Fundamental Principles of Public Finance Troy University PA

Fundamental Principles of Public Finance Troy University PA 6650 - Governmental Budgeting Chapter 1

What’s the Difference Between Public and Private Sector? • Similarities & Differences – Sources of funds – What funds get spent on – Decision making – Oversight and management control – Legal issues – Freedom of information – Measure of success

Why Do Governments Exist? • Governments make rules for markets • Governments enforce rules • Governments provide public goods WHY?

Market Failure • Governments exist to provide valuable services that businesses or individuals are unwilling or unable to provide independently

The Tragedy of the Commons • New England – 1600 s • Grazing of animals in the town square • Commons were overgrazed and destroyed Can you think of a similar situation today?

The Elements of Nonappropriability • Concepts – Exhaustion or Rivalry – Exclusion – Alternate use and joint use • 2 big questions – Is the exclusion of the goods feasible? – Is consumption individual or joint?

4 Categories of Resources PRIVATE GOODS • Food • Clothing • TV Sets TOLL GOODS • Turnpikes • Toll bridges • Motion pictures (alternate use, exclusion feasible) (joint use, exclusion feasible) COMMON-POOL RESOURCES • Aquifers • Fishing grounds • Petroleum reserves PUBLIC GOODS • National defense • System of justice • Vector control (alternate use, exclusion not feasible) (joint use, exclusion not feasible)

Nonappropriability • Nonexhaustion/nonrivalry (air • Free Riders

Externalities • Positive and Negative Unintended Consequences • Good outcomes – Vaccines result in less exposure to those who have not been innoculated) • Bad outcomes – (alligators in the swamp after draining)

Failure of Competition • Incomplete markets / imperfect information – Government testing of drugs, flood insurance – Adverse selection (HMOs rejecting cancer clients) – Moral hazard (flood insurance to those in flood zones) • Economic stabilization – Preventing unemployment, inflation – Increasing standard of living • Redistribution – Corrects perceived injustices

Privatization • Arguments supporting – Smaller government – Operating efficiency and response to clients – Cash • Arguments against – Loss of government capability – Possible monopolistic manipulation

Government Production & Government Provision with Government Production Government Provision with Private Production Private Provision with Government Production Private Provision with Private Production

Building Social Decisions from Private Preferences • Public choice theory – individuals are the best judges of their own well being • The welfare of the community depends upon the welfare of individuals in that community • Pareto Principle – If at least one person is better off from a policy action and no person is worse off, then the community as a whole is better off and the action should be taken • Tale of 3 projects – Pages 17 and 18

Political Science • Difference between liberal and conservative? • Differences between capitalist, socialist, and communist?

Politics, Representation, and Government Finance • Parties don’t know what citizens want • Citizens don’t know what government has done • There is an overall scarcity of knowledge

Politics, Representation, and Government Finance • Some people are more politically important than others • Specialists appear • Imperfect information results in bribery • Voters make uninformed choices

The Layers of Government • • • Express Powers Implied Powers Tenth Amendment Dillon Rule / Home Rule Hierarchy of Power

Political Science Quiz • • Republic Democracy Representative Democracy Unitary government Source of federal power Source of state power Source of local power

Do You Know Your Government • • • Cabinet members Vice President / Speaker of House U. S. Senators U. S. Representatives Supreme Court Justices Other agencies

Conclusion • Why do governments exist? • What are the objectives of governments? • What are the results of our system of government? • How are federal/state/local governments constrained?