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program
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combination of government activities producing a distinguishing output
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these people often have monopolistic power, specialized information not available elsewhere, and can seek to convince governing authorities that their output needs to be increased
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bureaucrats
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plurality rule
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a commonly use collective decision-making rule when at least three alternatives are on the ballot.- disadvantage of simple majority rule in this case is that when more than two alternatives are on the agenda, no single one may receive a simple majority- often allows a minority to decide- can result in cycling
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comprehensive consumption
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annual comprehensive income minus annual savings
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external debt
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portion of a government's debt borrowed from abroad
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public choice
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one made through political interaction of many people according to established rules
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user charges
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prices determined through political rather than market interaction
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lack of information about public issues that results because the marginal cost of obtaining the information exceeds the apparent marginal benefits of doing so is called...
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rational ignorance
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personal income uses
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consumption, taxes, donations, gifts, savings (increases in net worth)
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assessment
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the valuation of taxable wealth by government authorities
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program budgeting
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a system of managing government expenditures by attempting to compare the program proposals of all government agencies authorized to achieve similar objectives
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net capital gains
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capital gains minus capital losses
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excise tax
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selective taxes levied on certain types of consumption activities
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cost-benefit analysis
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a practical technique for determining the relative merits of alternative government programs over time
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the most-preferred political outcome
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the quantity of the government-supplied good corresponding to the point at which the person’s tax share is exactly equal to the marginal benefit of the good
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logrolling
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groups trade votes for those issues of great interest to them, when intensities of preference differ on issues
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the idea that means of financing gov't-supplied goods and services should be linked to the benefits citizens receive from gov't
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benefit principle
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unified budget balance
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the difference between all federal government expenditures and revenues, "on budget" or "off budget" (main off budget are ss, usps)
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taxes on all components of the economic bases; no exclusions, exemptions, or deductions from the base
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general tax
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special interest groups
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organizations that seek to increase government expenditures that benefit their constituents
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noncompliance w/tax laws by failing to pay taxes due
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tax evasion
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nonexclusive
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too costly to exclude those who refuse to pay from enjoying the benefits
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Marginal External Benefit
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benefit of additional output accruing to parties other than buyers and sellers of the good
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corrective subsidy
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payment made by government to either buyers or sellers so that the price paid by consumers is reduced
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retained earnings
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the portion of a corporation's profit retained by the corporation, not paid out to stockholders as dividends
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incremental budgeting
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bases the current budget on the previous year's budget with only minor changes in funding levels for various programs included in the budget
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tax credits
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based on a certain percentage of expense incurred, credits received by taxpayers. amount of credit is fixed for all taxpayers - eligibility is not
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limited liability
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liability for debts incurred by the corporation, attributable to stockholders in proportion to the amount of money they have invested in the corporation
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comprehensive income
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sum of annual expenditures and delta of net worth
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this is achieved when ppl of differing economic capacity pay annual tax bills that differ according to some collectively chosen notion of fairness
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vertical equity
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this is achieved when ppl of same economic capacity pay same amount of taxes per year
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horizontal equity
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what is budget surplus?
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excess of government receipts over outlays
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minimum sum required to compensate the owners of inputs used for making an extra unit of the good available
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marginal social cost
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average tax rate
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total dollar amount of taxes collected divided by dollar value of taxable base
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has the federal budget balance as a percentage of GDP been in surplus or deficit since 1962?
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deficit :(
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compensation criteria
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measure the value of the gains to gainers in dollar terms and compare these with the dollar value of losses to losers
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pure private good
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provides benefits only to the person who acquires the good, not anyone else; is rival in consumption
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pure public good
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nonrival in consumption for an entire population of consumers, nonexclusive
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what is public finance?
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the field of economicsthat studies government activities and the alternative means of financing government expenditures
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point-count voting
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system where each voter is assigned a number of points they may allocate in any way they wish among the possible alternatives.- affords opportunity for greater revelation of preferences- may protect rights of minority voters with strong feelings on particular issues-increases possibility of strategic behavior
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congestible public goods
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goods for which crowding or congestion reduces the benefits to existing consumers when more consumers are accomodated
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single-peaked preferences
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imply that individuals behave as if a unique optimal outcome exists for them. the further away from their optima, either in the positive or negative direction, the worse things are.
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simple majority rule
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rule under which a proposal is approved if it receives more than half the votes cast in an election
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semipublic goods
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Exist in a continuum ranging from pure private goods to pure public goodsGoods are categorized according to the degree of rivalry in consumption and the degree of excludability
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multiple-peaked preferences
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imply that people who move away from their most-preferred alternative become worse off at first but eventually become better off as the movement continues in the same direction.
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a tax that only taxes certain portions of the base, or allows exemptions and deductions from general tax base
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selective tax
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economic depreciation
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the decrease in the market value of durable physical capital used by firms in the productive process as that capital is "used up."
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VAT
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value added tax - a general tax on consumption levied on the value added to intermediate products by businesses at each stage of production.
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physical infrastructure (of a nation)
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a nation's transportation and environmental capital, including its schools, power and communication networks, and health care system
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what is national saving?
