law of justice, is left perfectly free to pursue his own interest his own way”. It means that libertarians are extremely skeptical or doubted about the ability of governments to improve social welfare. This is why they need freedom as in the concept of “invisible hand” of Smith. Social democrats – those who believe that substantial or firm government intervention is required for the good of the individuals. It means that, government intervention is considerably required to assure benefits sharing to the unemployed or the disable through subsidies or other social security program. ... There is no hard and fast division, rather a sliding scale of view about the necessary scope of government intervention. Then, which one is good? Which one should be selected to be used?
2.3.3. Class activities
Determining what is “good”! Ideologically, what is “good” to one person may be
viewed as bad as others. Let’s do an activity to illustrate this With a statement from 1-9 In pairs or in group, read up 1 by 1 and mark “Yes” if
you agree and “No” if you disagree with the statement. Count number of “Yes and No” in each group or pairs. Tell the class the reasons why saying that.
Attention! There is no “right” or “wrong” answer, give your reasons or arguments.
35 In Em, M. Sc. in Economics
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Slide 33: Class activities In this task (class activities), you (students) are asked to work in pairs or in group of 3 to 5, and Please read the statements one by one from 1 to 9, and (Ask them to read!) Please note whether the team agree with the statement or not, (Ask them to note !) Please count of how many “Yes and No” and provide arguments or reasons for their judgment, (Ask them to count !) Please keep in mind that there is no “right or wrong” answers, (Remind them!)
Statements 1-5 I believe that reckless (careless) driving should be stopped
through government actions such as the use of police. I think that government should build and maintain
roads and highways. I believe that each baby needs to be securely buckled
into a car seat while riding in a car, to be enforced by the government.
I believe that each person in a moving car needs a seat belt on, to be enforced by the government.
I believe each driver needs liability insurance, to be enforced by the government.
36 In Em, M. Sc. in Economics
Statements 6-9
I believe the government has a right to regulate when each person can use the roads, and the route they take, in order to control traffic patterns.
I believe that the government has a right to prevent pilots of commercial aircraft from using a cell phone while actively flying.
I believe that the government has a right to prevent drivers of cars from using a cell phone while driving.
I believe that the government should charge a 90% tax rate on all income I earn in my lifetime.
public service, defense, ... Size of government: Number of workers, annual
expenditures, GDP or GNP, ... Sources of government revenues: Taxation, non-taxation,
privatization, grant, ...(see Hang Chuon Naron et al., : Public finance, 2009 for the Cambodia government )
38 In Em, M. Sc. in Economics
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Slide 38: Government at glance Now, let’s see government at glance. As legal framework, government is created in accordance with the constitution, which is a supreme law of the countries. Government can come to power through election or nomination (parliamentary or presidential). Base on the constitution, Cambodia is free market economy and democracy with pluralism. Furthermore, we have laws, sub-laws, regulations, circulations and other legal instruments. Another example, the constitution of Republic of Croatia – entrepreneurial and market freedoms are the basis of the economic organization of the Republic of Croatia. With this regard, the government makes sure that all enterprises have equal legal status on the market. The abuse of the monopolistic positions defined by law is forbidden. And the government encourages economic development and the welfare of the local governments and takes care of the economic development of all of is regions. As organizational framework and structures, government can be looked at various level such, federal, national, state, regional and local. For Cambodia, we have only the national and sub-national level. At the national level, it can be divided into ministry, institutions, committees, units department. ... etc., At the sub-national level, it can be provinces or cities, districts, communes and villages. The important roles of government is to provide public services such as defense, health, education; legislations; regulations; and market interventions, which we will see that in detail in the following chapters. How to measure the size of government? All common measures of the size of government are employees (number of workers or government servants), annual expenditures, annual revenues, etc.- which may be involved some deficiency by the time. Nevertheless, there is strong evidence that the impact of the government on the allocation of national resources has increased over time. As summary, the size of the government can be measured through the following measurements: Measurement via annual expenditure Purchase of goods and services Size of transfers (social and subsidy) Payment of interest Expenditure of general government Inflation-adjusted expenditure Government spending per capita Government spending as proportion (%) of GDP
3. Summary of the chapter
Microeconomic review: supply, demand, equilibrium, utility, and budget constraints
Introduction to public finance: Topics related to government intervention,
revenues and expendituresDifferent viewpoints about governmentOrganic view and mechanistic viewGovernment at glance
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Assignments Assignment 1: Read and summarize the brief review of
microeconomic (additional reading 1). Students are required to work in group for summarizing the lesson do presentation on the specific part to be assigned.
Assignment 2: students are divided into 3 groups Group 1: Read and summarize lesson by do presentation
on the brief introduction to public finance (additional reading 2), specifically from item 1-3.
Group 2: Read and summarize lesson by do presentation on the brief introduction to public finance (additional reading 2), specifically from item 4-7.
Group 3: Using your knowledge of government at glance, do research and present on Cambodia government at present.
In Em, M. Sc. in Economics40
End of the chapter
Thank you!
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Slide 33: End of the chapter The Independence Monument (Khmer: វិមានឯករាជ្យ, "Vimean Akareach") in Phnom Penh, capital of Cambodia, was built in 1958 for Cambodia's independence from France in 1953. It stands on the intersection of Norodom Boulevard and Sihanouk Boulevard in the centre of the city. It is in the form of a lotus-shaped stupa, of the style seen at the great Khmer temple at Angkor Wat and other Khmer historical sites. The Independence Monument was designed by the influential Cambodian modern architect Vann Molyvann. During national celebrations, The Independence Monument is the center of activity. A ceremonial flame on the interior pedestal is often lit by a royal or high official on these occasions, and floral tributes line the stairs. Every year, The Independence Monument is visited by foreigners and locals alike.
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