THE ECONOMIC BASIS FOR GOVERNMENT ACTIVITY

THE ECONOMIC BASIS FOR GOVERNMENT ACTIVITYINDIVIDUALS & GOVERNMENT(PUBLIC FINANCE)INDIVIDUALS, SOCIETY & GOVERNMENTWhat would it be like to live in a nation without government?- disorganized society- No police / fire protection- Poor roads (economy is compromised)- No publicly funded schools- No health care and medicareBenefits We Get from Government ActivitiesWe all benefit from government activities and expenditures

Citizens benefit from the many goods and services made available by governments, but they also pay the costs of these services

We differ in our views about what governments should and should not do because our valuations of the benefits we get from government differ and because of variation in the amount of taxes and other costs each of us pay.PUBLIC FINANCEIs the field of economics that studies government activities and the alternative means of financing these government activities.GOVERNMENTSAre organizations formed to exercise authority over the actions of people who live together in a society and to provide and finance essential servicesPOLITICAL INSTITUTIONSConstitute the rules and generally accepted procedures that evolve in a community for determining what government does and how government outlays are financed

Such democratic institutions as majority rule and representative government - offer citizens an opportunity to express their desires through voting through attempts to influence the voting of othersHOW GOVERNMENT ALLOCATE RESOURCES BETWEEN GOVERNMENT & PRIVATE USEThe real cost of government goods and services is the value of private goods and services that must be sacrificed when resources are transferred to government use.Private Goods & Services are those items, such as food and clothing that are usually made available for sale in markets.Government Goods & Services items such as roads, schools and fire protection are not sold in markets

PRODUCTION-POSSIBILITY CURVEIllustrates the trade-off between government and private goods and services

This curve gives the alternative combinations of government goods and services and private goods and services that can be produced in an economy given its productive resources and technology and assuming that resources are fully employed.

HOW GOVERNMENT GOODS AND SERVICES ARE DISTRIBUTEDNon-Market Rationing the methods used by government to distribute government goods and services.This means that government goods and services are not made available to persons according to their willingness to pay and their use is not rationed by prices.In some cases, the services are available to all, with no direct charge and no eligibility requirements, while others have. The Mixed EconomyA Mixed Economy is one in which government supplies a considerable amount of goods and services and regulates private economic activities

Government use taxes and subsidies to affect incentives to use resources

Provisions of a significant amount of goods and services takes place through political institutions which often compel citizens to finance government goods and services and programs regardless of personal preference.

Pure Market EconomyVirtually all goods and services would be supplied by private firms for profit and all exchanges of goods and services would take place through markets

Prices are determined by free interplay of supply and demand

Buyers are not compelled to purchase something they do not want.

CIRCULAR FLOW IN THE MIXED ECONOMY

GOVERNMENT EXPENDITURES BASIC CATEGORIESGovernment Purchases are those that require productive resources (land, labor and capital) to be diverted from private use by individuals or corporations so that such resources can be used by government. Example: supply for national defense, garbage disposalGovernment Transfer Payments constitute a source of income support to recipients who are not required to provide any service in return for income received. Example: SSS pensions

THE GROWTH OF GOVERNMENT EXPENDITURES

Group Activity1. Use a production-possibility curve to show the cost of increasing government provision of medical services.

2. As productive resources and technological know-how increase, a nations production-possibility curve shifts outward. Use a production-possibility curve to show how resource growth and improvements in technology can allow a nation to increase its production of government goods and services while increasing its output of private goods and services.