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Government Spending and Public Goods

This chapter explores the concepts of public goods and merit goods, as well as government spending in these areas. It discusses the characteristics of public goods and provides examples of both public and merit goods. The chapter also examines the distribution of government spending at different levels and in various categories, such as education and security.

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Government Spending and Public Goods

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  1. Chapter 29 Government Spending Gottheil — Principles of Economics, 7e

  2. Economic Principles • Public goods • Merit goods • Transfer payments Gottheil — Principles of Economics, 7e

  3. Government Spending and Public Goods Public good • A good whose benefits are not diminished even when additional people consume it and whose benefits cannot be withheld from anyone. Gottheil — Principles of Economics, 7e

  4. Government Spending and Public Goods 1. Which of the following offers the best example of a public good: a. Lift tickets sold at ski resorts b. A network of street lights c. Restaurant meals Gottheil — Principles of Economics, 7e

  5. Government Spending and Public Goods 1. Which of the following offers the best example of a public good: a. Lift tickets sold at ski resorts b. A network of street lights c. Restaurant meals Gottheil — Principles of Economics, 7e

  6. Government Spending and Public Goods 2. What does the nonexclusiveness property of public goods mean? • A private good, such as a lift ticket or a restaurant meal, is exclusively the property of the person who bought it. That person can prevent others from using the good. Gottheil — Principles of Economics, 7e

  7. Government Spending and Public Goods 2. What does the nonexclusiveness property of public goods mean? • Public goods such as street lights are not exclusive, and nobody can be denied the benefits of the lighting. Gottheil — Principles of Economics, 7e

  8. Government Spending and Public Goods 3. What does the nonrival property of public goods mean? • It means that use by one person does not subtract from what is available for others. Examples include street lights and public radio. Gottheil — Principles of Economics, 7e

  9. Government Spending and Merit Goods Merit good • A good that market demand and supply do not produce enough of. Gottheil — Principles of Economics, 7e

  10. Government Spending and Merit Goods What are some examples of merit goods? • Public-supported colleges and universities • Public-supported arts and health care • Libraries and museums Gottheil — Principles of Economics, 7e

  11. EXHIBIT 1 FEDERAL, STATE, AND LOCAL SPENDING: 2010 ($ BILLIONS) Source:Source: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, Tables 3.1–3.3, Washington, D.C., September 2011. Gottheil — Principles of Economics, 7e

  12. Exhibit 1: Federal, State, and Local Spending: 2010 1. Which level of government (federal or state/local) is the largest purchaser of goods and services? • State and local Gottheil — Principles of Economics, 7e

  13. Exhibit 1: Federal, State, and Local Spending: 2010 2. In which category of government spending are Social Security contributions and benefits recorded? • Transfer payments Gottheil — Principles of Economics, 7e

  14. EXHIBIT 2 CONSUMPTION EXPENDITURES IN 2010, BY FUNCTION ($ BILLIONS) Source:U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Table 3.15.5, Washington, D.C., September 2011 Gottheil — Principles of Economics, 7e

  15. Exhibit 2: Consumption Expenditures In 2010, by Function 1. What is the largest single functional category of expenditure by the federal government? • National defense Gottheil — Principles of Economics, 7e

  16. Exhibit 2: Consumption Expenditures In 2010, by Function 2. What is the largest single functional category of expenditure by state and local government? • Education Gottheil — Principles of Economics, 7e

  17. EXHIBIT 3 GOVERNMENT SPENDING ($ billions) ON SECURITY: 2010 Source: Survey of Current Business (Washington, D.C.: U.S. Department of Commerce, September 2008). Gottheil — Principles of Economics, 7e

  18. Exhibit 3: Government Spending on Security: 2010 Complete the sentence: The two largest security expenditure categories by state and local government were _____ and _____. Gottheil — Principles of Economics, 7e

  19. Exhibit 3: Government Spending on Security: 2010 Complete the sentence: The two largest security expenditure categories by state and local government were police and prisons. Gottheil — Principles of Economics, 7e

  20. Exhibit 3: Government Spending on Security: 2010 The burden of national defense spending falls exclusively upon the federal government. Gottheil — Principles of Economics, 7e

  21. How Much Does Government Spend? The budget for veterans’ benefits and services is dominated by disability and survivor compensation. Gottheil — Principles of Economics, 7e

  22. EXHIBIT 4 FEDERAL, STATE, AND LOCAL GOVERNMENT SPENDING ON EDUCATION: 2010 ($ billions) Source: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Table 3.15.5, Washington, D.C., September, 2011. Gottheil — Principles of Economics, 7e

  23. Exhibit 4: Federal, State, and Local Government Spending on Education: 2010 1. True or false: Total education spending is dominated by expenditures on elementary and secondary education. • True. Elementary and secondary education consumes nearly three-quarters of the total education budget. Gottheil — Principles of Economics, 7e

  24. Exhibit 4: Federal, State, and Local Government Spending on Education: 2010 2. True or false: The federal government provides financial support for higher education, but not for primary or secondary education. • False. The federal government provides some financial assistance at all levels. Gottheil — Principles of Economics, 7e

  25. How Much Does Government Spend? 1. The highway system along accounted for what percentage of transportation spending: a. 26.2 percent b. 75.6 percent c. Over 90 percent Gottheil — Principles of Economics, 7e

  26. How Much Does Government Spend? 1. The highway system along accounted for what percentage of transportation spending: a. 26.2 percent b. 75.6 percent c. Over 90 percent Gottheil — Principles of Economics, 7e

