Public Finance Public finance is the field of economics that studies government activities and the alternative means of financing government expenditures.

Allocation of Resources Resources are allocated between government and private use: For government use: -Roads -Schooling -Fire Protection For private use: -Food -Clothing Units of private goods and services are forgone by individuals so that government can provide goods and services.

Production Possibility Curve

The Mixed Economy Characteristics of a mixed economy: Government supplies many goods and services Government regulates private economic activity Government expenditures equal ¼ to ½ of GDP Government participates in markets as a buyer of goods and services

Government Expenditures in the U.S. Government purchases divert productive resources from private use: -National defense Steel, labor Government transfer payments redistribute purchasing power among citizens: -Social benefits Social Security, Medicare

Government Expenditures, Table 1.1 (abbreviated) – Billions of dollars YearGDPFederal Government State and Local Government Total Government Percentage of GDP Total

Government Expenditures in the U.S.

International Comparisons Country Government Current Expenditures as a Percentage of GDP 2008 France52.5 Sweden51.2 United Kingdom Canada39.6 United States38.6 Japan36.4 Germany

Distribution of Federal Expenditures

Structure of Federal Government Expenditure

State and Local Government Expenditures

State and Local Government Comparison CategoryStateLocal Education Health4039 Public Safety1277 Transportation9062 Public Welfare507 Housing1040 Interest on General Debt4455 Total

State and Local Government Comparison

Financing Government Expenditures Federal Government—Taxes

Financing Government Expenditures

State and local governments—Taxes, Federal Grants

Financing Government Expenditures

State and Local Government Comparison CategoryStateLocal Sales Taxes35890 Federal Grants42358 Income Taxes27826 Corporate Profits Taxes507 Property Taxes13397 Education8525 Utilities16122 Total

State and Local Government Comparison

Annual Budget Differential (billions)

Annual Budget Differential (% GDP)

Federal Debt (billions)

Federal Debt (% GDP)

Functions of Government Provide items we cannot easily make available for ourselves or purchase from others in markets - Law enforcement and courts Redistribute income and economic opportunity - Income support for elderly, unemployed, poor Stabilize economic fluctuations - Recession/Inflation Regulate production and consumption - For improved health, elimination of excessive monopolistic control over prices

How much government is enough? How much should governments do, and how much should be left to private enterprise and initiative through market sale of goods and services?

Aging Populations & Public Finance Percentage of U.S. residents age 65 or older: 1950 – 8.3%; 2000 – 12.3%; 2050 – 21.1% Significant effects on Social Security and government-funded health care expenditures Tax rates to finance programs must increase or benefits to recipients must decline to avoid causing large federal budget deficit

Population Aging

Old-Age Dependency Ratios