ECON 408 study guide - Public Sector Economics 1 study...

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Public Sector Economics 1 study guide Econ 408 Chapter 1 – Introduction to public finance History of government: used to put taxes on imports, but grew to support all kinds of social programs as well as key sectors of the economy. They therefore needed more revenue, so established different kinds of taxes, like income tax and tax on consumption. Three levels of government, that have different taxing powers (from least to most): o Local: municipalities o Provincial o Federal Size of government: two ways of calculating it. o Number of government employees, but this one can be very misleading if fewer workers but more power for each worker vs. fictitious “government slaves”. o Volume of expenditures: everything that the government spends in a year Purchases of goods and services Transfers Interest payments o Few things make this calculation uncertain: Accounting issues: accounting decisions may have a huge impact on how big the government spending is in one year, since they sometimes don’t count future liabilities that they lock in today as part of today’s spending. Hidden costs: regulation itself may not be costly, but the weight born by firms is higher production costs, synonym to higher prices for end consumers. Sometimes however, these regulations may have social benefits that out- weight costs. Also, tax breaks are not included in spending per se, even though they have a similar impact than a direct payment to the agent who gets the tax break, and is not counted in annual spending. Governmental capital goods are not accounted for depreciation like private capital goods, so it may hinder calculations. Different levels of government have their own preferred ways of collecting revenues and areas of spending. Federal government collects most of the revenues, but transfers a lot of it to provinces and municipalities, which account for two thirds of the overall spending, even if they collect less than half of revenues. Chapter 2 – Fundamentals of welfare Economics Normative analysis: when analyzing a situation according to values, a vision or ethics. These statements cannot be proved or disproved, as they are opinion-based. Positive analysis: when analyzing a situation based on mere facts. These statements can be proved or disproved, as they have to be able to be tested. First Fundamental theorem of Welfare Economics: To achieve Pareto optimum in the economy, this rule needs to hold: o Assumptions: if the markets are perfectly competitive, and that markets exist for every commodity, society will reach a Pareto optimum.
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o MC i /MC j = MRT ij = MRS a ij = MRS b ij = P i /P j Explanation: MCi/MCj = MRTij: The marginal rate of transformation is the rate at which an amount of a unit of output can be produced by giving up one unit of the other good. The cost of giving up a good for the other can be expressed in terms of marginal costs at every level of output, and it can be done for both goods, thus giving the ratio MCi/MCj = MRTij.
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