  27. How Much Does Government Spend? 2. Which of the following has the smaller percentage of total government spending: a. Transportation b. Conservation and natural resources Gottheil — Principles of Economics, 7e

  28. How Much Does Government Spend? 2. Which of the following has the smaller percentage of total government spending: a. Transportation b. Conservation and natural resources Gottheil — Principles of Economics, 7e

  29. How Much Does Government Spend? Other than telecommunications, there has been relatively little commercial motive for space travel. Federal spending on space exploration was $15.3 billion in 2004. Gottheil — Principles of Economics, 7e

  30. How Much Does Government Spend? 3. What common denominator is there for government spending on security, education, transportation, natural resources, energy, and space? • For each of these, the target population of beneficiaries is everyone. Gottheil — Principles of Economics, 7e

  31. How Much Does Government Spend? In contrast, agricultural subsidies are targeted at benefiting farmers, and public assistance programs are targeted at benefiting the poor and needy. Gottheil — Principles of Economics, 7e

  32. How Much Does Government Spend? Welfare • Government-provided assistance—cash payments and goods and services—to the poor, the elderly, and the disabled. Eligibility is based principally on income and size of family. Gottheil — Principles of Economics, 7e

  33. How Much Does Government Spend? Until recently, eligibility for welfare was linked to single-parent families (Aid to Families with Dependent Children, AFDC) and to the sick or disabled (Supplemental Security Income Program, SSI). Gottheil — Principles of Economics, 7e

  34. How Much Does Government Spend? Eligibility for AFDC and SSI meant entitlement, with no time limit specified. Gottheil — Principles of Economics, 7e

  35. How Much Does Government Spend? 4. What new welfare program was created in 1996 and abolished AFDC? • Temporary Assistance for Needy Families (TANF). Gottheil — Principles of Economics, 7e

  36. How Much Does Government Spend? The new TANF program is not an entitlement. Welfare recipients must participate in work activities within two years of receiving welfare or risk losing it. Gottheil — Principles of Economics, 7e

  37. How Much Does Government Spend? In addition, a family is only eligible for a lifetime total of five years of welfare benefits. Gottheil — Principles of Economics, 7e

  38. How Much Does Government Spend? Food stamp program • An aid program that provides low-income people with stamps that can be redeemed for food and related items. Gottheil — Principles of Economics, 7e

  39. How Much Does Government Spend? Medicaid • A health care program administered through Social Security that is applicable to low-income and disabled people. Gottheil — Principles of Economics, 7e

  40. How Much Does Government Spend? Social Security • A social insurance program that provides benefits, subject to eligibility, to the elderly, disabled, and their dependents. Gottheil — Principles of Economics, 7e

  41. How Much Does Government Spend? 5. Which of the following are true about Social Security: a. It is compulsory. b. Everyone receives the same level of benefits. c. Your contributions are saved in an individual account that you can invest in stocks or bonds. Gottheil — Principles of Economics, 7e

  42. How Much Does Government Spend? 5. Which of the following are true about Social Security: a. It is compulsory. TRUE b. Everyone receives the same level of benefits. FALSE c. Your contributions are saved in an individual account that you can invest in stocks or bonds. FALSE Gottheil — Principles of Economics, 7e

  43. How Much Does Government Spend? 6. What is the purpose of Medicare? • Its purpose is to reduce the financial burden of illness on the elderly. Gottheil — Principles of Economics, 7e

  44. How Much Does Government Spend? 7. How are Social Security and Medicaid funded? • Social Security and Medicaid are pay-as-you-go programs that are financed through payroll taxes. The revenues go in to a trust fund from which benefits are paid out. Gottheil — Principles of Economics, 7e

  45. How Much Does Government Spend? 8. With the proportion of elderly in the U.S. population growing, what are the future prospects for Social Security and Medicaid? • As pay-as-you-go programs financed through payroll taxes, they are at risk because benefit demands are growing relative to the pool of working-age people paying the taxes to support the programs. Gottheil — Principles of Economics, 7e

  46. EXHIBIT 5 SOCIAL SECURITY EXPENDITURES AS A PERCENTAGE OF GDP FOR SELECTED ECONOMIES: 2006 Source: International Monetary Fund, Government Financial Statistics Yearbook, 2007. Gottheil — Principles of Economics, 7e

  47. Exhibit 5: Social Security Benefits as a Percentage of GDP for Selected Economies: 2006 1. Among the other rich industrialized countries listed in Exhibit 6, how does the U.S. rank in terms of Social Security benefits as a percentage of GDP? • Social Security as a percentage of GDP is 2nd lowest (among those listed) in the United States. Gottheil — Principles of Economics, 7e

  48. Exhibit 5: Social Security Benefits as a Percentage of GDP for Selected Economies: 2006 2. What conclusions might one draw from Exhibit 6? • Social Security is much less of a burden on the U.S. economy relative to many comparable industrialized countries. Gottheil — Principles of Economics, 7e

  49. How Much Does Government Spend? 9. Since the 1980s, the public debt has grown considerably. How much did the U.S. spend in 2007? How large was the debt? • As of 2007 the U.S. paid $411.1 billion in interest on a debt that reached $9 trillion. Gottheil — Principles of Economics, 7e

  50. Is the Level of Government Spending Too High? After learning about the different elements of government budgets, it becomes evident that wholesale cuts in government spending are difficult to advocate. Gottheil — Principles of Economics, 7e

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