Economics 101 pt. 3 - governments and economy

A constraint on the total level of federal spending must be imposed and the budget process should begin with the establishment of this constraint

Everyone else has one

Private sector output

Funds spent on other resources may have other, better uses

Three Costs of Government

Loss of private secot output//resources expended in tax collection and enforcement//price distortions caused by taxes and borrowing

Public Good

Public goods are goods (and services) that possess two traits. First, providing the good to one party simultaneously makes it available to others. This is called jointness in consumption. Second, it is difficult, if not impossible, to make the public good available to only those who pay. Therefore, consumers of public goods will have an incentive to become "free riders" because it will be easy for them to consume the available quantity without paying.// National defense and a just legal system are two examples of public goods. //Medical services, education, mail delivery, trash collection, and electricity come to mind. Yes, these services are often supplied by governments. However, they are also produced profitably in the private market. In both government and the private market, nonpaying customers can be easily excluded.

Distribution through political voting s fundamentally different and less efficient than market distribution - market dis is more consistent with economic progress

Resources need to be used efficiently, and competition allows that - when a monopoly is present, so is inefficency

The right of individuals to compete in a business or profession and/or buy and sell legally tradable goods and services at mutually acceptable terms shall not be infringed by Congress or any of the States.

Restrictions stop entreperneuars

Unless restrained by constitutional rules, special-interest groups will use the democratic process to fleece taxpayers and consumers.

Special interest groups gain the support of politicians - the guys get voted in and shuffle money towards their supporters - leaving other groups without any financial support

Public goods and externaltities result in incentives that may encourage self-interested individuals to undertake activities that are inconsistent woith ideal economic efficieny

Spill overr actions - whether benefit or loss - externality

Productive function

Supply public goods - national defense and regional flooding relief, roads

Competition is just as important in government as in markets.

There is little competition in government areas - efficiency does not necessarily mean benefit, and more money goes into those government projects due to inefficency

The net gain to those receiving government transfers is less, and often substantially less, than the amount they receive.

Three ways it does: An increase in government transfers will generally reduce the incentive of both the taxpayer-donor and the transfer recipient to earn// The competition for transfers will erode most of the long term gain of the intended beneficiaries - people modify their behavior to fit the requirements// Transfer programs reduce the adverse consequences suffered by those who make poor choices

Government slows economic progress when it becomes heavily involved in trying to help some people at the expense of others.

Two ways of acquiring wealth - production and plunder// Governments promote economic prosperity when they encourage productive activity and discourage plunder. //

Pork barrel legislation

a combonation of special interest groups in one group

A 2/3 approval of both Houses of Congress shall be required for the federal government to run an annual budget deficit or raise the overall limit on the national debt.

balance

Protective function

creates, upholds, and maintains a legal framework, protects and enforces the rights of the individuals to their person and property// clearly enforced protected rights - market prices reflect opportunity cost and producers - citizens are encouraged to be a part of the econoy - they wont be cheated out of their money

sources of monopolies

economies of scale - large firms have lower per unit costs than their rivals and grants of privelige

Neither the federal government nor state and local governments shall use their regulatory powers to take private property, either partially or in its entirety, for public use without paying the owner the full market value of the claimed property.

encourages, protects, and supports private property ownership

A three-fourths approval of both Houses of Congress shall be required for all expenditure programs of the federal government. At least two-thirds approval of the legislative branches of state government shall be required for the approval of expenditures by state governments.

equals broad agreement - no pork barrel or whatnot

The function of the Federal Reserve System is to maintain the value of the currency and establish a stable price level. If the price level either increases or decreases by more than 4 percent annually during two consecutive years, all Governors of the Federal Reserve System shall be required to submit their resignations.

establishes job

economic efficency

getting the most out of available resources

Congress shall not levy taxes or impose quotas on either imports or exports.

imposes on freedom to trade

A 2/3 approval of both Houses of Congress shall be required for the federal government to mandate any expenditures by either state governments or private business firms.

loophole

#1 - Government promotes economic progress by

protecting the rights of citizens and supplying goods that are difficult to provide through markets

Rent seeking

seeking favor of businesses and other groups

Fatal Conciet of Central Planning

substitutes politics for market verdicts - Subsidies and investment funds disbursed by governmental planners are influenced by political rather than economic considerations. "Old" firms tend to be favored over "new", growth-oriented firms. "Pork-barrel" projects will be pursued. //The incentive of government-operated firms to keep costs low, be innovative, and efficiently supply goods is weak//Central planners spending the money of taxpayers will invest less wisely than investors risking their own money.// Common resource - no private ownership - no care or responsibility

Externalities

the actions of an individual, group or business will "spill over" and exert a positive or negative impact on others and thereby affect their well-being without their consent.

Central planning replaces markets with politics, which wastes resources and retards economic progress.

the economy is too complex to be centrally planned and efforts to do so will result in inefficiency

Central planning

the economy would be better off if the government used taxes, subsidies, mandates, directives, and regulations to centrally plan and manage the key sectors of the economy

Unless restrained by constitutional rules, legislators will run budget deficits and spend excessively.

the two ways of balancing a budget - spending over so that the progress will bring more revenue - spending less so that you stop the debt - shortsightedness effect

Log - rolling

trading votes to get legislation passed for their groups