Fundamental Principles of Public Finance

Troy University

PA6650- Governmental Budgeting

Chapter 1

What’s the Difference Between Public and Private Sector?

• Similarities & Differences– Sources of funds– What funds get spent on– Decision making– Oversight and management control– Legal issues– Freedom of information– Measure of success

Why Do Governments Exist?

• Governments make rules for markets

• Governments enforce rules

• Governments provide public goods

WHY?

Market Failure

• Governments exist to provide valuable services that businesses or individuals are unwilling or unable to provide independently

The Tragedy of the Commons

• New England – 1600s

• Grazing of animals in the town square

• Commons were overgrazed and destroyed

Can you think of a similar situation today?

The Elements of Nonappropriability

• Concepts– Exhaustion or Rivalry– Exclusion– Alternate use and joint use

• 2 big questions– Is the exclusion of the goods feasible?– Is consumption individual or joint?

4 Categories of Resources

PRIVATE GOODS•Food•Clothing•TV Sets

(alternate use, exclusion feasible)

TOLL GOODS•Turnpikes•Toll bridges•Motion pictures

(joint use, exclusion feasible)

COMMON-POOL RESOURCES•Aquifers•Fishing grounds•Petroleum reserves

(alternate use, exclusion not feasible)

PUBLIC GOODS•National defense•System of justice•Vector control

(joint use, exclusion not feasible)

Nonappropriability

• Nonexhaustion/nonrivalry (air

• Free Riders

Externalities

• Positive and Negative Unintended Consequences

• Good outcomes– Vaccines result in less exposure to those who

have not been innoculated)

• Bad outcomes– (alligators in the swamp after draining)

Failure of Competition

• Incomplete markets / imperfect information– Government testing of drugs, flood insurance– Adverse selection (HMOs rejecting cancer clients)– Moral hazard (flood insurance to those in flood zones)

• Economic stabilization– Preventing unemployment, inflation– Increasing standard of living

• Redistribution– Corrects perceived injustices

Privatization

• Arguments supporting– Smaller government– Operating efficiency and response to clients– Cash

• Arguments against– Loss of government capability– Possible monopolistic manipulation

Government Production & Government Provision

Government Provision with Government Production

Government Provision with

Private Production

Private Provision with Government Production

Private Provision with Private Production

Building Social Decisions from Private Preferences

• Public choice theory – individuals are the best judges of their own well being

• The welfare of the community depends upon the welfare of individuals in that community

• Pareto Principle – If at least one person is better off from a policy action and no person is worse off, then the community as a whole is better off and the action should be taken

• Tale of 3 projects – Pages 17 and 18

Political Science

• Difference between liberal and conservative?

• Differences between capitalist, socialist, and communist?

Politics, Representation, and Government Finance

• Parties don’t know what citizens want

• Citizens don’t know what government has done

• There is an overall scarcity of knowledge

Politics, Representation, and Government Finance

• Some people are more politically important than others

• Specialists appear

• Imperfect information results in bribery

• Voters make uninformed choices

The Layers of Government

• Express Powers

• Implied Powers

• Tenth Amendment

• Dillon Rule / Home Rule

• Hierarchy of Power

Political Science Quiz

• Republic

• Democracy

• Representative Democracy

• Unitary government

• Source of federal power

• Source of state power

• Source of local power

Do You Know Your Government

• Cabinet members

• Vice President / Speaker of House

• U.S. Senators

• U.S. Representatives

• Supreme Court Justices

• Other agencies

Conclusion

• Why do governments exist?

• What are the objectives of governments?

• What are the results of our system of government?

• How are federal/state/local governments constrained?