1. Why do governments exist? What are the objectives of governments? What are the results of our system of government? How are governments constrained? Chapter 2 Fundamental of the Public Finance In Em, M. sc. in Economics 1

2. Learning Objectives In Em, M. sc. in Economics 2 Differences between private and public sector Market failure Existence of government Categories of resources Externalities Privatization Government production of private goods Political science

3. Differences of public & private Sector Levels of differences Organizational level => Cost efficacy/efficiency Too many formal processes Red tape (rules, regulations, procedures) Power braches (legislative, executive, judicial) Managerial level Decision-making process (centralize vs. decentralize) Conflict resolution (positive vs. negative) Employee level Collective or social value based Economic reward on firm or individual based In Em, M. sc. in Economics 3

4. Differences of public & private Sector In Em, M. sc. in Economics 4

5. Market Failure What is market failure? (Q D Q S ) Causes of market failure Imperfect competition Small number of producers Small number of consumers Poor judgment of individual consumer on their own welfare Externality effects Solution to market failure Governments exist to provide valuable services that businesses or individuals are unwilling or unable to provide independently. In Em, M. sc. in Economics 5

6. Existence of government Why Do Governments Exist? Governments make rules for markets Governments enforce rules Governments provide public goods Market failure Imperfect competition In Em, M. sc. in Economics 6

7. Categories of Resources PRIVATE GOODS Food Clothing TV Sets Cellphones (alternate use, exclusion feasible) TOLL GOODS Turnpikes (tool roads) Toll bridges Motion pictures/cinema Parks (Joint use, exclusion feasible) COMMON-POOL RESOURCES Irrigation system Fishing grounds Libraries Timber, coal (alternate use, exclusion not feasible) PUBLIC GOODS National defense System of justice Vector control Free-to-air TV, Fresh-air (Joint use, exclusion not feasible) In Em, M. sc. in Economics 7

8. Categories of resources In Em, M. sc. in Economics 8

9. Externalities What is Externalities? pollution, noisy, traffic jam,... Externality existence: Market failures Policy failures Institutional failures Dimensions of externalities: Negative effects: e. g. industrial waste vs. water pollution Positive effect: e. g. well education vs. firm productivity Production externalities: e.g. factory waste dumped the river. Consumption externalities: e.g. smoking, music noise. In Em, M. sc. in Economics 9

10. Policies toward externalities Policy toward externality problem Government intervention: Tax policy Externality tax Production tax Consumption tax Output-reduction subsidy policy Level of pollution estimated Standard on pollution or output Command and control approach oQuota of production to restrict output In Em, M. sc. in Economics 10

11. Privatization What privatization is Methods of privatization Types of privatization Benefits and Costs of privatization Advantages and disadvantages In Em, M. sc. in Economics 11

12. What is privatization? Private firms need their customers in order to survive – state industries do not. Financed through taxation, state operations are largely independent of consumer choices. “The transfer of public assets, operations or activities to private enterprise”. Margaret Thatcher once remarked: “The public controls the private sector, but nobody controls the public sector”. 12 In Em, M. sc. in Economics

13. Consider University education: Nationalization implies public good Assumes a constituent policy: Equity before efficiency no one pays the cost, but everyone is better off Privatization implies private good Assumes a distributive policy: Everyone pays the cost, benefits flow to only a few Therefore, efficiency-based, user-pays model Includes higher-tuition Academic-based/merit funding only Some observations on privatization 13 In Em, M. sc. in Economics

14. Methods of privatization There are four main methods of privatization: Share issue privatization (SIP) - selling shares on the stock market. Asset sale privatization - selling an entire organization (or part of it) to a strategic investor, usually by auction. Voucher privatization - distributing shares of ownership to all citizens, usually for free or at a very low price. Privatization from below - Start-up of new private businesses in formerly socialist countries. 14 In Em, M. sc. in Economics

15. Liquidation: gov’t sale of a state-owned firm to the private sector. Part Liquidation: PPWSA Whole Liquidation: rubber plantation, Cambodia Subsidization: gov’t provision of grants to non-profit orgs for public service, for example: informal education.... Franchising: to a private company exclusively to provide a region with a certain service, e. g. monopoly rights Contracting out: gov’t retention of responsibility but hiring a private contractor Petroleum and office supply for gov’t institutions Tax collection, custom clearance services Types of privatization 15 In Em, M. sc. in Economics

16. Costs and benefits of privatization Benefits of Privatization: One-time cash injection to gov’t revenues Increased efficiency Reduce cost of public service delivery Improvement of accountability Retain and enlarge employment for workers Market capitalization for publicly traded company 16 In Em, M. sc. in Economics

17. Costs of privatization: Loss of annual government revenue Loss of ‘guaranteed’ jobs Loss of government influence in market outcomes (Public Interest) Loss of government control over provision of public goods and services to market Costs and benefits of privatization 17 In Em, M. sc. in Economics

18. Advantages of Privatization To Government: Reduces the operating costs of government Raises proceeds to reduce the debt Reduces future calls on government expenditure Turns losses into tax revenues Reduces lobbying pressures on politicians 18 In Em, M. sc. in Economics

19. Advantages of Privatization To the Private Sector: Stimulates development of private enterprises Helps create a competitive environment which in turn increases efficiencies and reduces costs Could provide a basis for an export industry 19 In Em, M. sc. in Economics

20. Government production of private goods Government production of public goods: Defense, justice, social order,... Government production of private goods:  Postal services  Telecommunications  Water harbors, and  Electricity Rationale: Market failure – lack of competition with natural monopoly Problem: inefficiency, subsidy issues, intervention of politician. In Em, M. sc. in Economics 20

21. Political Science What is political science? Definitions APSA (American Political Science Association) Wikipedia, the free encyclopedia Aristotle –the study of the state or government (politics, system, behavior) Why study political science? Difference between liberal and conservative Differences between capitalism, socialism, and communism In Em, M. sc. in Economics 21

22. Political Science Difference between liberal and conservative: Conservatism: Definition (preservation and opposed radical changes) Characteristics Liberalism: Definitions (freedom, preference of changes, private property and limited roles of government in economy) Characteristics In Em, M. sc. in Economics 22

23. Political Science Differences between capitalism, socialism, & communism Capitalism: private ownership, market economy... ownership, benefits, freedom of choice, competition, pricing Socialism: social ownership, common ownership, state ownership,... co-operative management of economy, co-operative enterprise planning economy, roles of the state Communism: common or collective ownership, no social classes all means of production are of the government or state In Em, M. sc. in Economics 23

24. End of Chapter 2 In Em, M. sc. in Economics 24 Thank you!