Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 24 Copyright © 2010 Worth Publishers

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 2 of 24 Why Study Public Finance? F ERNANDO Q UIJANO AND S HELLY T EFFT P R E P A R E D B Y 1.1 The Four Questions of Public Finance 1.2 Why Study Public Finance? Facts on Government in the United States and around the World 1.3 Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education 1.4 Conclusion

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers C H A P T E R 1 ■ W H Y S T U D Y P U B L I C E C O N O M I C S ? 3 of 24 The Four Questions of Public Finance 1.1 public finance The study of the role of the government in the economy. four questions of public finance When should the government intervene in the economy? How might the government intervene? What is the effect of those interventions on economic outcomes? Why do governments choose to intervene in the way that they do?

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers C H A P T E R 1 ■ W H Y S T U D Y P U B L I C E C O N O M I C S ? 4 of 24 When Should the Government Intervene in the Economy? The Four Questions of Public Finance 1.1 market failure Problem that causes the market economy to deliver an outcome that does not maximize efficiency. Market Failures

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers C H A P T E R 1 ■ W H Y S T U D Y P U B L I C E C O N O M I C S ? 5 of 24 When Should the Government Intervene in the Economy? The Four Questions of Public Finance 1.1 redistribution The shifting of resources from some groups in society to others. Redistribution

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers C H A P T E R 1 ■ W H Y S T U D Y P U B L I C E C O N O M I C S ? 6 of 24 How Might the Government Intervene? The Four Questions of Public Finance 1.1 Tax or Subsidize Private Sale or Purchase One way that the government can try to address failures in the private market is to use the price mechanism, whereby government policy is used to change the price of a good in one of two ways: 1.Through taxes, which raise the price for private sales or purchases of goods that are overproduced, or 2.Through subsidies, which lower the price for private sales or purchases of goods that are underproduced.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers C H A P T E R 1 ■ W H Y S T U D Y P U B L I C E C O N O M I C S ? 7 of 24 How Might the Government Intervene? The Four Questions of Public Finance 1.1 Restrict or Mandate Private Sale or Purchase The government can directly restrict private sale or purchase of goods that are overproduced, or mandate private purchase of goods that are underproduced and force individuals to buy that good. Public Provision The government can provide the good directly, in order to potentially attain the level of consumption that maximizes social welfare. Public Financing of Private Provision Governments may want to influence the level of consumption but may not want to directly involve themselves in the provision of a good.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers C H A P T E R 1 ■ W H Y S T U D Y P U B L I C E C O N O M I C S ? 8 of 24 What Are the Effects of Alternative Interventions? Direct Effects direct effects The effects of government interventions that would be predicted if individuals did not change their behavior in response to the interventions. Indirect Effects indirect effects The effects of government interventions that arise only because individuals change their behavior in response to the interventions. 1.1 The Four Questions of Public Finance

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers C H A P T E R 1 ■ W H Y S T U D Y P U B L I C E C O N O M I C S ? 9 of 24 Why Do Governments Do What They Do? political economy The theory of how the political process produces decisions that affect individuals and the economy. 1.1 The Four Questions of Public Finance