Actions of Government What government does Establish and enforce the rules e.g. property rights Regulate competition environment Redistribute income Examples? Provide public goods Manage the macro economy Monetary policy Fiscal policy

The Miller Venture Capital Company, Ltd. The problem The solution Who wants to invest??

Private and Public Goods Two criteria Rival vs. shared consumption Does consumption by one person reduce the benefit of the good (or service) to someone else? Excludability Can the good (or service) be easily withheld from those who do not pay?

Private goods Rival consumption Excludable Example Can of soda

Public goods Shared (non-rival) consumption A ship steering by the light from the lighthouse does not reduce the ability of other ships to steer by that light Non-excludability No practical way to exclude ships that don’t pay from using the lighthouse

Mixed goods Criteria RivalShared Excludable Likely provided privately Private Can of soda Mixed Pay per view TV show Not excludable Likely provided publicly (Free riders) Mixed Busy city street Public Lighthouse

Government: Providing Public Goods and Some Mixed Goods Government must provide public goods (and some mixed goods) since they will be UNDERPRODUCED Examples – Streetlights National defense

Practice Right hand: Consumption Rival  Shared  Left hand: Excludability Excludable  Non-excludable  Show me PUBLIC Right  Left  Show me Private Right  Left 

Practice Busy hospital ER – all emergency cases accepted Right hand: Consumption  Left hand: Excludability  Rock concert – not sold out Right hand: Consumption  Left hand: Excludability  Town 4 th of July fireworks display Right hand: Consumption  Left hand: Excludability 

Manage the macro economy Monetary Policy Stabilizing the economy through managing M and interest rates Fiscal Policy Stabilizing the economy through changes in taxes and government spending

Fiscal Policy Fight recession Need more spending Cut taxes Increase gov’t spending Fight Inflation Need less spending Increase taxes Decrease gov’t spending (HA!) Incentives again

Fiscal policy A caveat: “Crowding out” 1.Deficits increase borrowing by the government – demand for loanable funds increases 2.Interest rates are prices that reflect the relative scarcity of loanable funds – they rise 3.Private investment that would have been profitable at lower rates is crowded out

Should you worry? Federal deficit is the amount the national government spends in excess of its revenue in a year. (surplus vice versa) A deficit adds to the total debt of the federal government – the “federal” or “national” debt

Should you worry? Some data Annual deficit Around $300 billion Around 3.75% of GDP 1983, 8% of GDP 2000, a SURPLUS of 2% of GDP Federal debt Closing on $8 trillion About 63% of GDP End of WWII debt as a % of GDP>100

Actions of Government What government does Establish and enforce the rules e.g. property rights Regulate competition environment Redistribute income Examples? Provide public goods Manage the macro economy Monetary policy Fiscal policy