Role of Government in Economics

1
Role of Government in Economics

• By Professor Jermaine Whirl
• For students of East Georgia College

2
Ultimate Questions Regarding Government

• Should the government play a role in the economy?
• If so how much of a role?
• For how long?
• What roles should it play?
• If its not successful should the government
  privatize?
• Costs and Benefits of government choices

3
Historical Ideas and Quotes

• Government is a poor manager good at making
  decisions, but not good at executing them (Peter
  Drucker 1960)Government is not the solution
  Government is the Problem (Ronald Reagan
  1980)Referring to NPR were honest, not
  dishonest, intelligent, not stupid (Al Gore 1995)

4
Why would government intervene?

• Lack of competition in markets. (Prevent
  Monopolies Collusion)
• To uphold Human Rights Laws and Constitutional
  laws
• Externalities (Negative)- spillover effects (or
  side effects) on non-consenting second parties. 
  Externalities can be either positive or negative,
  imposing either external costs or external
  benefits on second parties.
• Potential Information Problems- They are there to
  protect consumers from bad sellers or corrupt
  consumer goods, services, and information.

5
Two Legitimate Functions of Government

• Protective Function
• Should protect private property, laws, contracts,
  and provide national defense.
• Generate a stable environment in which business
  and industry can prosper.
• Productive Function
• Providing public goods or goods that won't be
  produce, because the private sector doesn't have
  an incentive to do so.

6
Rules of Economic Efficiency/ Decision Making
Process

• Cost-Benefit Analysis
• If the benefit outweigh the cost then the project
  should be done. If the costs outweigh the benefit
  then the project shouldn't be done.
• Council of Economic Advisors
• National Economic Council
• Federal Reserve System

7
Theories of Economic Public Policy

• Public Choice Theory
• Public Goods/Common Goods
• Privatization

8
Public Choice

• Methodological Individualist position that
  attempts to explain all social phenomena in terms
  of the aggregated rational calculations made by
  self-interested individuals
• Individual Utility Maximizer individuals make
  self-interested decisions that maximize their
  benefits at the least possible cost (Theory X)

9
Public Choice Continued..

• Public Choice Theorists view bureaucrats as
  self-interested utility-maximizers, motivated by
  such factors as salary, prerequisites of the
  office, public reputation, power, patronage
• Niskanens economic view of those darn
  bureaucrats . . .

10
Public Goods

• Public Goods are goods or services that can be
  consumed by several individuals simultaneously
  without diminishing the value of consumption to
  any one of the individuals.
• Secondly, these items must be provided by
  government, because the private sector has no
  incentive to do so.

11
Public Goods Characteristics

• Non-Rivalrous
• This simply means that a person doesnt have to
  fight another person to obtain the good or
  service. Its provided for everyone.
• Non-Excludable
• This simply means that one cannot be excluded
  from obtaining the good or service provided by
  the government.

• Common Goods
• Are both Non-Rivalrous Non-Excludable. Also
  they are common good available for everyone to
  use or to partake in.

12
Summary Chart of Public and Common Goods
13
Free Rider Problem

• Consumers can take advantage of public goods
  without contributing sufficiently to their
  creation.
• Example Obtaining national defense, but one
  doesn't pay taxes.
• Or in church, a big feast is given to all but the
  person doesn't help prepare, purchase, or serve
  the food, but does eat!

14
Privatization

• What is Privatization?
• Reducing the role of government and increasing
  the role of the private sector in the delivery of
  services (Hodge)
• Any arrangement between a government and the
  private sector (for profit-nonprofit) in which
  traditionally public activities are performed by
  the private sector (Savas)

• Why Privatize?
• Economic Recessions
• Growing Welfare
• Expenses
• Eroding Tax bases
• Unfunded Mandates

15
Pros of Privatization

• Steer rather than row
• Government can specialize in policy making and
  contract management rather than service delivery
• Expertise
• Efficiency
• Cost-Effective
• Create markets of opportunity

16
Cons of Privatization

• Privatization creates principle-agent challenges
• Accountability issues
• Contract monitoring/oversight challenges
• Performance evaluation challenges
• Increased transaction costs
• Arguments are often Ideological not empirical
• Competition is often lacking
• Opens door to Corruption
• Bid rigging, grafts kickbacks, bribes, etc.

17
Precautions of Privatizing

• Government must be a smart buyer
• Know how to write good contracts
• Know how to pick the best contractor - not
  necessarily the cheapest
• Must be Competition in the marketplace
• Sufficient oversight Contract Mgt.
• Managed Competition
• Understand Legal and Ethical Implications