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Section 3 10 Elements of Clear Thinking About Economic Progress and the Role of Government March 23 2011 1 Government Promotes Economic Progress by Protecting the Rights of Individuals and Supplying Goods that 2 Provide goods that cannot be easily provided by the market overcome market failure Cannot be Provided Through Markets The government should 1 Protect individuals and their property rights Market failures A lack of competition monopolies Antitrust Acts B lack of information regulations C Externalities If positive Subsidy If negative Tax D Public goods March 30 2011 Public 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 others 2 Non excludable it is impossible or incredibly costly to exclude nonpaying customers from receiving the good i e National Defense outdoor firework show Free rider A person who receives the benefit of a good without paying for it This 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 allocation There is no assurance that a policy favored by a majority will promote economic progress does not mean that If voters do not pay in the proportion to the benefits received then the majority could pass unproductive the benefits costs projects or fail productive projects unproductive projects will not However when voters pay in proportion to the benefits they receive then productive projects will be passed and User charges require people who use the service more to pay a larger share of the costs I e if you use a lot of electricity you have a higher bill than a house that does not Many economists believe that government programs should pass only if either or 1 People pay in proportion to the benefits they receive 2 A supermajority 80 90 of the voters supported the program Only 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 Taxes The 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 government Money has to come from somewhere cid 224 private sector taxes B The cost of resources expended in the collection of taxes and the enforcement of government mandates Large and complex collection system with lots of money and jobs going into that task that could be used for more productive purposes C The cost of price distortions resulting from taxes and borrowing cid 224 deadweight loss April 4 2011 4 Unless Restrained by Constitutional Rules Special Interest Groups Will Use the Democratic Political Process to Fleece Taxpayers and Consumers 2 Special 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 it i e Make me rich tax Class population 180 Population of FL 19 000 000 1 tax cid 224 not worth fighting 19 000 000 180 105 556 per classmate cid 224 worth lobbying i e Sugar Growers of America 0 20 per pound of sugar in the US 0 06 per pound of sugar worldwide Households 20 cid 224 not worth fighting Sugar Growers of America get 1 9 billion dollars 30 000 per person cid 224 worth lobbying 5 Unless Restrained by Constitutional Rules Legislators Will Run Budget Deficits and Spend Excessively Shortsightedness 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 Others There are two ways that people can acquire wealth production and plunder Production involves making the economic pie bigger plundering involves taking someone else s piece The government is often used as an agent for plundering People 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 Receive They in fact get less than what they are trying to transfer There 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 income Both groups are made worse off B Competition for transfers will erode most of the long term gain from the intended beneficiaries The more competition the less each person gains Waiting to receive Hours waiting Total long term Cost of waiting in 3 50 100 line per hour 10 10 4 hours 8 hours gains 10 20 C Programs that protect potential recipients against diversity arising from imprudent decisions encourage them to make choices that increase the likelihood of the adversity i e Unemployment compensation cid 224 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 job Government transfers tend to crowd out private charitable efforts which are usually more effective at helping people More money paying taxes cid 224 less money to freely give to charity 8 Central Planning Replaces Markets with Politics Which Wastes Resources and Retards Economic Progress There are four major reasons why central planning will almost surely do more damage than good A Central planning merely substitutes politics for market verdicts 1 Logrolling politicians trade votes cid 224 if you vote for my bill to pass I ll vote for yours even if totally 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 2011 B

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