Introduction SPHA511, John Ries

Introduction Goal of course: Analyze the role of government in private enterprise economies such as Canada. Under what circumstances should a government regulate or modify private enterprise and private markets in order to improve economic efficiency or social equity? What considerations actually influence governments to intervene in private markets, and how have they done so in the past? What are the effects of government intervention?

Introduction Normative versus positive analysis Normative analysis asks the question: “What role should the government play in the economy?”

Introduction economic efficiency and growth macroeconomic stability fairness other social objectives: the promotion of ethics, multiculturalism, Canadian culture, etc What are the goals of government?

Introduction Positive analysis asks the question: “What explains the actual policies adopted by government?" Government may act in ways that do not promote public interests due to special interest groups or self-serving bureaucrats

How well do you know Canada? 1.What was the Canadian population in 2007? What percent of the population in 2006 was born outside Canada? 2. What percent of the female population was in the labour force in 2006? 3. What percent of the population held a bachelor's degree or higher in 2006? 4. What percent of the Canadian population was 65 years of age or older in age in 2007? Between 50 and 64? 5. What were the unemployment rate, inflation rate in 2007? 6. What is Canada’s world rank in terms of per capita income? Who is highest? 7. Which provinces had the highest and lowest unemployment rates in 2007? 8. What was total government spending relative to GDP in 2007? 9. What is the total (federal and provincial) government deficit in ? What government’s primary source of revenue? Primary expenditure items? 10. What is the largest industrial sector in Canada in 2007 in terms of employment: 1) manufacturing 2) trade 3) agriculture and fishing, 3) forestry, fishing, mining, oil & gas, 4) health care and social assistance or 5) finance and insurance? In terms of GDP? 11. What percent of manufacturing sales in Canada are accounted for by foreign controlled firms? 12. What are Canada’s leading imports, exports? 13. What percent of Canadian GDP was exported in 2007? What was the U.S. share of Canadian exports in that year?

Immigrant Population Canada (2006) Number Total - Place of birth 6,186,950 United States 250,535 Central and South America 381,165 Caribbean and Bermuda 317,765 Europe 2,278,345 United Kingdom 579,625 Other Northern and Western Europe 489,540 Eastern Europe 511,095 Southern Europe 698,080 Africa 374,565 Asia and the Middle East 2,525,160 West Central Asia and the Middle East 370,515 Eastern Asia 874,370 Southeast Asia 560,995 Southern Asia 719,275 and other countries 59,410

PPP

Sweden54.2% of GDP Belgium45.6% of GDP France45.3% of GDP Italy42.0% of GDP Netherlands41.4% of GDP Norway40.3% of GDP Germany37.9% of GDP United Kingdom37.4% of GDP Canada35.8% of GDP Switzerland35.7% of GDP New Zealand35.1% of GDP Australia31.5% of GDP Ireland31.1% of GDP United States29.6% of GDP Japan27.1% of GDP Total Tax as % GDP

Consolidated federal, provincial, territorial and local government revenue $ millions Revenue 468,557499,676531,137561,187590,718 Personal income taxes 145,324155,136167,409180,034193,491 Corporation income taxes 38,92546,92850,89358,24065,995 Property and related taxes 44,24446,72149,40451,22052,993 Consumption taxes 98,918104,495107,844105,396111,461 Health insurance premiums 3,1323,2063,2583,2683,424 Sales of goods and services 39,13041,27542,86945,93848,278 Investment income 35,98438,60045,34147,74847,791 Other revenue from own sources 9,9467,9505,9506,8233,916

Consolidated federal, provincial, territorial and local government expenditures $ millions Expenditures 474,712487,365513,957543,541574,070 General government services 18,63318,79219,79620,61221,110 Protection of persons and property 39,15441,09643,53446,75249,125 Transportation and communications 20,25821,17224,72325,91329,516 Health 89,47994,49799,126106,919115,358 Social services 121,058125,372131,543139,183147,659 Education 74,24677,14082,68586,83791,144 Resource conservation and industrial development 19,43018,65219,75420,97821,379 Environment 11,39111,90312,93514,46416,082 Recreation and culture 13,14313,47614,20714,89115,880 Debt charges 49,51447,68646,94047,83247,281 Surplus or deficit -6,15612,31217,18017,64716,648

