Economics of Government

1
Chapter 25

• Economics of Government

2
Public Choice

• Majority Voting Most votes wins
• Can lead to inefficient outcomes
• People have different degrees of benefits
• Paradox of voting
• Median voter model
• Candidates will label opponents as too far to the
  ..
• Candidates will call themselves middle of the
  roaders
• Candidates (who are losing in the polls) will
  modify their positions to be more like the leader
• Candidates will speak in general terms
• MC of voting (driving, standing in line, filling
  out the ballot)gt MB of voting (will it effect the
  outcome, what will I get)
• Rational Ignorance it costs too much to get
  information

3
Government Failure

• Special interests - Politicians want to get
  reelected serve their own interests
• A small group get large gains at the expense of a
  society as a whole
• Lobbying
• Rent-seeking appealing to the government for
  special benefits
• Limited Choice
• Bundled choice
• Logrolling trading votes
• Bureaucracy inefficiency in government
• No profit motive

4
Public Finance

• Tax principles
• Ability to pay
• Benefits Received
• Types
• Progressive
• Personal income tax
• Regressive
• Social security (payroll)tax
• Proportional
• Sales tax
• Structure
• Federal progressive
• State and local regressive
• Overall slightly progressive (proportional)

5
Public Goods

• Goods provided by the Government and paid for
  with taxes
• Characteristics
• Indivisible
• Nonexcludable no one can be excluded
• Free rider problem
• Nonrival my use does not interfere with yours
• Collective Demand add up what all the people
  are willing to pay
• Supply marginal costs
• Optimal quantity intersection of Demand and
  supply
• Cost Benefit Analysis
• MB MC