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sum of personal saving by households, business saving, and saving by the gov't
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net federal debt
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that portion of the debt of the federal government held by the general public, excluding holdings of U.S. gov't agencies, trust funds, fed reserve banks
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4 marginal conditions for efficiency
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1. total social benefit
2. marginal social benefit
3. total social cost
4. marginal social cost
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how does deficit affect interest rates, traditionally?
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it contributes to their rise
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any given quantity of an economic good available in a given time period will povide satisfaction to those who consume it
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total social benefit
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corrective tax
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designed to adjust MPC of a good or service in such a way as to internalize the externality; must equal MEC per unit.
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2 things taxes do
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1. provide funds to purchase inputs necessary to produce government-supplies goods and services or to redistribute purchasing power among citizens2. reallocate reources from private to government use in two steps.
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improvements in efficiency are often opposed by
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special-interest groups that would suffer losses by the improvements
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unanimous consent (characteristics and concerns)
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- Allows only Pareto-efficient changes to be approved- Will block those changes that involve redistribution of either property rights to ownership or wealth, or income- Could result in high transactions costs- May encourage strategic behavior on the part of voters- Concern for minority rights has led to discussion of “relative unanimity,” such as a seven-eighths majority
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net worth
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the value of a person's assets held at any point in time, less the value of their liabilities
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accelerated depreciation
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allows a firm to deduct more than the actual economic depreciation from its income each year
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equity (of a corporation)
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difference between the value of a corporation's assets and the value of its outstanding debt
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4 functions of government
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1. Provide items we cannot easily make available for ourselves or purchase from others in markets(Law enforcement and courts)
2. Redistribute income and economic opportunity
(Income support for elderly, unemployed, poor)
3. Stabilize economic fluctuations(Inflation)
4. Regulate production and consumption(For improved health, elimination of excessive monopolistic control over prices)
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critics of the market system argue that the poor should receive transfers financed by
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taxes on the more fortunate
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General theory of second best
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States that when two opposing factors contribute to efficiency losses, they can offset one another’s distortionsEconomists treat each problem on an ad hoc basis to determine if there are any “second best” problems present
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nonrival in consumption
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a given quantity of a public good can be enjoyed by more than one consumer without decreasing the amounts enjoyed by rival consumers
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5 determinants of political equilibrium
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1. Public choice rule; the proportion of yes votes in relation to the number of votes required for approval of the issue2. Average and marginal costs of the public good3. Information available to voters on the cost and benefit associated with the issue4. Distribution of tax shares among voters and the way in which extra taxes vary with extra output of the good provided5. Distribution of benefits among voters
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3 more conditions for collective rationality!
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4. public choices and political equilibrium must not be influenced by the order in which alternatives are presented to voters5. public choices must not be affected by the elimination or addition of an alternative.6. public choices should be transitive.
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high-employment deficit or surplus - what is it?
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a calculation that estimates the budget deficit or surplus that would prevail at a certain designated level of unemployment in the economy. (gov't expenditures rise as unemployment rates go up, tax revenues increase with increase in employment)
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line budgeting system (of program budgeting)
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compares budget proposals of agencies in a department with each other, regardless of mission
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Alternative Minimum Tax (AMT)
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a shadow tax rate structure applied to taxpayers who have significant amounts of certain tax preferences
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social opportunity cost of funds
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percentage rate of return that savers and investors forgo to give up either consumption or investment to finance a government project
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a perfectly competitive market has 5 conditions:
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1. all productive resources are privately owned.
2. all transactions take place in markets, in which competing sellers offer a standardized product to many buyers.
3. economic power is dispersed in that no single buyer or seller can influence prices.
4. all relevant information is available to buyers and sellers.
5. resources are mobile and may be freely employed in any enterprise.
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normative approach argues that output of public enterprise must be priced how?
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at its marginal cost to achieve efficiency
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if a firm can depreciate its capital expenditures quickly and write off a greater proportion of the expenditures in earlier years of use, its after-tax income . . .
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will increase (assuming flat-rate tax)
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what is the risk of minority rule?
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imposing decisions that do not satisfy a majority of the community
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2 effects of higher interest rates
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1. higher rate of saving2. decrease of private consumption
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if benefit principle is successfully implemented, it links _______ and _______
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links cost per unit of gov't provided services with marginal benefits of those services
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how can burden of debt be offset?
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if revenue obtained from public debt is used to finance projects that yield future benefits
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debt financing - how does it affect current generation compared to tax financing?
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it allows them greater private consumption over their lifetime
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what do governments do to reduce reliance on taxes?
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they often sell private goods and services to raise revenues (e.g. state lotteries, retail services like liquor stores)
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when to realized capital gains happen?
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when assets are sold for cash or exchanged for other assets
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4 reasons people don't vote
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1. The cost of time and effort to vote outweighs the perceived benefit2. They believe that their votes do not make any difference3. They may see little or no difference between the alternatives considered in the election4. They have scanty information
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what is the diff btwn private and government goods and services
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former is usually available for sale in markets, latter is not
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how does our savings rate now affect future rate of output?
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greater saving, greater future rate of growth output. less saving, smaller future potential to grow
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what would notably be excluded from expenditure tax?
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savings - until they are withdrawn and used for consumption
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