1

Individuals and Government

Chapter 1

2

Public Finance Public finance is the field of economics

that studies government activities and the alternative means of financing government expenditures.

3

Figure 1.1 A Production-Possibility Frontier

G2 B

X2

G1 A

X1

C

M 0

Gov

ernm

ent G

oods

and

Ser

vice

s pe

r Yea

r

Private Goods and Services per Year

4

Distribution of Government Goods and Services

Nonmarket rationing: Prices and willingness to pay those prices are

not applicable to goods like national defense.

5

The Mixed Economy: Markets and Politics

Pure Market Economy Virtually all goods and services are supplied by for-

profit private firms. Supply and demand determine price.

Mixed Economy A mixed economy is one in which government

supplies a considerable amount of goods and services and regulates private economic activity.

6

Figure 1.2 Circular Flow in the Mixed Economy

Input

Market

Output Market

Government Households Firms

Subsidies Taxes, fees, charges Government Services

Taxes, fees, charges Government Services

Income Support & Subsidies

Dollars

Resources

Dollars

Goods & Services

Dollars

Goods & Services

Dollars

Resources

7

Government Expenditures in the United States

Government purchases of labor land capital

Government Transfer Payments Welfare Social Security

8

Growth in Government Expenditures

Table 1.1 (abbreviated)Year GDP Federal

GovernmentState

and Local Government

Total Government

Percentage of GDPTotal

1930 91.3 2.5 7.5 10.0 10.95

1945 223.0 84.7 8.5 93.2 41.79

1960 527.4 85.8 34.1 119.9 22.73

1975 1635.2 345.4 152.1 497.5 30.42

2002 10442.1 2073.9 1050.9 3124.8 29.93

  

9

International ComparisonsCountry Government Current Expenditures

as a Percentage of GDP 2001

Denmark 49.1

France 48.8

Germany 45.1

United Kingdom 39.4

Japan 38.1

Canada 36.7

United States 31.9

10

Federal Government Expenditures by Function

11

State and Local Government Expenditures

12

Federal Revenues

13

State and Local Government Revenues

14

State Budget Crunch of 2002 37 states were forced to reduce their budgets. Revenues were typically 10% less than

anticipated. States with the most severe deficits:

AK, AZ, CA, NY, NC, OK, OR, VA, and WA Causes

Cuts in taxes on business and individuals in the 1990s

No sales tax collections on services Growth in costs of Medicaid

15

Implications of a Graying America Social Security

In 2008 baby-boomers start to retire and collect The ratio of workers to retiree falls

Medicare Health care inflation is substantially higher than

overall inflation Medicaid

Increased use of long-term care for baby-boomers