Public Sector and Public Choice

Coverage of Chapter 9

1) Other important facets of the public sector:

protecting property rights

providing legal system

intervention in cases of insufficient competition

income redistribution

promoting stability and growth in the economy

2) We will see how the government obtains revenues through taxation to

provide goods and services.

3) 3) We will also examine the different types of taxation.

4) 4) Also the application of economic principles to politics.

FUNCTIONS OF THE GOVERNMENT

Property Rights and Legal System

In a market economy, private individuals and firms own most of the

resources

Private Property Rights

- when consumers buy, they have purchased the right to use the goods in ways
they see fit.

PPR Give individuals the incentive to use their property efficiently. And owners with
such rights have greater incentives to maintain, to preserve or increase its value

It is the government that defines and protect the rights of people and their
property through the legal policy and police protection.

By providing rules and regulation, the government makes the market work
efficiently.

Private enforcement is possible but hard; because nowadays the major means of
protection is by political institution.

Property Rights
 Include intellectual property-the property rights that an owner receives
(through patents, copyrights, and trademarks).

These rights give the owner long-term protection that encourages individuals
to showcase what they have (ex. Music, novels, invent new things, etc.)

In short, PR encourages investment, innovation, exchange, and

economic growth.

Legal System

Ensures the right of:

private ownership

The enforcement of contract

And the legal status for business.

Serves as the referee and imposes penalties on violators of our legal

rules.

Insufficient Competition in MarketsInsufficient Competition in Markets

Government also intervenes and correct cases of insufficient competition that

arise in the markets

Ex.:

Monopoly (one supplier)-results in higher prices and lower quantities traded than in
competitive market.

*Resulting to the detriment of the consumers

The Antirust Division of the DOJ and the Federal Trade Commission (FTC)

-attempt to increase competition by attacking monopolistic practices.

Income Redistribution

The market, determines:

what goods to be produce

in what quantities
 through the interaction of demand and supply for productive
resources; the distribution of output among individuals

3 MAJOR WAYS IN WHICH GOVERNMENT REDISTRIBUTES INCOME

TAXES

The enforced proportional contributions from persons and property imposed

by the state through its law-making body, by virtue of its sovereignty for the
support of government and all public needs.

Important tool for redistributing income.

Tax creates revenue to the government

TYPES OF TAXES

PROGRESSIVE TAX

is designed so that those with higher incomes pay a greater proportion of

their income in taxes.

Example: Personal Income Tax

EXCLUDED from income for taxation purposes

interest on municipal bonds

income kind (like Food stamps or Medicare)

REGRESSIVE TAX

takes a larger percentage of income from low-income earners than from high-
income earners.

There is no such kind of tax in the Philippines.

PAYROLL TAX

Taxes imposed on employers or employees, and are usually calculated as a

percentage of the salaries that employers pay their staff.

Payroll taxes generally fall into two categories: deductions from an

employee's wages, and taxes paid by the employer based on the employee's
wages.

EXCISE TAX
 A charged imposed upon the performance of an act, the enjoyment of a
privilege, or the engagement of an occupation.

Considered as Sales Tax on individual products such as cigarettes, alcohol,

gasoline and gambling

A charged imposed upon the performance of an act, the enjoyment of a

privilege, or the engagement of an occupation.

Considered as Sales Tax on individual products such as cigarettes, alcohol,

gasoline and gambling

GOVERNMENT SUBSIDIES

A subsidy is a benefit given by the government to groups or individuals,

usually in the form of a cash payment or a tax reduction.

The use of governmental revenues to provide low-cost public services.

Example:

Inexpensive public housing

Subsidized public transport

(MRT & LRT)

Public parks

Free/inexpensive Public

TRANSFER PAYMENTS

Cash transfer payments are by the government, particularly to the poor

and aged, for which no goods or services are exchanged.

Includes: Social Security, unemployment compensation benefits, welfare

(temporary assistance for needy families or TANF) & veteran payments.

Noncash transfers

Examples:

Food stamps

Medicaid

School lunch programs

 Housing subsidies (are designed to raise the living
standards of the poor)

GROWTH IN GOVERNMENT

Government plays an important role in the economy, and its role increased
markedly from 1929 to 1975. Although it is true that federal spending has changed
little since 1960, the composition of government spending has changed
considerably.

WHAT ARE THE CONTRIBUTING FACTORS THAT AFFECTS GOVERNMENT SPENDING?

National Defense

On 1960, the national defense spending fell from roughly 9 % to 2.9% in

2000.

- However, the aftermath of the terrorist attacks on September 11, 2001 and
war on Iraq and Afghanistan, led to increases in defense spending.

Social Security and Income Security Programs

Health and Medicare

Interest on National Debt

Miscellaneous Items

- foreign aid, agriculture, transportation and housing.

Government Spending