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Documente Cultură
PUBLIC DECISIONS
Economics of the Public Sector
Course outline
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References
Matei A. (2003) Economie public. Analiza economic a deciziilor publice, Editura Economic, Bucureti.
Andrei L. C. (2007) Economie, Editura Economic, Bucureti, pp. 366-393.
http://store.ectap.ro/externe/The_Economics_of_Public_Affairs_2012l.pdf
Stiglitz J. E. (1999) Economics of the Public Sector, Ediia a treia, W.W. Norton & Company, New York.
Lipsey R. G. i Chrystal K. A. (1999) Economia pozitiv, Editura Economic, Bucureti.
Lipsey R. G. i Chrystal K. A. (2002) Principiile economiei, Editura Economic, Bucureti, pp. 371-434.
Stiglitz J. E. i Walsh C. E. (2005) Economie, Editura Economic, Bucureti, pp. 302-326, 722-739.
Additional references:
Friedman M. (1995) Capitalism i libertate, Editura Enciclopedica.
McConnell C. R. i Brue S. L. (1996) Economics. Principles, Problems, and Policies, ediia a 13-a,
McGraw-Hill, SUA.
Friedman M. i Friedman R. (1998) Liber s alegi. Un punct de vedere personal, Editura Bic All.
Smith A. (2011) Avuia naiunilor, Editura Publica, Bucureti.
Keynes J. M. (2009) Teoria general a ocuprii forei de munc, a dobnzii i a banilor, Editura Publica,
Bucureti.
Schumpeter J. A. (2010) Zece mari economiti. De la Marx la Keynes, Editura Publica.
Stiglitz J. E. (2010) n cdere liber. Editura Publica, Bucureti.
Price setting
Supply of public goods and services
-
Taxes and
tariffs/duties
Income from
capital
Income from
states private
goods
Borrowing
Public
revenues
Public
expenditures
Transfers
Expenditures
with public
policies
Capital
expenses
Interest
judgments, which does not include verifiable facts: is necessary, should be,
would be wrong, better, more important
Economists concern
The problem of CHOICE
The problem of SCARCITY
Production Possibility Frontier (PPF)
and so on
- concepts, notions
Substantiate these elements through theories in the field
of public economics
Strengthen your knowledge of public economics with
1905)
Long cycles Kondratief 40-50 years Nikolai Kondratieff (1892
1938)
by the state
Classics Smith (1776) limiting the states role; the
individuals, by aiming at satisfying their own interests
(competition, profit) will thus serve the public interest invisible hand
19th century laissez faire lack of state involvement in
the private sectors activities (through regulation or
control) best responds to the societys interests
19th century increased role of the state in controlling the
means of production (collective farming)
20th century transition to market economy, though the
private-public frontier still remains an open subject
Facts, phenomena
and economic
processes
Public
administrations and
enterprises (or
privately held
enterprises
engaged in the
production of public
goods or services)
Science the
economic analysis
of public decisions
(ECONOMICS)
Regulation
Consequences
Price setting
(through taxes, duties,
subsidies)
Public
revenues
Public
expenditures
Needs
Scarcity
mental
capacity of workers to produce goods
and services.
K (Capital) = goods that do not directly
satisfy
human
needs:
factories,
machineries, equipment used to
produce other goods.
Is money considered capital in
economics ?
Choice
maker:
What is to be produced?
How is to be produced?
For whom is it to be produced?
How are these decisions made?
What is to be produced?
Production possibility
Resource allocation in
frontier
Private
goods
A
B
C
Public
goods
How is to be produced?
Production
Public
Private
Factors of production
More k, less L?
Less k, more L?
Public policy making
Environmental (can have an
impact upon technology)
Fiscal (can influence labour
factor)
Fiscal policy;
Social policy;
Provided public goods (satisfy the needs
of certain groups).
commons
Stages of collective (public) decision:
Knowing the public sector activities
and organization:
Financing method;
Expenditures and taxes (on a
central and local level);
Anticipating the consequences:
The effects of a tax on return
(price increase, wage cut);
Increasing the retirement age;
Assessing the alternatives;
The influence of the political factor.
Public goods;
Collective choices;
Justice.
Optimum
A balanced situation preferred by everyone (equilibrium);
Is reached by the presence of other individuals producing
Public goods
Some goods will either not be supplied by the market or, if
Collective choices
Example of collective decision-making the voting paradox (Marquis de Condorcet)
Voting preferences
As preferences
Bs preferences
Cs preferences
First choice
Shrek
Twitty
Tom
Second choice
Twitty
Tom
Shrek
Third choice
Tom
Shrek
Twitty
2:1
tranzitivity
NO !
2:1
Justice
Socially acceptable objective of the Government:
Protecting life and property;
Economic efficiency (obtaining the best result with limited resources);
Reaching a standard of justice (equity) (income distribution equal
vs. differentiated);
Economic growth;
Economic stability.
Tradeoff between equity and efficiency
leaky bucket
Economic policy fulfilling the criteria of economic efficiency;
Social policy aims at fair income distribution.
