2. 1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

3. 2 Chapter 29 Government Spending 5/20/2015 © ©1999 South-Western College Publishing

4. 3 What is the role of government? Note that this is a normative issue Begin with the market failure theory of government, government intervenes when the market fails to do something

5. 4 First case of market failure, government must provide pure public goods A pure private good is rival and exclusion is possible A pure public good is just the opposite, non-rival and exclusion difficult or impossible

6. 5 Example of a pure public good National defense Police and fire protection come close The free rider problem

7. 6 Second case of market failure, government needs to correct for serious externalities (see chapter 14 for a discussion of externalities Externalities: side effects in production or consumption, or unpriced by-products Can be both positive and negative externalities

8. 7 Negative externalities (external or social costs)--pollution for example Positive externalities (external benefits), inoculation from disease, education, etc. The market tends to overproduce things with negative externalities and underproduce things with positive externalities Can try to correct for this with taxes, subsidies, regulation, etc.

9. 8 Other roles of government Merit goods Promote competition © ©1999 South-Western College Publishing Redistribution of income Stabilize the economy

10. 9 What is a Merit Good? A good with strong positive externalities that market demand and supply do not produce enough of, in some people’s opinion © ©1999 South-Western College Publishing

11. 10 What are examples of a Merit Good? higher education artistic endeavors health related goods public libraries national public radio © ©1999 South-Western College Publishing

12. 11 How can government redistribute income? Through a system of taxes and transfers

13. 12 What is a Transfer Payment? Government spending that transfers income from one person to another © ©1999 South-Western College Publishing

14. 13 What are examples of Transfer Payments? welfare food stamps social security unemployment benefits © ©1999 South-Western College Publishing Medicare Medicaid

15. 14 2 ways of measuring the growth of government spending Absolute dollars Relative measure, as a % of GDP

16. 15 How much does the government spend? In 1996, state and federal governments spent $2,636.1 billion © ©1999 South-Western College Publishing

17. 16 Government as a % of GDP 1929, all levels of government, about 10% Today, between 35-40% Normative issue, is this good or bad?

18. 17 17 © ©1999 South-Western College Publishing http://www.ssa.gov http://nces.ed.gov http://www.idresearch.com http://www.ed.gov http://www.socialsecurity.org http://www.ncpssm.org/menu.html http://www.publicdebt.treas.gov

19. 18 What comprises government spending? What is a Public Good? What is a Merit Good? What is a Transfer Payment? What is Welfare? What is Medicaid? What is Social Security? What is Medicare? What percent of GDP does the government spend?What percent of GDP does the government spend?

20. 19 ENDEND © ©1999 South-Western College Publishing