Chapter 9 Government’s Role in the Economy

Section A Public Goods and Services Provided by govt. on an equal basis Provided by govt. on an equal basis Examples? Examples? Why doesn’t the private sector provide these goods? Why doesn’t the private sector provide these goods? Principle of Exclusion Principle of Exclusion –Profit motive –Not available to everybody –“Pay to play”

Externalities Effects (both good and bad) for resources being allocated incorrectly. “External” costs (unseen) to society. Effects (both good and bad) for resources being allocated incorrectly. “External” costs (unseen) to society. Examples? Positive and Negative Examples? Positive and Negative

Positive Externality

Negative Externality Where is the negative externality? Where is the negative externality? Dead Weight Loss? Dead Weight Loss?

Redistribution of Income How does govt. redistribute income? How does govt. redistribute income? How much support should be given to the poor? How much support should be given to the poor?

Examples of Redistribution Transfer Payments: Cash benefits Transfer Payments: Cash benefits Transfer in Kind: (Non-cash) Transfer in Kind: (Non-cash) –Food Stamps –Medical care –Low-cost housing Payments to Individuals Payments to Individuals –What is the most important thing revealed by chart on pg. 242?

Payments to Individuals Largest portion of budget Largest portion of budget How much did it grow between ? How much did it grow between ? ? ? Should we be worried? Should we be worried?

Section B Taxes and the Economy

Why are taxes necessary? Why are taxes necessary? Two basic principles Two basic principles –Benefits Received Those who use it, pay it Those who use it, pay it Ex. Gas tax Ex. Gas tax –Ability-to-Pay Richest should pay higher burden Richest should pay higher burden Progressive tax (Income Tax) Progressive tax (Income Tax) How much of total taxes do the richest pay? How much of total taxes do the richest pay?

Productivity principle Productivity principle –Tax laws that encourage efficiency and productivity (corp. tax deductions for equip.) Least Likely to Offend Principle Least Likely to Offend Principle –Who can I tax and not lose votes?

Burden of Taxation Progressive Progressive How much of total taxes do the richest pay? How much of total taxes do the richest pay?

Regressive tax Regressive tax –Poor hit hardest as percent of income Sin Taxes Sin Taxes Proportional Tax Proportional Tax –Flat Tax proposals –Same percentage across the board.

Federal, State, and Local Taxes Federal Federal –Personal Income 5-36% –Social Insurance Medical, Social Security Medical, Social Security –Corporate Income Tax on profits Tax on profits –Others Estate, Tariffs Estate, Tariffs

State and Local Revenues Sales Tax Sales Tax Property Tax Property Tax –Usually funds education Income Tax Income Tax License Fees License Fees Intergovernmental Revenue Intergovernmental Revenue

Section C: Government Spending Public Decision Making Public Decision Making –Contradictions Good for people vs. Reelection Good for people vs. Reelection Good politically vs. Good economically Good politically vs. Good economically –Public also to blame “What have you done for me lately” “What have you done for me lately” –Programs Hard to Stop Inefficiencies can go on and on. Inefficiencies can go on and on.

Writing the Budget President drafts spending bill President drafts spending bill Congress passes bill Congress passes bill –Compromise usually needed between conservatives and liberals Pork Barrel Legislation Pork Barrel Legislation –Spending used to gain votes in your district

Section D: The Problem of the National Debt Good or Bad? Good or Bad? Bad: Used only for consumption Bad: Used only for consumption Good: Used for future growth Good: Used for future growth

National Debt

How does this graph change the debt picture?