The American health system historically gave a high priority to patient choice at
the price of ballooning costs and the exclusion of the uninsured from the system.
Having increased coverage, the Obama reforms will have to restrict choice if
they are to control costs.
State through:
Power of coercion monopoly on:
Law making;
National defense;
Management of military reserves during war.
States functions
Allocative function Government intervention in the allocative
Allocative function
Property right
Belongs to an individual (private property) the right to exclude other
individuals from the benefits provided by a certain good;
Belongs to more individuals (common property) the right of a group
of individuals to benefit without boundaries from the object of that
property (see tragedy of the commons and free rider);
The use of common property right:
Umg = Price
It does not involve scarce resources
Otherwise:
Excessive use (like in the case of excess hunting and fishing);
Premature exhaustion of natural resources;
Congestion (in the case of positional goods goods having an insufficient supply
and their production cannot be easily increase).
social cohesion
Income distribution
Existent (can be in accordance with societys standards on equity)
Preferable (desirable) established through state intervention in order
reduce:
Tendencies towards monopoly;
Negative externalities.
Self-regulation
Automatic regulation of systems (cybernetic system)
Principle anticipated by Smith "invisible hand"
Economic growth
Job security reducing unemployment;
Price stability inflation control;
External balance balance of payments.
How?
Through monetary and fiscal policy instruments used to restore
balance
By coordinating the economic decisions of different groups of
economic actors from the private sector
economic growth
Ensuring balance for an economic growth path (Keynes)
Targeting economic recovery (growth of real national income vs. Growth of
potential national income) limit economic cycle oscillation for ensuring
sustainable and balanced economic growth
Confusion!
States responsibility to ensuring the general conditions for every
individual to work (with the appropriate exceptions)
States duty to secure jobs for all those who want to work
oversizing the public sector developing the PS in accordance with
different criteria, not economic efficiency
objective:
included) means:
Their efficient use (optimum use)
Securing jobs
Reduce
unemployment
the year
measures for employment growth are those supporting economic recovery
Structural unemployment determined by the restructuring of
or reducing inflation
The achievement of a high degree of price stability; this will be
apparent from a rate of inflation which is close to that of, at most,
the three best performing Member States in terms of price stability
(one of the convergence criteria)
Where is Romania standing?
Inflation/deflation/disinflation?
What is the supervising body?
Through what tools?
Monetary policy
Policies for economic recovery
Lead to solving many other macroeconomic imbalances
Preferred due to social pressures pertaining to recession
Private market
sector
Enterprises
Form of production of market economy
Government
Public administration
Public market
sector
State-owned companies
Provide goods and services
Non-profit associations
Participates in production through labor
Productive
Non-productive
companies
The existence of a
commodity
Marketable goods and
services
Non-existence of a
commodity
The existence of
expenditures item financed
from taxes
Non-marketable goods and
services
State budget
Public revenues and
expenditures = Correlating
the budget with the public
sector size
Shows the balance/
imbalance
Budget surplus (can show a
Long term
The public sector itself
Marginal social benefit (MSB) =
marginal revenue of the public
sector
Marginal social costul (MSC) =
cost of administering the public
sector
MSB = MSC optimum size of
Laissez-faire model
Welfare state
Social aid
Lower income
Social-democrat model
Distinct objectives:
Nationalization strengthening the public sector and national strategies,
Decentralization
Privatization
Deregulation
Exemples
Decentralization
better allocation
Privatization
Expansion after changing the stateowned company into a joint stock
company (still state-owned)
Reducing PS by transferring social
assistance to the private sector
Deregulation
Expansion due to cost coverage
(American financial system)
Reducing PS through careful
deregulation
Macro-focused
dimension of PS;
Political nature.
nature.
Decentralization strategy
replaced:
Planning
Rigid budgets
Control
System of
rules
Supervising
Evaluation
Performance
budgets
Management
by objectives
Framework
legislation
Discretion
Answer
Efficiency
Can be stimulated by a local
administrative (decentralized)
system, but moving resources
(down) does not necessarily
improve efficiency (e.g. police and
justice)
Reduction policies are neutral in
relation to efficiency or inefficiency
in the PS
Productivity
Aimed at through
privatization
Need for increased competition
PS:
Becomes a set of internal markets;
Intensive use of tender process (procurement) for providing public
Suppliers
Existent
competitors
in the field
Substitute
products
Buyers
Bargaining power
of suppliers
Competitive
rivalry within
the industry
Threat of
substitute
products
Bargaining power
of buyers
Idea
The five forces are the grounds for STRATEGY
development
reflect the complexity of competition in a sector
A greater intensity of competition is registered under perfect competition
TACTICAL significance
to technology)
Low
High
Entrance barriers
Low
High
Low
stable
earnings
Low,
risky
earnings
Large,
stable
earnings
Large,
risky
earnings
concerned products
Products are standard or undifferentiated
The switching cost is reduced
The buyer has complete information
In case of upstream integration
their products to
There are no substitute products
Sector is not an important client for the group of suppliers
Let us remember
Public policy objectives impose:
The need for a market mix;
Technically possible (PPF); What and how is produced?
