Exercise 5. Listening from Guide to economics, unit 10 – “Government spenging”, track 30

The pie chart below shows how the UK government spends its revenue. Each segment of the pie (A to H) shows a different area of spending. Some labels are missing. Which of these areas do you thing they are?

• Education
• Defense
• Environment
• Health care
• Transport

Listen and complete the chart.

 

Exercise 6. Translate into English:

Размах экономической деятельности государства зависит от типа экономической системы. Все государства устанавливают юридические нормы, покупают и продают товары и услуги, осуществляют трансфертные платежи и собирают налоги.

При командно-административной экономической системе государство распределяет ресурсы, ограничивает право собственности и регулирует экономическую деятельность на всех уровнях. Большая часть предприятий находится в государственной собственности, а владение частной собственностью едва ли возможно.

В экономических системах смешанного типа государство оказывает косвенное влияние на цены, процентные ставки и уровень производства и таким образом воздействует на функционирование экономики. Правительства делают это в основном путем взимания налогов, например, налога на добавленную стоимость.

Государство финансирует себя при помощи налогообложения и займов. Часть денег, полученных в виде налогов, возвращается к гражданам в форме трансфертных платежей и социальных услуг, предоставляемых бесплатно.

Если расходы государства превышают его доходы, государство сталкивается с дефицитом бюджета. Если правительство увеличивает количество денег в экономике, чтобы справиться с дефицитом бюджета, это приводит к повышению уровня инфляции. Однако повышение количества денег – не единственный способ вывести экономику из состояния спада. Чтобы стабилизировать экономику, многие западные правительства снижают налоги.

Государство в условиях экономики смешанного типа пытается достичь полной занятости при низкой инфляции. Но уровень безработицы и уровень инфляции постоянно изменяются на протяжении бизнес-цикла.

 

Exercise 7. Comment on the quotations:

a) The office of government is not to confer happiness, but to give men the opportunity to work out happiness for themselves. (W.E. Channing)

b) If the Government is big enough to give you everything you want, it is big enough to take away everything you have. (Gerald R. Ford)

c) Most bad government has grown out of too much government. (Thomas Jefferson)

d) Every cook has to know how to govern the state. (V.Lenin)

What Should Governments Do?

Why should governments intervene in a market economy? Adam Smith, the father of economics, argued in his 1776 classic, The Wealth of Nations, that people pursuing their own interests are led as if by 'an invisible hand' to promote the interests of society. If there is an invisible hand, if markets allocate resources efficiently so that consumers' wants are satisfied at minimum cost, why should governments intervene in the economy at all?

In this section we discuss theoretical justifications for government intervention in market economy. The general argument for government intervention is market failure. Sometimes markets do not allocate resources efficiently, and government intervention may improve economic performance. Economic theory identifies six broad types of market failure, which we describe below.

Very few economists dispute the idea that the government could in theory improve the allocation of resources by correcting market failures, but many dispute the idea that government in fact improves the allocation of resources. Conservative economists, including Nobel Prize winners Milton Friedman of the Hoover Institution and James Buchanan of George Mason University, argue that in practice the government is even more likely to fail to allocate resources efficiently than are markets. We take up their arguments in Part 3, but first we discuss the six reasons why government intervention may, at least in principle, improve the allocation of resources.

The Business Cycle

The business cycle has many external causes, from wars or oil price changes to bursts of new inventions. Government policies also affect the business cycle. Increases in taxes and reductions in government spending generally reduce GNP; increases in the money stock increase GNP and prices. Government policy can make the business cycle worse, lengthening recessions and creating inflation, or it can reduce economic fluctuations.

There are major controversies in macroeconomics over whether and to what extent the government can stabilize the economy. Obviously, the government cannot control the economy perfectly or we would not have severe recessions and inflation. But since the government does control a large share of total spending and the quantity of money, it must make its decisions with their effect on the business cycle in mind. And it does: taxes may be cut when the economy is in a recession, and the growth rate of money may be reduced when the inflation rate is too high or be increased when the economy is in a recession.

