The Size and Growth of the U S Government 11 06 2014 1 The difference between government spending and a transfer payment A transfer payment is the transfer of income from individuals who pay taxes to others social security unemployment benefits welfare All of these are apart of the direct income transfers that account for of government spending 2 Of government spending is for transfer payments Similarities Differences between Gov t Markets Political Decision Making 11 06 2014 3 Two concepts present in both the political and market process Competition In government politicians compete for elective office in market bureau chiefs agency heads compete for larger budgets Scarcity opportunity costs In government they use resources to achieve one goal and those resources are unable to achieve others In market provision of goods through gov t is costly even if good is free of charge to certain customers 4 Four key differences between political market process 1 Public sector organizations can break linkage between payment and consumption of a good In the market sector goods are allocated to those who are willing to pay the price But when decisions are made politically some pay little to nothing for a good while others pay dearly even if they receive little to no benefits 2 Private sector action is based on mutual agreement public sector action is based on majority rule In market voluntary and motivated action takes place when engaging in trade by the expectation of mutual gain Political action based on majority rule In political elections minority must deal with policies passed and help pay for it if necessary This creates winners and losers 3 When political choices are made legislatively voters face a bundle purchase problem They must chose among candidates who represent a bundle of positions on issues On election day voters can only chose 1 politician even if he she disagrees on some views This limits voter s power to make his her preference on certain issues In market a buyer can purchase some clothing from one store and also from another In the market there is rarely a bundle purchase problem 4 Income and influence are distributed differently in the 2 sectors In the market people who supply more highly valued resources in market place will have larger incomes In political setting one citizen one vote is the rule Donation of time influencing friends neighbors writing letters to legislation can all influence political outcomes When the Political Process Works Well 11 06 2014 5 When the political process creates productive actions voters pay in proportion to the benefits they receive then productive projects will be passed and underproductive projects will not be passed efficient use of resources There are also user chargers which requires people who use a service more to pay a larger share of the cost When the Political Process Works Poorly 11 06 2014 6 Politicians don t always vote for laws that promote the general welfare because of a special interest issue in which there is substantial personal benefits for a small number of constituents while the costs are spread widely across the bulk of citizens 7 If voters realize that their tax dollars are being used for special interest programs they are unable to stop the projects because organized interest groups are eager to provide cooperative politicians with vocal supporters campaign workers and most important financial contribution giving politicians more of an incentive to support legislation that provide benefits 8 Debt financing compounds the shortsightedness effect in the sense that borrowing provides politicians wit an alternative to current taxes it makes it possible for them to spend now and push visible taxes in the future to see current benefits Ch 6 Study Guide Questions 11 06 2014 Political Favoritism Crony Capitalism Gov t Failure 11 06 2014 9 Two examples of Crony Capitalism a situation where the allocation of resources and winners and losers in business are determined by political favors rather than by consumer preferences translated through the market profit and loss system 1 Matel incorporated costly testing procedures which increased costs of rivals and drove used toy sellers like Goodwill out of the market 2 General Electric partners with environmentalists to advocate subsidies and tax breaks for alternative energy sources This government favoritism increased demand for GE turbine engines solar panels wind farms Ch 6 Pre Post Quizes Qs As 11 06 2014 Which of the following is accurate regarding government expenditures The federal government spends considerably more than state and local governments combined In economics actions by individual interest groups designed to influence public policy more income to themselves are rent seeking Public choice analysis suggests that the primary motivating factor for politicians will be finding the policies that are most likely to get them re elected Which of the following is a distinguishing characteristic of a user charge Persons pay roughly in proportion to the extent that they use a good service As both the budget and regulatory powers of the government grow public choice analysis indicates that individuals and groups will find it in their best interest to spend more time rent seeking Why elected representatives will find borrowing to be an attractive method of financing current government programs short sightedness effect The rational ignorance effect refers to the lack of incentives voters have to become well informed about candidates and issues because their vote is unlikely to affect the outcome of an election When is crony capitalism most likely to be present When businesses either implicitly or explicitly provide political decision makers exchange for government factors improving profitability Restrictions that limit sugar imports sports stadiums etc That reflect the political attractiveness of special interest groups For activities in which benefits are concentrated and costs widespread government is less likely to undertake too much of these activities relative to what would be efficient Why private production is more efficient than government production All of the above Private face profit motive strong incentive even if costs benefits Why agricultural interests lobby for higher farm subsidies and price supports Agricultural interests seek redistribution of income favoring themselves An analysis of marker failure and government failure indicates both the market and
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