Role of Government & Comparison of the sizes of public sectors in various countries. Presented by Youri, Marshella, Carolyn, Min, Azfar (Group 5)

Guidance of Efficiency “A firm is said to be operating efficiently when it produces a given quantity and quality of goods at the lowest possible cost” (101). “One person cannot be made better off without harming someone else, then economic efficiency prevails” (101). Group 5.Carolyn Chan

Information Market Imperfections—information is not perfect. Group 5.Carolyn Chan

Information Imperfect Market: Market for used cars. “Prospective buys cannot distinguish between low-quality cars and high-quality cars. Although a buyer can get some information about a particular car by looking at the car and taking it for a test drive, this information is not sufficient to determine whether the car is a low- or high-quality. In contrast, the seller knows from experience” (Sullivan 317). Group 5.Carolyn Chan

Price System When the market price rises, buyers know that the quantity demanded at the prior equilibrium price exceeded the quantity supplied. Group 5.Carolyn Chan

Externalities “The cost or benefits of a transaction that are borne by someone not directly involves in the transaction” (103). Government can use tuition subsidies to increase the equilibrium number of college degree. Group 5.Carolyn Chan

Externalities Group 5.Carolyn Chan

Public Goods Consumption of the good by one individual does not reduce the amount of the good available for consumption by others. Example: all sorts of goods and services, including: streets, highways, education, parks, and public safety, national defense, and space exploration. For example, if one individual eats a cake, there is no cake left for anyone else; but breathing air or drinking water from a stream does not significantly reduce the amount of air or water available to others. Group 5. Marshella

Private Property Right The limitation of ownership to an individual Example : when a person buys a house, he/she must pay a certain price to the seller before getting the right to own it. Once the price is paid, the house is that person’s possession and no one else can enter or trespass without permission by the owner.

Free Ride The enjoyment of the benefits of a good by a producer or consumer without having to pay for the good. Example: People enjoy the public radio and television stations without having to spend money on them. They get free rides from people who donate money to them. Group 5. Marshella

Monopoly Defined as a persistent market situation where there is only one provider of a product or service. It happens because : lack of economic competition for the good or service. lack of viable substitute goods. Example: Microsoft has achieved market dominance because Microsoft’s plan to charge subscription fees for access and use. Microsoft sees itself as a Global- Software Utility Company in the future. Group 5. Marshella

Business Cycle The periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other microeconomics variables. A business cycle is identified as a sequence of six phases : Contraction Trough Expansion Peak Recession Depression or slump Group 5. Marshella

The Public Choice Theory of Government Rent seeking : occurs when an individual, organization, or firm seeks to make money by manipulating the economic environment rather than by making a profit through trade and production of wealth. Such as by : Gaining control of land and other pre-existing natural resources or by imposing burdensome regulations or other government decisions that may affect consumers or businesses. Group 5. Marshella

Public Choice Theory How individual decision- making results in policy that conflicts with the overall desires of the general public. For instance: Many special interest and pork barrel projects are not the desire of the overall democracy. However, it makes sense for politicians to support these projects because it will benefit them psychologically as they feel more powerful and important. It also can benefit them financially as it may open the door to future wealth as lobbyist ( after they retire ). Group 5. Marshella

Microeconomic Policy Provide the public goods that society requires Government provides public goods avoid the free-rider problem that would occur if private firms provided the goods 2. Internalizing the externality A wide range of government policies have been proposed to deal with externalities -regulation -taxes and subsidies -market-based regulation 3. Promoting Competition Government regulates industries where free market competition may not exist and policies other industries to promote competition. Ex) Justice Department , Federal Trade Commission Group 5. Yuri

Macroeconomic Policy Monetary Policy Monetary policy is policy directed toward control of money and credit. Major player is the Federal Reserve The Federal Reserve controls the three tools of monetary policy- open market operations, the discount rate, and reserve requirements Two basic goals: to promote "maximum" sustainable output and employment and to promote "stable" prices Group 5. Yuri

decrease the money in circulation 2. Fiscal policy Policy directed toward government spending and taxation. Fiscal policy is determined by laws that are passed by Congress and signed by the president. Government has the responsibility of minimizing the damage from business cycles. Inflation is too strong government can use fiscal policy increase taxes increase taxes decrease in government spending decrease the money in circulation Group 5. Yuri

3. Government Spending Budget surplus 2007 Budget surplus When government spending is less than revenue Budget deficit When government spending is greater than revenue Current situation U,S . Budget deficit 2007 is $400 billion Group 5. Yuri

Group 5. Yuri

Government expenditures as Percent of total output 100 North Korea Cuba Government expenditures as Percent of total output 75 Vietnam Sweden 50 Germany United Kingdom Canada 25 Japan United States Market Centrally Planned Types of economy Group 5. Azfar

Centrally planned economy An economic system where government has control over the goods and services produced and the control of prices that they are sold to the citizens. Ex) Cuba, North Korea Group 5. Azfar

Market economy When the government plays a small role in control of goods and services plus the control of the economy Ex) United States, Canada Group 5. Azfar