Economics 5: Public Sector
Government in the circular flow
Government collects tax from households/firms
Government buys resources from households and buys goods/services from firms
Government pays households for resources and pays firms for goods/services
Leakage: Taxes
Injection: Government spending
Technical efficiency: When the economy operates on PPF
No unemployed or underemployed resources
Necessary condition for economic efficiency because movement toward
PFF will benefit persons
Economic efficiency: Occurs when any change benefitting someone harms someone else
No market imperfections interfering with “ideal” market
Occurs because voluntary trade benefits both buyer/seller
Seller: sells item when it results in a bigger payment than keeping it
Buyer: buys item when is it preferred over alternative item
Trade: occurs: all potential gains are exhausted & economic efficiency occurs
Market failure: “Markets can’t achieve economic efficiency”
More Types of market failures in economy
Market failure: Free market not pareto efficient on its own
We could make somebody better off without making somebody worse off
Need government intervention
Externalities:
Negative: Oversupply Factory make steel & dump waste in river. Kids
play in river and gets sick. Thus, the factory imposing cost on family. Note:
if it was agreed to pay off the family $20000 annually, it wouldn’t be
externality
Positive: Undersupply 1st party benefiting 2nd without benefitting
themselves. I got a flu shot, so you less likely to get sick
, Public good:
Nonrivalrous: Undersupply: National defense (France). Spaniard move to
France & won’t interfere with French national defense
Rivalrous: I eat fish, 1 less for others to eat
Nonexcludable: No supply: France can’t exclude Spaniard from national
defense, creating Free rider problem: Spaniard have no incentive to
voluntarily pay national defense unless government intervention: Tax
Incomplete information: Market don’t supply enough information to consumers. Example:
People don’t know interest rate, Don’t know what in drugs (Gov ensure labels)
Monopoly: Lack of competition (Price = Market Cost) to influence prices. Thus P>MC
Single firm supply the market
Monopolist gain, society lose
Net worst off
Incomplete market:
Market don’t develop, even through individuals
Insurance market can’t develop because adverse selection &
information asymmetry: healthy persons willing to pay $200
monthly, insurance offer $150. This Willingness to pay > Cost. But
sick people want insurance too. When sick people sign up, the
company loses money so they raise prices.
Information asymmetry: Client know more about health than
about insurance
High unemployment/Inflation: Serious macroeconomic problem
Efficiency: Produce more output with every unit of input (not wasting)
Example: use 60 mangoes to make more jam use resources efficiently
Types of efficiency: Allocative:
1 Allocative: Concerned with the optimal distribution of
goods/services
2 Productive: Concerned with the optimal method of producing
goods/services at lowest cost On PFF curve
Government in the circular flow
Government collects tax from households/firms
Government buys resources from households and buys goods/services from firms
Government pays households for resources and pays firms for goods/services
Leakage: Taxes
Injection: Government spending
Technical efficiency: When the economy operates on PPF
No unemployed or underemployed resources
Necessary condition for economic efficiency because movement toward
PFF will benefit persons
Economic efficiency: Occurs when any change benefitting someone harms someone else
No market imperfections interfering with “ideal” market
Occurs because voluntary trade benefits both buyer/seller
Seller: sells item when it results in a bigger payment than keeping it
Buyer: buys item when is it preferred over alternative item
Trade: occurs: all potential gains are exhausted & economic efficiency occurs
Market failure: “Markets can’t achieve economic efficiency”
More Types of market failures in economy
Market failure: Free market not pareto efficient on its own
We could make somebody better off without making somebody worse off
Need government intervention
Externalities:
Negative: Oversupply Factory make steel & dump waste in river. Kids
play in river and gets sick. Thus, the factory imposing cost on family. Note:
if it was agreed to pay off the family $20000 annually, it wouldn’t be
externality
Positive: Undersupply 1st party benefiting 2nd without benefitting
themselves. I got a flu shot, so you less likely to get sick
, Public good:
Nonrivalrous: Undersupply: National defense (France). Spaniard move to
France & won’t interfere with French national defense
Rivalrous: I eat fish, 1 less for others to eat
Nonexcludable: No supply: France can’t exclude Spaniard from national
defense, creating Free rider problem: Spaniard have no incentive to
voluntarily pay national defense unless government intervention: Tax
Incomplete information: Market don’t supply enough information to consumers. Example:
People don’t know interest rate, Don’t know what in drugs (Gov ensure labels)
Monopoly: Lack of competition (Price = Market Cost) to influence prices. Thus P>MC
Single firm supply the market
Monopolist gain, society lose
Net worst off
Incomplete market:
Market don’t develop, even through individuals
Insurance market can’t develop because adverse selection &
information asymmetry: healthy persons willing to pay $200
monthly, insurance offer $150. This Willingness to pay > Cost. But
sick people want insurance too. When sick people sign up, the
company loses money so they raise prices.
Information asymmetry: Client know more about health than
about insurance
High unemployment/Inflation: Serious macroeconomic problem
Efficiency: Produce more output with every unit of input (not wasting)
Example: use 60 mangoes to make more jam use resources efficiently
Types of efficiency: Allocative:
1 Allocative: Concerned with the optimal distribution of
goods/services
2 Productive: Concerned with the optimal method of producing
goods/services at lowest cost On PFF curve
