gruber chapter 1.ppt
- 1. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 1 of 28 Why Study Public Finance? 1.3 Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education 1.2 Why Study Public Finance? Facts on Government in the United States and Around the World 1.1 The Four Questions of Public Finance Controversies about the proper role of the government raise the fundamental questions addressed by the branch of economics known as public finance. The goal of public finance is to understand the proper role of the government in the economy.
- 2. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 2 of 28 The Four Questions of Public Finance 1 . 1 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?
- 3. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 3 of 28 market failure Problem that causes the market economy to deliver an outcome that does not maximize efficiency. A. When Should the Government Intervene in the Economy? Market Failures 1 . 1 The Four Questions of Public Finance
- 4. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 4 of 28 The Measles Epidemic of 1989–1991 A P P L I C A T I O N After the measles vaccine was introduced in 1963, measles cases had become relatively rare in the U.S. by the 1980s. Over the period from 1989 to 1991, however, there was a huge resurgence in measles. It is clear that this outbreak resulted from very low immunization rates among disadvantaged inner-city youths. These unimmunized children were imposing a negative externality on other children who had received their immunizations but for whom immunization may have worn off. The federal government responded to this health crisis in the early 1990s: The government publicly encouraged parents to get their children immunized. The government also paid for the vaccines for low-income families. The result was impressive. Immunization rates, which had never been above 70% before the epidemic, rose to 90% by 1995. Government intervention clearly reduced this negative externality.
- 5. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 5 of 28 redistribution The shifting of resources from some groups in society to others. A. When Should the Government Intervene in the Economy? Redistribution 1 . 1 The Four Questions of Public Finance
- 6. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 6 of 28 B. How Might the Government Intervene? Tax or Subsidize Private Sale or Purchase 1 . 1 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. The Four Questions of Public Finance
- 7. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 7 of 28 How Might the Government Intervene? Restrict or Mandate Private Sale or Purchase 1 . 1 The Four Questions of Public Finance Public Provision The government can directly restrict the private sale or purchase of goods that are overproduced, or mandate the private purchase of goods that are underproduced and force individuals to buy that good. 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.
- 8. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 8 of 28 C. What Are the Effects of Alternative Interventions? Direct Effects 1 . 1 The Four Questions of Public Finance 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.
- 9. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 9 of 28 The Congressional Budget Office: Government Scorekeepers A P P L I C A T I O N The methods and results derived from empirical economics are central to the development of public policy at all levels of government. The Congressional Budget Office (CBO) provides Congress with the objective, timely, nonpartisan analyses needed for economic and budget decisions. The CBO increasingly plays a critical role as a “scorekeeper” for government policy debates. Legislative spending proposals that are to become law must first have their costs estimated by the analysts at the CBO. It is not an overstatement to say that the economists who work at the CBO frequently hold the fate of a legislative proposal in their hands. The large price tag that the CBO assigned to the Clinton administration’s plan to reform health care in the United States in 1994 is often cited as a key factor in the defeat of that proposal.
- 10. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 10 of 28 D. Why Do Governments Do What They Do? 1 . 1 The Four Questions of Public Finance political economy The theory of how the political process produces decisions that affect individuals and the economy.
- 11. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 11 of 28 Spending, Taxes, Deficits, and Debts 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World
- 12. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 12 of 28
- 13. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 13 of 28 The Size and Growth of Government 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World
- 14. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 14 of 28 Spending, Taxes, Deficits, and Debts 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World
- 15. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 15 of 28
- 16. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 16 of 28 Spending, Taxes, Deficits, and Debts 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World
- 17. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 17 of 28 Spending, Taxes, Deficits, and Debts 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World
- 18. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 18 of 28 State and Local Spending, Taxes, Deficits, and Debts 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World
- 19. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 19 of 28 Decentralization 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World A key feature of governments is the degree of centralization across local and national government units—that is, the extent to which spending is concentrated at higher (federal) levels or lower (state and local) levels.
- 20. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 20 of 28 Distribution of Spending 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World
- 21. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 21 of 28 Distribution of Spending---Federal and State 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World
- 22. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 22 of 28 Distribution of Spending 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World public goods Goods for which the investment of any one individual benefits everyone in a larger group. social insurance programs Government provision of insurance against adverse events to address failures in the private insurance market.
- 23. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 23 of 28 Distribution of Revenue Sources 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World
- 24. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 24 of 28 Distribution of Revenue Sources---State/local 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World
- 25. Chapter 1 Why Study Public Finance? © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 25 of 28 Regulatory Role of the Government 1 . 2 Why Study Public Finance? Facts on Government in the United States and Around the World Another critical role the government plays in all nations is that of regulating economic and social activities. The Food and Drug Administration (FDA) regulates the labeling and safety of nearly all food products and bottled water, tests cosmetics to ensure their safety, and approves drugs and medical devices to be sold to the public. The Occupational Safety and Health Administration (OSHA) is charged with regulating the workplace safety of the 115 million Americans employed at 7.2 million job sites. The Federal Communications Commission (FCC) regulates interstate and international communications by radio, television, wire, satellite, and cable. The Environmental Protection Agency (EPA) is charged with minimizing dangerous pollutants in the air, water, and food supplies.