2. Economic Functions of Government
√ Legal and Social Framework
• provides legal framework and services
needed for a market economy to function
efficiently.
• sets “rules of the game” governing
business relationships such as contract
enforcement
• services like police powers, weights
and measures, and system of money
• agencies that protect consumer and
regulate businesses
3. Economic Functions of Government
√ Maintaining Competition
• actions that encourage competition
in order to promote efficiency to provide
low prices and an adequate quantity of
goods for consumers
• Regulation and ownership controls
• Anti-monopoly laws
4. Economic Functions of Government
√ Redistribution of Income
• providing for those unable to do so
themselves
• transfer payments such as welfare,
SS payments, food stamps; unemployment
compensation
• market intervention such as price
controls or price supports
• sharing the wealth of the nation
through income-based taxation
5. Economic Functions of Government
√ Reallocation of Resources
• measures to correct over- and under-allocation of
resources
• Externalities or Spillovers occur when some of the
costs or the benefits of the good or service are passed on
to parties other than the immediate buyer or seller.
Negative Externalities or spillover costs
√ production or consumption costs inflicted on a third
party without compensation; pollution of air, water are
examples
Positive Externalities or spillover benefits
√ production or consumption costs conferred on a
third party or community at large without their
compensating the producer; education, vaccinations
are examples
6. Economic Functions of Government
√ Provider of Public Goods and Services
• providing goods and services to society
that the private sector is not willing or able to
provide
√ private goods are subject to exclusion
principle—those unable or unwilling to pay do
not get the product.
√ exclusion principle does not apply to
public goods—there is no effective way to
exclude individuals
7. Economic Functions of Government
What goods and services should be
provided by Gov’t?
Two principles apply:
1. Nonexclusion
√ no effective way to exclude
individuals
2. Shared Consumption
√ one person’s use does not reduce
usefulness to others
8. Economic Functions of Government
Shared Consumption
NO YES
Exclusion
Y Pure Private Toll Goods
E Bread Theatres
S Ice cream Parks
N Common Pool Pure Public
O Resources National defense
Irrigation water Flood control
Fish in the river
9. Economic Functions of Government
Public or Private?
College Education? Interstate Highway System?
Electric Power? Elementary Schools?
National Defense? Police Protection?
Groceries? Garbage collection?
Water? Recreational Facilities?
Postal Service? Sporting Facilities?
Prisons? Flood Control?
10. Economic Functions of Government
√ Provider of Public Goods and Services
• Quasi-public Goods—goods and services
produced and delivered in such a way that the
exclusion principle applied even though the private
sector could offer
√ Often, government will provide these g/s since
private sector may tend to underallocate
resources for their production; Medical care and
public housing are examples.
• Allocation of resources to public and quasi-
public goods—government spending, taxing policies,
and manipulating interest rates are the ways
government can shift resource use.
11. Economic Functions of Government
√ Promoting Stability
• Use of Fiscal and Monetary Policy
Unemployment
Inflation
12. Land, Labor, Capital & Entrepreneruial Ability to bs and govt
Resource Money Payments paid by bs. and govt
Bs. Taxes Taxes
Businesses Government Households
Subsidy Transfers
Money Payments for goods and services from
government and households
Goods and Services for Households and Government
13. Federal Finance—Expenditures
Total
• Social Security Expenditures
• National Defense $2,011 Billion
• Health
• Interest on Public
Debt
• Other Entitlements
• Other mandatory
2002 Data
2002 Data
14. Federal Finance—Federal Tax Revenues
•Social Insurance
Total Tax Revenues
Receipts $1,853 Billion
•Personal Income Tax
•Corporate Income
Tax
•Excise Tax
•Other
2002 Data
15. State Finance
State Revenues
Sales & Excise Taxes ~ 47%
State Income Taxes ~ 34%
Corporate Income Taxes ~ 7%
License Fees ~ 6%
Other taxes ~5%
Non-tax sources
Lotteries
Intergovernmental Grants
State Owned Utilities/Stores
16. State Finance
State Expenditures
Education ~ 36%
Public Welfare ~ 25%
Health and Hospitals ~ 8%
Highways ~ 8%
Public Safety ~ 5%
17. Local Finance
Local Revenues
Property Taxes 72%
Sales & Excise Taxes 17%
Local Expenditures
Education 44%
Welfare, Health, and
Hospitals 12%
Public Safety 11%
Housing, Parks, 8%
and Sewerage
Highways 5%
