CHAPTER 1 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE (INDIVIDUALS AND GOVERNMENT) Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 1

2 After studying this chapter, you should be able to: Use a production-possibility curve to explain the trade-off between private goods and services and government goods and services. Describe how the provision of government goods and services through political institutions differs from market provision of goods and services and how government affects the circular flow of income and expenditure in a mixed economy. Explain the difference between government purchases and transfer payments and discuss the growth of government expenditures in the United States and other nations since 1929.

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 3 After studying this chapter, you should be able to: (Cont’d) Discuss the various categories of federal, state, and local government expenditures in the United States and the way those expenditures are financed. Determine some of the issues that must be addressed to evaluate the costs and benefits of government activities.

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 4 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE?  Public Finance: is the field of economics that studies government activities and the alternative means of financing government expenditures.  It is also known as “Public sector economics” or “Public Economics”  Focus is on microeconomic functions of government polices that affect overall unemployment and the price level  Scope of public finance unclear__ government has role in many activities, but focus will be on taxes and spending  Public Finance Defined

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 5 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE? o Governments are organizations formed to exercise authority over the actions of persons who live together in a society and to provide and finance essential services. o The government is endowed with certain rights of compulsion.  Government

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 6 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE? o Political Institutions are rules and generally accepted procedures that evolve for determining what government does and how government outlays are financed.  Government (Finish)

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 7

8 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE? o What governments Do? o How does the government affect the economy? o What should the government do? o Why are some economics activities undertaken in the public/ private sector? o Why has the scope of government activities changed over time, and differed across countries? o Does it perform its economic role efficiently or could efficiency be improved?  Government: Central Questions

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 9 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE? Governments usually have three important economic functions to perform as follows: _ The economic efficiency function/ Allocation Function: means that government must provide goods and services to the community because otherwise these goods and services will not be provided. The Economic Functions of Government

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 10 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE? _ The distribution function: allocating resources (land, labors and capital) better than the market + Market Failure:  Monopoly  Public good and services  Externality  Government: Central Questions (Cont’d)

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 11 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE? _ Government needs to ensure that income and wealth are distributed in some fair way _ Government transferring money to the poor or by providing services to the poor that they could not otherwise buy. _ Instrument to achieve a fairer distribution include: Larger taxes on higher incomes and wealthier persons, and provision of services to the poor. _ Stabilization Function: Government responsibility to maintain stability of the economic fundamentals such as economic growth, unemployment, inflation, the trade balance, Government debt, the balance of Payments and the rate of exchange.  Government: Central Questions

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 12 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE?  A mixed economy is one is which government supplies an amount of goods and services and regulates private economic activity.  While many economic activities are undertaken by private firms, others are undertaken  Pure market Economy: _ All goods and services are supplies for profit by private firms, and all exchange of goods and services would take place through markets. _ Supply and demand determine price The Mixed Economy Markets

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 13 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE?  Nonmarket rationing: _ Distribution of government goods and services such as national defense, whose price and willingness to pay are not applicable.  In addition, government the behavior of the private sector through a variety of regulations taxes and subsidies.  Privatization: Converting government enterprises into private firms.  Government: Central Questions (Finish)

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 14 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE?  Private - Food - Housing - Cars - Clothing The allocation between private and Government Rosources  Government: the resources government obtain are used to provide citizens: - National Defense - Public Schools - Police - Roads - Fire protection

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 15

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 16

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 17 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE?  Market failure _ The great depression fundamentally changed attitude toward government _ In response to the depression: - More active role of the government to stabilize the level of economic activity - Legislation designed to alleviate many of the specific problems: unemployment insurance and social security. The Economic Role of the Government

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 18 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE?  Government Failures _ Limited information _ Limited control over private market responses _ Limitations imposed by political processes  Balance between public and private sectors _ Limited government intervention - Areas in which market failures are most significant and - Where there is evidence that government intervention can make a significant difference The Economic Role of the Government (Cont’d)

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 19 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE?  Controversy remains over how limited or how active the government should be: _ How serious are the market failures? _ How effective is the government in remedying them?  Central Questions _ What is to be produced? - Public Versus Private goods _ How Should it be produced? - Privately or publicly? _ For whom is it to be produced? The Economic Role of the Government (Finish)

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 20 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE?  Government can be divided into two categories: + Government Expenditures _ Current Expenditures - Wages - Non-wages _ Capital Expenditure + Government Transfer Payments _ Welfare ( unemployment benefits) _ Social security pension benefits _ Subsidies Government Expenditures

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 21

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 22

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 23 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE? o Education o Civilian Safety o Transportation o Executive, Legislative, and Judicial o Income Security o Health and Hospital o Recreational and Cultural Activities The Structure of Government Expenditure by sector

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 24

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 25

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 26 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE?  Taxes: Profit Tax Gift Tax Income Taxes (Corporate and Personal) Payroll Tax (Salary or Wage Taxes ) Excise Tax (Specific Tax) VAT / Sales Tax Other (Stamp Tax, Registration Tax, Patent Tax, Unused Land Tax, Accommodation Tax,………………) Customs Duty (Import and Export Taxes ) Financing Government Expenditure

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 27

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 28 CHAPTER 1: INTRODUCTION TO PUBLIC FINANCE?  Non- Taxes: Fees, or charges Royalties Rents Tuitions Financing Government Expenditure (Finish)  Borrowing From public Commercial banks and financial institutions International borrowing Central Bank  Printing Money

Financial Markets  Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage of funds. Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 29

Prepared by Professor: Mr. SOEM Pheakkdey, (BA, MFI, and MPS) Telephone: / E_mail: 30