What individuals prefer (utility). Whom for?
Public intervention. How are these decisions taken?
situation)
Namely a competitive economy
With an efficient resource allocation
Failure dissatisfaction
You always want what you do not have!
The idea of an alternative way to organize the economy
(more advantageous for one who thinks of it)
Maybe you are right!
Markets (almost always) produce too much of something
(pollution) and too little something (research);
a change that improves the situation of the rich without
affecting the poor is also Pareto efficient
Contracts guarantee
The problem of the overdue loans
1. Failure of competition
2. Public goods
3. Externalities
4. Incomplete markets
5. Failure of information
6. Unemployment, inflation and imbalance
1. Failure of competition
Pareto efficiency means perfect competition (ideal
situation)
Number of companies is large enough to keep the
market price unchanged
Otherwise:
Monopoly
Oligopoly
restrict competition
2. Public goods
They are either not provided or are insufficiently
provided;
For a private company that good would be inefficient
and non-marketable;
Pure public goods (defense, police protection, energy
plants etc.):
They do not involve additional costs when they are consumed
3. Externalities
The actions of an individual / a firm raises costs for another
(accidents)
Individuals do not cover the total cost of negative externalities they
4. Incomplete markets
Not only pure public goods and services are those that
innovation
2. Market innovation
5. Failure of information
Information = public good (supplying information to an
imbalances
Influence the structure of fiscal policy
Heavily regulated on a regional level
Let us remember
Market fails
Markets (almost
P
S
PE
E
Market is efficient
Marginal benefit =
QE
account?
Supply of labor
Demand of labor
Quantity of the good (labor)
DL
Price of labor
wE
Significance of the
IV
SL
I
E
II
III
imbalances
I over-wage
II over-quantity
III under-wage
IV under-quantity
LE
Underuse of labor
Labor main factor of production
Underuse of labor unemployment:
Supplied labor quantity is higher than demanded labor quantity (II)
It must be considered for both the over-wage and the under-wage
areas
There will be losses due to the production that the unused workers
could cover
Okuns Law unemployment assumes sacrificing a part of
the conclusion that for an increase of 1 per cent over NAIRU (Non
Accelerating Inflation Rate of Unemployment) in the unemployment rate there
will be a reduction in the GNP growth rate of 2 per cent in terms of
the potential national income
Overuse of labor
Can lead to overproduction of goods
Associated to an economic boom
?!
Change in wages
Type of job
Education (undergrad studies, high school etc.)
Age
Experience at work (employee loyalty, encourage employment
Effects:
competition)
Monopsony
Monopsony with low wage
There is no negotiation on
wages, or differentiations in
these negotiations
The hiring conditions are
pre-established (wage
included)
Labor:
terms,
Leaves the area to search for
work (uncommon, due to
rigidity)
W
S
Ec
Wi
Er
WE
A
Qc
B
E
QEQr
labor market:
union - monopoly
employers monopsony
and discrimination;
Direct involvement in the negotiations between unions and employers
as a mediator to ensure convergence to the labor markets optimum.
Regulations on employers
Consider void the employment contracts subject to not belonging
Regulations on unions
Address three main areas:
Union organization
Unfair union practices
Right to strike
Union organization
Aims at exclusive objectives specific to the labor
market:
higher wages,
better working conditions,
shorter working hours,
paid annual leave etc.
Political neutrality
Let us remember
Economy system organized on markets:
Labor market
Market of goods and services
Monetary market
An efficient market = a competitive market
Perfect competition
Imperfect competition
Non-optimal income distribution
State intervention
income.
Considering short-term consumer income constant, it results that any
manufacturers.
Monopolys strategies
Legend (1)
Monopoly faces the market demand demand curve
Legend (2)
The monopoly obtains superprofit (S), as the difference
Legend (1)
Initial situation (Q0, P0).
Temptation price control.
The oligopolistic firm has the following alternatives:
If it wants to increase the price, the demand will suddenly turn elastic because
Legend (2)
The marginal income Vm in the case of the imperfect
Solution negotiation
Cooperation between
firms in the oligopoly
avoids the kinked curve
and the firm gains
because the income
earned due to price
increase is larger than
the income lost due to
sales quantity drop
monopoly
Cartel firms keep their autonomy (e.g. OPEC)
Coordination may be based on agreements negotiated by
the participants
These agreements provide for:
commodity prices,
local markets,
Supply quotas assigned to each participant.
strategy
Conditions favorable to tacit coordination :
Less fierce competition,
Demand expansion,
Lower danger of new competitors emergence.
Coordination horizontal/vertical
Horizontal structures define the same level of
impossible
franchise, sales, leasing, licensing, sales, exclusive, contractual
requirements, territorial restrictions
resale price maintenance price strategy used by the manufacturer to
control the final consumer price
informational limitations
conditional sales contracts conditions the delivery of a good by the
purchase of another good