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Why does government exist?

Why does government exist?. Three main rationales for public sector action: Market failure (consumer ignorance of mortgages, pollution) Externalities (public goods and bads) Distributional unfairness (poverty)

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Why does government exist?

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  1. Why does government exist? Three main rationales for public sector action: • Market failure (consumer ignorance of mortgages, pollution) • Externalities (public goods and bads) • Distributional unfairness (poverty) • Market failure typically evokes a regulatory response (e.g., consumer education, fair lending laws, securities regulation). • Public goods encourage government to supplement private sector provision of a good or services (e.g., subsidization of crop insurance, subsidization of vaccines, public education). • Distributional fairness can result in regulatory, direct provision of a service, or direct cash transfer • Laws regarding usury, anti-discrimination legislation • Public housing • National child benefit, progressive tax, GST rebate for lower income households

  2. Definition of government initiatives • Social marketing to promote a goal (articulation of goal or intent; guidance on preferred behaviour) • Expenditures on goods and services • Direct resource commitments on goods (public housing, vaccination) • Direct resource commitments on services (consumer information, training) • Tax expenditures (tax deductions and credits awarded to citizens and businesses to behave, spend, invest, etc.) • Grants/contributions/contracts to third parties to perform services • Legislation is a general framework for how citizens conduct themselves (smoking bans, criminal code) and requires political assent. • Regulation modifies elements of legislation (changes to the speed limit) and can be completed by administrative fiat.

  3. Information Failure • Moral hazard • Market participants alter their behaviour in response to the divergence of public and private costs • Taxes/subsidies cause market participants to purchase/sell less/more than would have occurred with prices equal to the marginal cost • Asymmetry of information • Sellers are typically more informed than buyers • Prisoners paradox - information lack produces sub-optimal outcomes • Uncertainty about other players reactions causes poor decisions • Nash equilibrium exists when I account for your probable reaction to my choices. Equilibrium exists when we have all adjusted and readjusted to each others choices/decisions.

  4. Distributive justice as a merit good • Equity/fairness • Pareto efficient outcomes are not often (never?) “fair” Recent research shows that ideas of equality and fair distribution become settled for most people by the age of 10*. Strong evidence exists that humans develop altruistic instincts early. Share and share alike, Nature. 454(28) Aug 2008 • Efficiency is not the only goal • One can judge a society by how it takes care of its weakest. • Daniel Moynihan (US Senate)

  5. Value for money

  6. Value for money can be defined as: • Relevance – Are we doing the right thing? • Program addresses a demonstrable need, is appropriate to the federal government, and is responsive to Canadians • Performance – Are we achieving value? • Economy: Are taxpayer resources well-utilized? • Efficiency: Are program outputs (services and products) achieved in an affordable manner? • Effectiveness: To what extent have program objectives been achieved? That is, what results were produced? Are the costs of achieving program outcomes minimized? Adapted from Treasury Board Secretariat of Canada http://www.tbs-sct.gc.ca/eval/ppt/dec06-001/vfmp-por_e.asp

  7. Relevance Relevance (need) emerges in two ways: • Consumers validate the demand for goods and services in the market place (private goods). • Government determines needs that the public sector may legitimately provide (government provision of private and public goods). • Private and public goods • Private goods allow all the benefits/costs to be consumed (internalized) by the consumer. • Public goods have external benefits and costs that cannot be internalized (i.e., externalities exist); there is no incentive for private provision. • Merit goods/services are offered by government or charities based on ethical concepts (e.g., National Child Benefit).

  8. Measuring the value for money Two requirements: • Measure the “bang” • Measure the “bucks” Benefit cost = “bang per buck” Cost - benefit = “buck per bang” Cost-effectiveness analysis – What is the cost of specific outcomes arising from different interventions that produce that outcome? Cost-utility analysis – What is the perceived value of the outcomes relative to their costs? Cost-benefit analysis – What is the value of all outcomes in relation to all costs?

  9. Foundations of public sector decision-making

  10. CBA, CEA, and CUA compared Monetary value of net change to welfare of all outcomes for all stakeholders ($) CBA Social cost ($) (tangible and intangible) Outcomes (outputs, inputs) (actual changes measured in natural units, not $) CEA Cost of outcome ($) Value of outcomes (subjective value of outcomes - adjusted natural units, not $) CUA Cost of outcome ($)

  11. CBA, CEA, and CUA compared

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