Fundamental Principles of Public Finance Troy University PA6650- Governmental Budgeting Chapter 1

What’s the Difference Between Public and Private Sector? Similarities & Differences –Sources of funds –What funds get spent on –Decision making –Oversight and management control –Legal issues –Freedom of information –Measure of success

Why Do Governments Exist? Governments make rules for markets Governments enforce rules Governments provide public goods WHY?

Market Failure Governments exist to provide valuable services that businesses or individuals are unwilling or unable to provide independently

The Tragedy of the Commons New England – 1600s Grazing of animals in the town square Commons were overgrazed and destroyed Can you think of a similar situation today?

The Elements of Nonappropriability Concepts –Exhaustion or Rivalry –Exclusion –Alternate use and joint use 2 big questions –Is the exclusion of the goods feasible? –Is consumption individual or joint?

4 Categories of Resources PRIVATE GOODS Food Clothing TV Sets (alternate use, exclusion feasible) TOLL GOODS Turnpikes Toll bridges Motion pictures (joint use, exclusion feasible) COMMON-POOL RESOURCES Aquifers Fishing grounds Petroleum reserves (alternate use, exclusion not feasible) PUBLIC GOODS National defense System of justice Vector control (joint use, exclusion not feasible)

Nonappropriability Nonexhaustion/nonrivalry (air Free Riders

Externalities Positive and Negative Unintended Consequences Good outcomes –Vaccines result in less exposure to those who have not been innoculated) Bad outcomes –(alligators in the swamp after draining)

Failure of Competition Incomplete markets / imperfect information –Government testing of drugs, flood insurance –Adverse selection (HMOs rejecting cancer clients) –Moral hazard (flood insurance to those in flood zones) Economic stabilization –Preventing unemployment, inflation –Increasing standard of living Redistribution –Corrects perceived injustices

Privatization Arguments supporting –Smaller government –Operating efficiency and response to clients –Cash Arguments against –Loss of government capability –Possible monopolistic manipulation

Government Production & Government Provision Government Provision with Government Production Government Provision with Private Production Private Provision with Government Production Private Provision with Private Production

Building Social Decisions from Private Preferences Public choice theory – individuals are the best judges of their own well being The welfare of the community depends upon the welfare of individuals in that community Pareto Principle – If at least one person is better off from a policy action and no person is worse off, then the community as a whole is better off and the action should be taken Tale of 3 projects – Pages 17 and 18

Political Science Difference between liberal and conservative? Differences between capitalist, socialist, and communist?

Politics, Representation, and Government Finance Parties don’t know what citizens want Citizens don’t know what government has done There is an overall scarcity of knowledge

Politics, Representation, and Government Finance Some people are more politically important than others Specialists appear Imperfect information results in bribery Voters make uninformed choices

The Layers of Government Express Powers Implied Powers Tenth Amendment Dillon Rule / Home Rule Hierarchy of Power

Political Science Quiz Republic Democracy Representative Democracy Unitary government Source of federal power Source of state power Source of local power

Do You Know Your Government Cabinet members Vice President / Speaker of House U.S. Senators U.S. Representatives Supreme Court Justices Other agencies

Conclusion Why do governments exist? What are the objectives of governments? What are the results of our system of government? How are federal/state/local governments constrained?