1. Individuals and Government
Chapter 1
Individuals and Government

2. Public Finance
Public finance is the field of economics that studies government activities and the alternative means of financing government expenditures.

3. Figure 1.1 A Production-Possibility Frontier
Government Goods and
Services per Year
Private Goods and Services per Year C M G2 B X2 G1 A X1

4. Distribution of Government Goods and Services
Nonmarket rationing:
Prices and willingness to pay those prices are not applicable to goods like national defense.

5. The Mixed Economy: Markets and Politics
Pure Market Economy
Virtually all goods and services are supplied by for-profit private firms.
Supply and demand determine price.
Mixed Economy
A mixed economy is one in which government supplies a considerable amount of goods and services and regulates private economic activity.

6. Figure 1.2 Circular Flow in the Mixed Economy
Goods & Services
Goods & Services
Output
Market
Dollars
Dollars
Taxes, fees, charges
Government Services
Income Support
& Subsidies
Subsidies
Taxes, fees, charges
Government Services
Households
Government
Firms
Resources
Dollars
Dollars
Resources
Input
Market

7. Government Expenditures in the United States
Government purchases of
labor
land
capital
Government Transfer Payments
Welfare
Social Security

8. Growth in Government Expenditures
Growth in Government Expenditures
Table 1.1 (abbreviated)
Year
GDP
Federal Government
State
and Local Government
Total
Government
Percentage
of GDP
1930
91.3
2.5
7.5
10.0
10.95
1945
223.0
84.7
8.5
93.2
41.79
1960
527.4
85.8
34.1
119.9
22.73
1975
1635.2
345.4
152.1
497.5
30.42
2002
2073.9
1050.9
3124.8
29.93

9. International Comparisons
Country
Government Current Expenditures as a Percentage of GDP 2001
Denmark
49.1
France
48.8
Germany
45.1
United Kingdom
39.4
Japan
38.1
Canada
36.7
United States
31.9

10. Federal Government Expenditures by Function

11. State and Local Government Expenditures

12. Federal Revenues

13. State and Local Government Revenues

14. State Budget Crunch of 2002
37 states were forced to reduce their budgets.
Revenues were typically 10% less than anticipated.
States with the most severe deficits:
AK, AZ, CA, NY, NC, OK, OR, VA, and WA
Causes
Cuts in taxes on business and individuals in the 1990s
No sales tax collections on services
Growth in costs of Medicaid

15. Implications of a Graying America
Social Security
In 2008 baby-boomers start to retire and collect
The ratio of workers to retiree falls
Medicare
Health care inflation is substantially higher than overall inflation
Medicaid
Increased use of long-term care for baby-boomers