Documente Academic
Documente Profesional
Documente Cultură
PUBLIC DECISIONS
Economics of the Public Sector
Course outline
1.
2.
3.
4.
5.
6.
7.
8.
Remember!
Briefing
Debriefing
Crosschecking
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.
Dinu I.T. (2012) The Economics of Public Affairs, Bucureti,
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, McGrawHill, 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.
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
and so on
- concepts, notions
of public economics
Seminar*
Texts from famous authors (e.g. Thomas Piketty)
Case studies (e.g. HBR)
Group research on a topic (e.g. DG Competition )
State involvement
Strong (former USSR, North Korea, Cuba)
Medium (Europe before the privatisation wave)
Low (USA has evolved over time: from privately held highways
and railways to public roads and state transport companies)
1905)
Long cycles Kondratief 40-50 years Nikolai Kondratieff (1892
1938)
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
Consequences
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 ?
The concerns of the public decision-
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?
Q
L
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.
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.
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.
income policies).
regulation
When the regulation cost exceeds its social benefits
Regulation
for countries in transition to market economy
is absolutely necessary to first introduce coherent
economic regulation
Self-regulation
Automatic regulation of systems (cybernetic system)
Principle anticipated by Smith "invisible hand"
How?
Through monetary and fiscal policy instruments used to restore balance
By coordinating the economic decisions of different groups of economic
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)
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
Productive
Non-productive
Public administration activity
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
Exemples
Decentralization
Expansion of public services
Reducing expenditures through a
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:
Answer
Efficiency
Productivity
Aimed at through
administrative (decentralized)
system, but moving resources
privatization
(down) does not necessarily
Need for increased competition
improve efficiency (e.g. police and
on the supply side
justice)
Expanding opportunities for
Reduction policies are neutral in
selection on the demand side
relation to efficiency or inefficiency
in the Will
PS these released resources be used for public sector
development?!
PS:
Becomes a set of internal markets;
Intensive use of tender process (procurement) for providing public
Competitive
rivalry within
the industry
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 (free
TACTICAL significance
Fluctuations in the economic situation;
Shortages of raw materials;
Strikes;
Demand fluctuations, etc.
to technology)
Low
Low
High
Entrance barriers
High
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
The providers product is an important input for the work
ORGANIZATION
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY
PURCHASING
Margin
Support activities
Primary activities
MARKET FAILURE
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
Contracts guarantee
The problem of the overdue loans
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)
4. Incomplete markets
Not only pure public goods and services are those that private
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
LABOUR MARKET
Market fails
Markets (almost
P
S
D
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
USA 2006-2007 unemployment rate < 5%
Oversizing the wages
?!
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:
Accepts the monopsonys
terms,
Leaves the area to search for
work (uncommon, due to
rigidity)
W
S
Ec
Wi
Er
WE
A
Qc
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 to
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
COMPETITION
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 around
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
quantity
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.
Otherwise - coordination arrangements
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
Competition in Romania
Competition Council (Consiliul concurentei)
http://www.consiliulconcurentei.ro/ro/despre-noi.html
Competition in EU
DG Competition
Test your knowledge on competition policy
http://ec.europa.eu/competition/consumers/quiz/
index_en.html
MONETARY MARKET
Premises
Money creation
Money Supply and Demand
Monetary Policy
What is money?
Money can be:
Payment for goods
Medium of exchange
Value keeper saving
Commodities (stones, cigarettes), Silver, Gold, Coins, Bills
vs. Barter
Price of money = exchange value of money = purchasing
power of the monetary unit (PPM)
Price of money inversely proportional with the price of
goods
PPM = 1/P
Measuring money
Monetary aggregates = statistical indicator used for certain
groups of currency:
1. Cash
2. Current accounts without interest
3. Travel checks
M1 = 1+2+3 (narrow money)
4. Savings accounts
5. Term deposits
M2 = M1+4+5
6. Deposit certificates
7. Long term savings account
M3 = M2+6+7 (broad money)
Money creation
Money suppliers: Central Bank, Treasury, commercial
banks
How?
Commercial banks
reserves
Money in
circulation
Deposits
Central Banks
supplies liquidity
+10
-10
+10
-8
+8
Depositing the
money
Loaning the money
+0,8
Depositing the
money
Loaning the money
+7,2
-5,8
+0,6
Loans/ credits
+10
+7,2
+5,8
+5,2
+5,2
Back to step 2
TOTAL
+1,4
+8,6
+13,8
+22,4
Monetary policy
The way in which the state uses the instrument of money
emission
Correlates the fiduciary money with the other assets to
regulate the monetary supply
Masters of the monetary policy Mugur Isarescu (NBR),
Mario Draghi (ECB), Janet Yellen (Fed), Haruhiko Kuroda
(Nippon Ginko)
Objectives:
Maintaining price stability
Exchange rate stability
Balanced economic growth
Full employment
Exam questions
1. What is the general principle of public economics? What are the main issues it
2.
3.
4.
5.
6.
7.
8.
9.
10.
focuses upon?
The public decision-maker has four main dilemmas. What are those and how is
he/she tackling them?
The utility interests us due to its role in the analysis of public economy focusing on
four pillars. Please comment.
What are the states economic functions and how do they operate?
How can you define the public sector in economic terms (depending on the types of
activities, results of activities, or time)?
The state can intervene in case of a market failure. Choose three such situations
and explain them.
Labour (L) can be underused or overused. What can the two situations determine?
How can the state intervene in the labour market?
What are the results that reforming the public sector can have? Please provide
examples.
Porter describes a model helping the decision-makers to establish the grounds for
strategy development. Explain.