Public Finance - Chapter One - Background & Key Concepts PDF

Public Finance AlMoatassem Mostafa, Ph.D.  Term Translation Financial Administration ‫اإلدارة المالية‬ Public Debt ‫الدين العام‬ Allocation ‫تخصيص‬ Distribution ‫توزيع‬...

Public Finance AlMoatassem Mostafa, Ph.D.  Term Translation Financial Administration ‫اإلدارة المالية‬ Public Debt ‫الدين العام‬ Allocation ‫تخصيص‬ Distribution ‫توزيع‬ Stabilization ‫استقرار‬ Majority Rule ‫قاعدة األغلبية‬ Outlays ‫وظائف‬/‫أنشطة‬ Glossary Property Rights ‫حقوق الملكية‬ Framework ‫إطار‬ Production Possibilities ‫منحنى فرص اإلنتاج‬ Frontier Efficiency ‫كفاءة‬ Circular Flow Model ‫نموذج التدفق الدائري‬ Chapter One: Background and Key Concepts Public Finance Government Production Possibilities Frontier Circular Flow Model  Public Finance Public Finance – the field of economics that studies government activities and the alternative means of financing government expenditures. – The scope of the science of public finance now-a- days has widened too much.  Scope Public Finance PUBLIC PUBLIC REVENUE PUBLIC DEBT FINANCIAL EXPENDITURE ADMINISTRATION Functions Public Finance Allocation Stabilization Distribution Public Finance Public Finance vs. Private Finance Public Private Finance Finance Adjustment of Income to Expenditure to Income and Expenditure Income expenditure Unit of Time Fiscal Year No Specific Period Internal or External External borrowing Borrowing Borrowing only Public Finance vs. Private Finance (Cont’d) Public Private Finance Finance Currency Full control No control Future Provision Solid Provision No Provision Changes Big & Deliberate Limited Surplus Budgeting Limited Virtue Publicity Exists Limited  Government Governments – are organizations formed to exercise authority over the actions of persons who live together in a society and to provide and finance essential services.  Political Institutions Political Institutions – are rules and generally accepted procedures that evolve for determining what government does and how government outlays are financed.  Examples of Political Institutions Majority rule Representative government  Government Establishes legal Taxes and Public framework of the Revenues economy Functions Public Spending Transfer Payments  Government Legal Framework The rules of the game – A complex body of commercial law clarifies relations between buyers and sellers, employers and employees, and parties involved in private contracts. The regulation of corporations – Liability of individual shareholders Property rights – laws that establish the privileges, obligations, and limitations of ownership. – Regulations control entry into certain economic activities such as banking or medicine – Restrict what firms can say in their ads, and – Prohibit sale of goods deemed not in the public interest.  Government Taxes and Public Revenues Taxes are collected by government from households and firms. – The U.S. federal government collects most of its revenue from individual income taxes. – also taxes corporate profits and estates, levies excise taxes on the value of certain goods and tariffs on imports from abroad, and it collects payroll taxes.. Decides what activities are taxed, and how heavily, gives government many levers with which to encourage or discourage specific economic activities. Example: The tax on gasoline  Government Public Spending spends some of these tax revenues to provide goods and services through agencies that operate much like firms, – Public goods Definition Examples Spending mechanism – Socialist – Capitalist The allocation of government spending among alternatives also influences how firms and households allocate their private resources. – Example: level of police protection or transportation  Government Transfer Payments Paid to those who are entitled to receive them under the law. – Example: Social Security benefits on the basis of age or disability or Farm subsidies to firms which qualify by engaging in certain farming activities. Objectives of transfer payments – redistribute income among groups in society – affect private decisions. Example: choosing earlier retirement Economists refer to governments at all levels as the public sector.  The Production Possibilities Frontier Society as a whole cannot have everything it might want. – Because society has limited resources at any point in time, there is a limit to the quantities of goods and services it can produce. Government provision of goods and services requires labour, equipment, buildings, and land. – Government goods and services vs. private goods and services  The Production Possibilities Frontier Government goods and services are shared by all – they cannot be used by any one citizen exclusively. Example: defence and security Other goods and services provided by government are limited in availability to certain groups – Example: Public secondary schools The Production Possibilities Frontier  The Production Possibilities Frontier Non-market rationing – government goods and services are not made available to persons according to their willingness to pay – their use is not rationed by prices. – the services are available to all, with no direct charge and no eligibility requirements. – criteria such as income, age, family status, residence, or the payment of certain taxes, fees, or charges are used to determine eligibility to receive benefits.  Productive Efficiency & Allocative Efficiency In a market-oriented economy with a democratic government, – the choice will involve a mixture of decisions by individuals, firms, and government. Efficiency – refers to lack of waste. The production possibilities frontier can illustrate two kinds of efficiency: – productive efficiency – allocative efficiency. Productive Efficiency & Allocative Efficiency  Productive Efficiency & Allocative Efficiency Productive efficiency – given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good. Allocative efficiency – the particular mix of goods a society produces represents the combination that society most desires.  The Circular Flow Model Money—The green links Factors The represent the flow of Money The green links represent the blue links represent the money in the economy. flow of money in the flows of the factors of production economy. and of goods in the economy. Factors—The blue links represent the flows of the factors of production and of goods in the economy.  Where do consumers, that is, households go to get goods or services that they want or need? Where do consumers, that is, households go to get goods or services that they want or need? They go to the product market.  How do households get goods or services that they want or need? Are the goods and services free or given away by businesses?  How do households get goods or services that they want or need? No, households exchange money for the goods and services. How do the goods and services get to the product market? How do the goods and services get to the product market? Businesses sell their goods and services at the product market.  What do businesses get in exchange for providing goods and services to the product market? What do businesses get in exchange for providing goods and services to the product market? $$$$$$ Money $$$$$$ How do households get money to buy goods and services? How do households get money to buy goods and services? They provide labor or rent other factors of production to businesses at the factor market.  What do consumers, that is, households get from providing labor or renting other factors of production to businesses at the factor market?  What do consumers, that is, households get from providing labor or renting other factors of production to businesses at the factor market? $$$$$$ Money $$$$$$ What do the businesses do with the money they get from selling their goods and services at the product market? What do the businesses do with the money they get from selling their goods and services at the product market? They pay households for the factors of production.  What do businesses get from the factor market in exchange for their money ?  What do businesses get from the factor market in exchange for their money ? They get the factors of production that they need to produce goods and services such as labor, land, and capital. Circular Flow Model in Market Economy  Figure 1.2 Circular Flow in the Mixed Economy Goods & Services Goods & Services Output Market Dollars Dollars Income Support & Subsidies Subsidies Taxes, fees, charges Taxes, fees, charges Households Government Services Government Government Services Firms Dollars Input Dollars Market Resources Resources THANK YOU