Public Goods

Most of the goods supplied by businesses and demanded by consumers are private goods. A private good is a good that, if consumed by one person, cannot be consumed by another. Ice cream is a private good. When you eat your ice cream cone, your friend doesn't get to consume it. Your clothes are also private goods. When you wear them, everyone else is precluded from wearing them at the same time.

But there are goods we can all consume simultaneously, without anyone's consumption reducing anyone else's. These are called public goods. A public good is a good that, even if it is consumed by one person, is still available for consumption by others. Clean air is a public good. So is national defense, or public safety. If the armed forces are protecting the country from danger, your being safe in no way prevents anyone else from being safe.

It is no coincidence that most public goods are not provided in private markets. Because of the free-rider problem, private markets have trouble ensuring that the right amount of a public good will be produced. A free-rider is someone who gets to consume a good that is costly to produce without paying for it. The free-rider problem applies particularly to public goodsbecause, if anyone were to buy the good, it would then be available for everyone else to consume.

For instance, suppose a market were set up for national defense. Even if each of us felt that we needed defense, we would not have the right incentives to buy our share of defense. Since the amount of national defense I will have is the same as the amount everyone else has, I have a strong incentive to wait for someone else to buy it rather than contribute my fair share. I will have a free ride on everyone else's purchases. But of course, if everyone is waiting for someone else to buy national defense, there will be no defense.

To get around the free-rider problem, the country has to find some way of deciding together how much to spend on defense. Governments are set up to make such collective decisions. Many of the goods provided by the government are in fact public goods. National defense and police services are certainly public goods. National parks are a mixed case, since the views in the parks are a public good, at least until congestion sets in, but use of the eating facilities is not.

It may seem from this discussion that the government should produce public goods and should not produce any other goods. Neither conclusion is correct. The government does not have to produce public goods; it only has to specify how much of each should be produced. It may rely on private contractors to do the actual production, as it does, say, with regard to defense equipment. Indeed, it used to be common for countries to have private con­tractors provide armies on a commercial basis. It is increasingly common for municipalities to hire private contractors to remove the rubbish.

On the other hand, there is no general economic reason why governments should not produce private goods. There are government-owned firms or nationalized industries in most countries. Some government enterprises appear to be commercially successful and efficient. None the less, experience suggests that in many circumstances the government is less likely to produce efficiently than is the private sector.

Externalities

Markets work well when the price of a good equals society's cost of producing that good and when the value of the good to the buyer is equal to the benefit of the good to society. However, the costs and benefits of production are sometimes not fully reflected in market prices.

Consider the problem of pollution. A firm produces chemicals and discharges the waste into a lake. The discharge pollutes the local water supply, kills fish and birds, and creates an offensive smell. These adverse side effects represent costs to society of producing the chemical, and they should accordingly be reflected in its market price — but they may not be. Unless the chemical company is charged for the damages caused by its pollution, the market price of its output will understate the true cost of production to society. In this case there is an externality in the production of the chemical.

An externality exists when the production or consumption of a good directly affects businesses or consumers not involved in buying and selling it and when those spillover effects are not fully reflected in market prices.

Externalities are not all negative. The homeowner who repaints her house provides spillover benefits for the neighbours; they no longer have to look at a peeling or dilapidated house. In all externalities, there exists something that affects firms' costs or consumers' welfare (such as pollution or views of newly painted houses) but is not traded in a market. Economists often speak of externalities as caused by 'missing markets'.

When externalities are present, market prices do not reflect all the social costs and benefits of the production of a good. Government intervention may improve the functioning of the economy, for example by requiring firms to treat their waste products in certain ways before dumping them. Since externalities involve missing markets, they can also be handled in principle by market-type solutions. The government might charge firms (an estimate of) the damages their pollution causes, or might permit a certain amount of total pollution and allow firms to buy and sell rights to pollute.

The presence of externalities can provide the justification for a number of government activities besides pollution control. Examples range from control of broadcasting (interference is an externality) to various restrictions on land use.