Employment by industry thousands All industries 15, , , , ,866.4 Agriculture Forestry, fishing, mining, oil and gas Construction , ,069.71,133.5 Manufacturing 2,275.22,292.12,207.42,117.72,044.9 Trade 2,467.82,507.12,574.62,633.52,682.4 Finance, insurance, real estate and leasing ,040.51,060.4 Professional, scientific and technical services 1,003.61,018.31,050.01,089.91,136.9 Educational services 1,027.11,035.71,106.11,158.41,183.2 Health care and social assistance 1,679.21,733.41,734.61,785.51,846.1 Accommodation and food services 1,005.51,012.41,004.51,015.01,069.4 Public administration

Canadian Trade ($cdn billion) Exports Agricultural and fishing products Energy products Forestry products Industrial goods and materials Machinery and equipment Automotive products Imports Agricultural and fishing products Energy products Forestry products Industrial goods and materials Machinery and equipment Automotive products

Canada Exports (billion $US) U.S UK China Japan Mexico Netherlands Total Canada Imports (billion $US) U.S China Mexico Japan Germany UK Total

Merchandise Trade, 2005, $US billions ExportsImportsBalance China (incl. HK) Germany USA Japan France Netherlands Great Britain Italy Canada Belgium

Useful Economic Concepts 1. Opportunity Cost Definition: "the opportunity cost of any action is the value of the next most valuable action forgone" 2. Incentive Effects Individuals respond to economic incentives. Policies may have unintended consequences because they alter the incentives of individuals

Useful Economic Concepts Activity What is the opportunity cost of attending this MHA program? Use the formula for the present value of an annuity— PV=A[1-1/(1+i) n ]/i, where A is an annual payment, i=0.05 is the interest rate, and n=30 is the number of years working, to solve for the additional income (A) necessary to justify your decision given your opportunity cost (PV).

Incentive effects Identify adverse incentive effects associated with –high marginal income tax rates –generous unemployment insurance –free healthcare What healthcare policies (pay schemes, etc.) result in adverse incentive effects? What is a negative income tax?

Useful Economic Concepts The paradox of value (water is cheaper than diamonds): Clearly, water is more important to people than are diamonds, yet diamonds are much more expensive. Why? Prices reflect marginal value. 3. Marginalism

Prices are determined on the margin SDSD D SWSW DWDW PDPD PWPW P Q

Useful Economic Concepts It is important not to confuse the total value of an activity with the marginal value of increasing the activity. Just because health care is more important than parks does not mean funding should be increased on healthcare at the expense of parks. Marginalist principle: any policy or action should be undertaken only if the incremental or "marginal" benefit exceeds the marginal opportunity cost.

Useful Economic Concepts (1) production efficiency is attained when a firm is managed so that total costs are minimized for a given level of output. This is exactly equivalent to saying that the maximum amount of output is being produced from a given level of inputs. (2) allocational efficiency is attained when it is impossible to re-allocate the resources among a group of people in such a way as to make at least one person better off without making anybody else worse off. Allocational efficiency is also known as "Pareto-efficiency”. 4. Efficiency Efficiency relates to two questions: Is a given level of output being produced at lowest cost? Is the right level of output being produced?

Useful Economic Concepts A Pareto improvement occurs when at least one person is made better off while no one is made worse off. Similarly, a potential Pareto-improvement is said to exist if a re- allocation of resources allows those individuals who are net gainers to (hypothetically) fully compensate the net losers, and still be better off. Genuine Pareto-improvements are rare in practice, often the best we can hope for often is that a particular policy is a potential Pareto-improvement, which leaves open the question of whether gainers actually compensate losers.

Health care funding and efficiency There are three ways to potentially increase efficiency in health care (1) Improve production efficiency—combine resources better in order to deliver more output $ Q S=MC S’=MC’ a b D=MB

Health care funding and efficiency (2) Increase the healthcare budget if marginal benefits exceed marginal costs of additional supply. S Quantity S=MC D=MB Q0Q0 Q*

Health care funding and efficiency (3) Within the healthcare budget, reallocate funds away from areas with low marginal benefits and towards those with high marginal benefits MBs MB p $ Total budget A0A0 A*