Intro to Economics - Government II

8/3/2019 Intro to Economics - Government II

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Government II

Dr. Katherine Sauer A Citizens Guide to EconomicsECO 1040


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Overview:

I. Government and Efficiency

II. RegulationsIII. The Optimal Size of GovernmentIV. TaxesV. US Government Deficit and Debt


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There are 3 main roles for government:1. make markets possible2. deal market failures

- externalities- public goods

3. do some wealth redistribution

Keep in mind:There are things the government can do to make things

better.

There are things the government is likely to do under theinfluence of political incentives and constraints.


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I. Government and Efficiency

We do need some government.

However, more government isnt necessarily better .

Explain.


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Governments are often described as being inefficient .

They actually operate exactly as wed expect, given their incentives .

-Government has a monopoly in many cases.

DMV example

Post Office example


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Unless the market is failing , there is not a compelling

reason to have the government provide the good.

providing the good producing the good itself


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When the government is controlling the allocation of resources, it is bureaucrats and politicians who aremaking the decision.

- political considerations

When the market controls the allocation of resources,they go where theyll earn the highest return .

- amoral- supply and demand


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II. Regulations

Some government regulations may be beneficial tosome parties, but all regulations come with a cost .

Why did Mil ton F r ied man argue t hat more l aw yers

should b e a ll owed into t he pract ice? Why did man y exi st ing l aw yers di sagree?

Why did t he workers in Delhi, I ndia protest t he regu l at ion t hat was im pose d

in or d er to cl ean u p p oll ut ion?


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Some regulations are favored by people who have theluxury of caring.

- DDT Example


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N ot all regulations are well-written .- striped bass example


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Often times a certain group pushes for regulations

in their industry to keep out competition .- interior design licenses


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Sometimes the government acts like a helping hand

and sometimes like a grabbing hand.

Explain.


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III. The Optimal Size of Government

Economics can point out the tradeoffs , but youll haveyour own opinion.

F ramework for thinking about the role of thegovernment in the economy:


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1. Government has the potential to enhance the productive capacity of the economy and make us better

off as a result.- legal framework - public goods- externalities


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2. Some government activity shrinks the size of the pie, but still may be socially desirable .

- technically inefficient to transfer wealth

- many people want some sort of social safety net


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3. Some government involvement in the economy is purely destructive .

- good intentions arent enough

- some regulations have costs that outweigh the benefits


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IV. Taxes

Even when the government is engaging in goodactivities, it must finance its spending through taxes.

All taxes exert a cost on the economy.


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The costs of taxes:

- fiscal drag

- deadweight loss

- discourage investment


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To minimize the costs of taxes, economists favor taxesthat are:

broad

simple

fair


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B ureau of Economic Analysis bea.govV. US Government Spending, Deficit, and Debt


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How your taxes are spent htt p:// www.whitehouse.gov / taxrece ipt 1. Federal


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2. Colorado htt p:// www.co l ora d o.gov / taxtracks /


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To find the amount of the yearly deficit, take totalreceipts minus total expenditures.

3,982. 5 5,538.8 = -1,556.3


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When the US government spends more than it collects intaxes, it issues bonds to make up the difference.

A bond is like an IOU.- People who buy bonds are lending thegovernment money now.

- The government promises to pay them back later.


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Issue price: $18.75Maturity date: May 2008Interest over 30 years: $87.92Final value: $106.67

T reasur ydirect.gov


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U.S. debt is now equal to economyB y Richard Wolf

USA Today 1/8/2012


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From the C B O: Projected Outlays and Revenues as %of GDP


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Summary

Governments are often inefficient, due to incentives.

Regulations can be helpful or harmful, they all comewith costs, and good intentions are not enough.

Economics gives a framework for considering theoptimal size of government.

Taxes are necessary but also impose costs.

The government spends more than it collects.


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http://www.federalbudgetchallenge.org/budget_challenge/sim/budget_master.html


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What did you learn today?

Please explain 2 concepts from todays class.

Documents

Intro to Economics - Government II