CHAPTER II

INDIVIDUALS AND
GOVERNMENT

(ELECTIVE 200)

PUBLIC FINANCE

By: Stephanie A. Sabino

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OBJECTIVES:

 Describe individuals, society and the

government
 Identify and discuss how the provision of
government goods and services through
political instituition diff ers from market
provision of goods and services and the
distribution of government and private use
 Describe and discuss the mixed economy
markets

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Individuals, Society & Government

What would it be like to live in a nation without

government?
 No system of cour ts to administer justice

 No provision of national defense & homeland

security would be diffi cult or disorganized
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 No central government to maintain & supply the
armed forces

 No gov. programs such as social security,

unemployment insurance, & welfare that provides
income suppor t to the elderly, unemployed, the
poor and disabled.

 Police and fi re protection are not provided

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 driving on roads and other bridges, all the

highways, streets, and other public transpor tation
infrastructure we use ever yday that we take for
granted are supplied and maintained bythe
government

 There would be no budget fund in elementar y,

secondar y schools and higher education would be
in trouble
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 Our system of healthcare depends on government
programs to pay the medical bills of many poor,
elderly and veterans.

 Institution ranging from medical schools to public

clinics & hospital would have their operations
impaired without government suppor t.

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 Government expenditures are fi nanced mainly
by the taxes, taxpayers give up more of their income
each year to suppor t government activities than they
do to satisfy their desires for such basic items as food,
clothing and shelter.

- Oppor tunity cost of any item is whatever must be

given up to obtain it. It is the relevant cost for
decision making.

GOVERNMENT & POLITICAL INSTITUTION

Public Finance is the fi eld of economics that

studies government activities. An economic basis for
government activities. A crucial objective of the
analysis is to understand the impact of government
expenditures, regulations, taxes and borrowing on
incentives to work, invest and spend income . That
develops principles in understanding the role of the
government in the economy & its impact on resource
Presentation Title use and the well being of citizens. 5
 Governments are organization formed to
exercise authority over the actions of people who lived
together in a society and to provide and fi nance
essential ser vices.

Many citizens and resources are employed in

the production of government ser vices. Individuals pay
taxes and, in many cases are recipients of income
fi nanced by those taxes (e.g., social security pensions,
unemployment insurance compensation, and subsidies
to the poor are fi nanced by taxes).

The extent to which the individuals have the

right to par ticipate in decisions that determine what
governments do varies from society to society. That
answers the following question:

 What governments do?

 How much they spend?

Presentation Title
 And how they obtain the means to fi nance their
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 Political institution constitute the rules and
generally accepted procedures that evolve in a
community for determining what government does and
how government outlays are fi nanced. Through these
mediums, individuals desires are translated into
binding decisions concerning the extent and functions
of government.

Such democratic institutions as majority rule &

representative government off er citizen an oppor tunity
to express their desires through voting and through
attempts to infl uence the voting of others.

under majority rule, one alternative such as

political candidate or a referendum to increase
spending for education is chosen over others if it
receives more than half the vote cast in an election.
Modern economic basis the study of government
activity on a theor y of individual theor y.

Presentation Title 7
 THE ALLOCATION OF RESOURCES BETWEEN
GOVERNMENT & PRIVATE USE
 Government provision of goods & ser vices requires, labor, equipment, buildings and land.

 The real cost of government goods & ser vices is the value of private goods and ser vices that
must be sacrifi ced when resources are transferred to government use. When citizens pay taxes,
their capacity to purchase goods and ser vices for their own exclusive use are reduced, such as
automobiles, clothing, housing, cameras, & dining-out.

 Resources that are thereby diver ted from private use are purchased or other wise obtained by
the government.

 Taxes aff ect prices of goods and ser vices and the incentive to work, save, allocate expenditures
among goods and ser vices.

 The resources governments obtain are used to provide citizens with goods and ser vices, such as
roads, police, fi re protection, & national defense.

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 THE ALLOCATION OF RESOURCES BETWEEN
GOVERNMENT & PRIVATE USE
 Cannot be used by any one citizen exclusively

 Other goods and ser vices provided by government are limited in the availability to cer tain
groups, such as the aged or children, as with social security pensions, public primar y and
secondar y schooling.

 The tradeoff between government and private goods and ser vices can be illustrated with the
familiar production-possibility cur ve.

 Figure 1.1, this cur ve give the alternative combinations of goods and ser vices & private goods &
ser vices that can be produced in an economy, given its productive resources and technology
assuming that resources are employed.

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 PRODUCTION POSSIBILITY CURVE

Production possibility curve is a

graphical model that represents all of
the different combinations of two
goods that can be produced. A
production possibilities curve graph
shows every possible production
combination between two goods that
fully utilizes the available resources

- PPC captures scarcity of resources

and opportunity costs.

