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Fundamental Principles of Public Finance

Fundamental Principles of Public Finance. Troy University PA6650- 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

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Fundamental Principles of Public Finance

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  1. Fundamental Principles of Public Finance Troy University PA6650- Governmental Budgeting Chapter 1

  2. 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

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

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

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

  6. 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?

  7. 4 Categories of Resources

  8. Nonappropriability • Nonexhaustion/nonrivalry (air • Free Riders

  9. 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)

  10. 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

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

  12. Government Production & Government Provision

  13. 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

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

  15. 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

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

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

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

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

  20. 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?

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