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Actions of Government

What government does Establish and enforce the rules e.g. property rights Regulate competition environment. Redistribute income Examples? Provide public goods Manage the macro economy Monetary policy Fiscal policy. Actions of Government. The Miller Venture Capital Company, Ltd.

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Actions of Government

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  1. What government does Establish and enforce the rules e.g. property rights Regulate competition environment Redistribute income Examples? Provide public goods Manage the macro economy Monetary policy Fiscal policy Actions of Government

  2. The Miller Venture Capital Company, Ltd. • The problem • The solution • Who wants to invest??

  3. Private and Public Goods • Two criteria • Rival vs. shared consumption • Does consumption by one person reduce the benefit of the good (or service) to someone else? • Excludability • Can the good (or service) be easily withheld from those who do not pay?

  4. Private goods • Rival consumption • Excludable • Example • Can of soda

  5. Public goods • Shared (non-rival) consumption • A ship steering by the light from the lighthouse does not reduce the ability of other ships to steer by that light • Non-excludability • No practical way to exclude ships that don’t pay from using the lighthouse

  6. Mixed goods

  7. Government: Providing Public Goods and Some Mixed Goods • Government must provide public goods (and some mixed goods) since they will be UNDERPRODUCED • Examples – • Streetlights • National defense

  8. Practice • Right hand: Consumption • Rival • Shared  • Left hand: Excludability • Excludable  • Non-excludable  • Show me PUBLIC • Right  Left  • Show me Private • Right  Left 

  9. Practice • Busy hospital ER – all emergency cases accepted • Right hand: Consumption •  • Left hand: Excludability •  • Rock concert – not sold out • Right hand: Consumption •  • Left hand: Excludability •  • Town 4th of July fireworks display • Right hand: Consumption •  • Left hand: Excludability • 

  10. Manage the macro economy • Monetary Policy • Stabilizing the economy through managing M and interest rates • Fiscal Policy • Stabilizing the economy through changes in taxes and government spending

  11. Fiscal Policy • Fight recession • Need more spending • Cut taxes • Increase gov’t spending • Fight Inflation • Need less spending • Increase taxes • Decrease gov’t spending (HA!) • Incentives again

  12. Fiscal policy • A caveat: “Crowding out” • Deficits increase borrowing by the government – demand for loanable funds increases • Interest rates are prices that reflect the relative scarcity of loanable funds – they rise • Private investment that would have been profitable at lower rates is crowded out

  13. Should you worry? • Federal deficit is the amount the national government spends in excess of its revenue in a year. • (surplus vice versa) • A deficit adds to the total debt of the federal government – the “federal” or “national” debt

  14. Should you worry? Some data • Annual deficit • Around $300 billion • Around 3.75% of GDP • 1983, 8% of GDP • 2000, a SURPLUS of 2% of GDP • Federal debt • Closing on $8 trillion • About 63% of GDP • End of WWII debt as a % of GDP>100

  15. What government does Establish and enforce the rules e.g. property rights Regulate competition environment Redistribute income Examples? Provide public goods Manage the macro economy Monetary policy Fiscal policy Actions of Government

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