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 THE ALLOCATION OF RESOURCES BETWEEN
GOVERNMENT & PRIVATE USE
 Private goods and ser vices are those items such as , food & clothing that are usually ,made
available for sale in markets.

 Government goods and ser vices , such as roads, schooling, and fi re protection , usually are
not sold in the market.

 At point A in fi gure 1.1, MX1 units of private goods and ser vices are forgone by individuals so
that government can provide 0G1 units of goods and ser vices. Resources that would have been
employed in producing private goods and ser vices are used by the government to provide
ser vices and exercise its functions.

 An increase in the amount of government goods & ser vices provided per year from 0G1 TO 0G2
requires reduction in the amount of private goods available per year. In fi gure 1.1 the annual
amount of private goods available declines from 0X1 TO 0X2 as the economy moves from point A
to point B on the PPC.

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 THE ALLOCATION OF RESOURCES BETWEEN
GOVERNMENT & PRIVATE USE
 For example, suppose that individual demands more environmental protection ser vices. To make
the ser vices available, governments might raise taxes paid by fi rms that pollute the air and
water or they could enact more stringent regulation that prevent pollution.

 The new regulations or taxes are likely to increase cost of production for business fi rms, causing
the prices of products produced by these fi rms to increase and the quantities demanded in the
market place by consumers to decline.

 The new policies will result in improved environmental quality-a government supplied good- but
will also require household sacrifi ce consumption of private goods and ser vices to pay for the
cleaner environment.

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 THE ALLOCATION OF RESOURCES BETWEEN
GOVERNMENT & PRIVATE USE
 Government goods and ser vices are by, and large distributed to groups of individuals through
the use of nonmarket rationing. This means that government goods and ser vices are not made
available to persons according to their willingness to pay and their use is not rationed by prices.

 In some cases, the ser vices are available to all, with no direct charge and no eligibility
requirements. The provision of national defense ser vices is one strong example of a good that is
freely available to all and not rationed with prices.

 In other cases such as criteria such as income, age, family status, residence or the payment of
cer tain taxes, fees or charges are used to determine eligibility to receive benefi ts.

 Example, social security pension individuals must be in a cer tain age and have worked for a
cer tain period of time (about 10 years) while covered by social security and must have paid
their share of social security taxes during that time.

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 THE ALLOCATION OF RESOURCES BETWEEN
GOVERNMENT & PRIVATE USE
 Another example, a fare must be paid to use public transpor tation facilities in the cities. If the
fares paid do not cover the full cost of operating the system, the defi cit is made up by taxes
levied by the government.

 To be eligible for elementar y schooling in a given school district children must reside within the
boundaries of that district.

 In public fi nance we study how means of rationing, the use of goods and ser vices and fi nancing
their resource cost aff ect incentives, resource use and production possibilities.

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 THE MIXED ECONOMY, MARKETS & POLITICS

 The United States and most other nations today have mixed economies. It is a combination
command economy and market economy. A mixed economies in which government supplies a
considerable amount of goods and ser vices and regulate private economic activity

 Taxes absorb at least one quar ter of national income in the typical mixed economy and the
government usually regulate private economic activities and use taxes and subsidies to aff ect
incentives to use resources.

 In pure market economy, vir tually all goods and ser vices would be supplied by private fi rms for
profi t and all exchanges of goods and ser vices would takes place through market with prices
determined by free interplay of supply and demand.

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 THE MIXED ECONOMY, MARKETS & POLITICS

 Individuals would be able to purchase goods and ser vices freely, according to their taste and
economic capacity (their income and wealth) given the market determines the prices.

 On mixed economies, the provision of a signifi cant amount of goods and ser vices takes place
through political institutions.

 In a market buyers are not compelled to purchase something they don’ t want.

 Political decisions, however compel citizens to fi nance the government ser vices, programs,
regardless of their personal preferences.

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 THE CIRCULAR FLOW IN THE MIXED ECONOMY

 In a pure market economy, all productive resources are privately owned by individuals who
decide how to use these resources. These individuals together with other living in their
households, make decision about how to use the resources they own.

 Their decisions are infl uenced in par t by market prices for goods and ser vices. They off er their
resources for sale as inputs in the market place

 Private business fi rms are organize to hire resources in input markets to produce goods and
ser vices desired by households members. The products in return are sold by businesses to
households in output markets.

 In a per fectly competitive economy, no seller can infl uence the prices. Instead, prices are
determined by free play of the forces of supply and demand. Given market prices, households
decide to sell the resources they own and fi rms decide to buy and what outputs to produce.

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THE CIRCULAR FLOW IN THE MIXED ECONOMY

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THANK YOU

“Never spend your

money before you have
earned it”.
-Thomas Jeff erson-

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