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FSU ECO 2000 - Lecture notes

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March 23, 2011#1 Government Promotes Economic Progress by Protecting the Rights of Individuals and Supplying Goods that Cannot be Provided Through MarketsThe government should…1) Protect individuals and their property rights2) Provide goods that cannot be easily provided by the market (overcome market failure)Market failures:A) lack of competition (monopolies—Antitrust Acts)B) lack of information (regulations)C) ExternalitiesIf positive: SubsidyIf negative: TaxD) Public goodsMarch 30, 2011Public goods have 2 characteristics (must have both to be a “public” good):1) Non-rival consumption: making the good available to one consumer does not reduce its availability to others2) Non-excludable: it is impossible (or incredibly costly) to exclude nonpaying customers from receiving the goodi.e. National Defense; outdoor firework showFree-rider: A person who receives the benefit of a good without paying for itThis will cause the good to become under-supplied (shortage)Solution = taxes (everyone pays for the good; i.e. National security)The good can be provided at an adequate amount if paired with a private good (i.e. radio [public] and advertising time [private])#2 Allocation through voting is fundamentally different than market allocationThere is no assurance that a policy favored by a majority will promote economic progress (does not mean that the benefits > costs)If voters do not pay in the proportion to the benefits received, then the majority could pass unproductive projects (or fail productive projects)However, when voters pay in proportion to the benefits they receive, then productive projects will be passed and unproductive projects will notUser charges: require people who use the service more to pay a larger share of the costsI.e. if you use a lot of electricity, you have a higher bill than a house that does notMany economists believe that government programs should pass only if (either/or):1) People pay in proportion to the benefits they receive2) A supermajority (80-90%) of the voters supported the programOnly 10-20% of antagonists are affected (as opposed to the 51+% way of doing it where 49+% of the people do not want the program passed)Less likely to pass a project where costs > benefits#3 The Costs of Government Are Not Only TaxesThe cost of government action goes beyond just taxes, but also involves…A) The opportunity cost of private-sector output that could have been produced with the resources that are now employed producing the goods supplied by the governmentMoney has to come from somewhere  private sector (taxes)B) The cost of resources expended in the collection of taxes and the enforcement of government mandatesLarge and complex collection system with lots of money and jobs going into that task that could be used for more productive purposesC) The cost of price distortions resulting from taxes and borrowing  deadweight loss!April 4, 2011#4 Unless Restrained by Constitutional Rules, Special-Interest Groups Will Use the Democratic Political Process to Fleece Taxpayers and ConsumersSpecial Interest effect: An issue that generates substantial benefits for a small group by generating minimal costs (small tax) to a large group (in the long run, losses may exceed benefits)Costs are so widespread (thus, so little per person), that no one is willing to stop/fight iti.e. Make me rich taxClass population: 180Population of FL: 19,000,000 ~ $1 tax  not worth fighting$19,000,000/180 = $105,556 per classmate  worth lobbyingi.e. Sugar Growers of America$0.20 per pound of sugar in the US$0.06 per pound of sugar worldwideSugar Growers of America get $1.9 billion dollars ~ $30,000 per person  worth lobbyingHouseholds ~ $20  not worth fighting#5 Unless Restrained by Constitutional Rules, Legislators Will Run Budget Deficits and Spend ExcessivelyShortsightedness effect: Politicians will favor programs that generate current visible benefits (make them look good and more popular), even if long-term costs of the project outweighs the benefits (let the next guy take care of the debt)Government officials have little incentive to control spending#6 Government Slows Economic Progress When It Becomes Heavily Involved in Providing Favors to Some People at the Expense of OthersThere are two ways that people can acquire wealth: production and plunderProduction involves making the economic pie bigger, plundering involves taking someone else’s pieceThe government is often used as an agent for plunderingPeople use lobbying, political campaigns, and other forms of favor-seeking to take the wealth of others#7 The Net Gain to Those Receiving Government Transfers Is Often Substantially Less Than the Amount They ReceiveThey in fact get less than what they are trying to transferThere are three major factors that undermine the effectiveness of income transfers:A) An increase in government transfers will reduce the incentive of both taxpayers (donors) and the transfer recipient to earn incomeBoth groups are made worse offB) Competition for transfers will erode most of the long-term gain from the intended beneficiariesThe more competition, the less each person gainsWaiting to receiveCost of waiting in line per hourHours waitingTotal long-term gains$50$104 hours$10$100$108 hours$20C) Programs that protect potential recipients against diversity arising from imprudent decisions encourage them to make choices that increase the likelihood of the adversityi.e. Unemployment compensation  Why work if you’ll receive money for being unemployed? And sometimes the compensation is more that what you’d be earning at a low paying jobGovernment transfers tend to crowd out private charitable efforts, which are usually more effective at helping peopleMore money paying taxes  less money to freely give to charity#8 Central Planning Replaces Markets with Politics, Which Wastes Resources and Retards Economic ProgressThere are four major reasons why central planning will almost surely do more damage than good…A) Central planning merely substitutes politics for market verdicts1) Logrolling: politicians trade votes  if you vote for my bill to pass, I’ll vote for yours (even if totally inefficient)2) Pork-barrel legislation: people attach their own little projects at the end of bills. President either accepts the entire bill and it’s additions, or totally rejects everything, including anything that was originally beneficial (usually lowers popularity)April 6, 2011B) The incentive of


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