What is the Public Sector? Resources allocated through government U.S. government allocates about 1/3 of nation’s resources

Goals for Studying Public Sector Economics Explain how government allocates resources Establish framework to analyze government activities

Politics and Economics Economic activities influence political decisions Political decisions influence the economy The importance of the political decision-making process

Public Choice or Benevolent Despot? Government decisions are made collectively in democracies Political process, not benevolent despot, determines resource allocation No assurance government will allocate resource efficiently

Public Choice or Benevolent Despot? Market failure does not necessarily imply government intervention Cannot assume perfect government implementation of “optimal” policy Magnitude of government failure must be compared to size of market failure

The Activities of Government Government is comprised of thousands of government units Three levels: Federal State Local Each level allocates different levels and types of resources

The Activities of Government

Federal Expenditures Account for half of public sector spending Three major categories of government spending National defense Human resources Interest

Federal Expenditures

Federal Expenditures Defense spending has declined since 1950s Offset by human resource spending

Federal Expenditures

Federal Deficit and Interest Expenditures Deficit financed by government bonds Debt interest substantial part of federal budget Federal budget/deficit trends as percentage of GDP

Federal Deficit and Interest Expenditures

Federal Government Revenues Personal income tax Social insurance revenues Corporation income taxes Excise taxes, estate and gift taxes, customs duties

Growth of Government in 20th Century

International Comparisons Difficult to compare government size across countries U.S. government growth relatively small compared to other countries

International Comparisons