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2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
Controversies about the proper role of the government raise the fundamental questions addressed by the branch of economics known as public finance. The goal of public finance is to understand the proper role of the government in the economy.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.1
four questions of public finance When should the government intervene in the economy? How might the government intervene? What is the effect of those interventions on economic outcomes? Why do governments choose to intervene in the way that they do?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.1
Market Failures
market failure Problem that causes the market economy to deliver an outcome that does not maximize efficiency.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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children who had received their immunizations but for whom immunization may have worn off. The federal government responded to this health crisis in the early 1990s:
The government publicly encouraged parents to get their children immunized. The government also paid for the vaccines for low-income families.
The result was impressive. Immunization rates, which had never been above 70% before the epidemic, rose to 90% by 1995. Government intervention clearly reduced this negative externality.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 5 of 28
1.1
Redistribution
redistribution The shifting of resources from some groups in society to others.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.1
1.1
Public Provision
The government can provide the good directly, in order to potentially attain the level of consumption that maximizes social welfare.
Introduce Regulation
Governments may want to influence the working of the markets through regulations and legislations.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.1
Direct Effects
direct effects The effects of government interventions that would be predicted if individuals did not change their behavior in response to the interventions.
Indirect Effects
indirect effects The effects of government interventions that arise only because individuals change their behavior in response to the interventions.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 9 of 28
APPLICATION
Chapter 1 Why Study Public Finance?
1.1
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
Decentralization
A key feature of governments is the degree of centralization across local and national government unitsthat is, the extent to which spending is concentrated at higher (federal) levels or lower (state and local) levels.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
Distribution of Spending
public goods Goods for which the investment of any one individual benefits everyone in a larger group.
social insurance programs Government provision of insurance against adverse events to address failures in the private insurance market.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
Distribution of Spending
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
Distribution of Spending
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.2
Why Study Public Finance? Facts on Government in the United States and Around the World
Chapter 1 Why Study Public Finance?
1.3
Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education
Chapter 1 Why Study Public Finance? Social Security, health care, and education are each the subject of debate, with both the liberal and conservative positions holding differing views in their approach to each problem.
Social Security
Social Security is the single largest government expenditure program. The financing structure of this program is basically that todays young workers pay the retirement benefits of todays old.
Health Care
There are currently 45.8 million Americans without any health insurance, about 18% of the non-elderly U.S. population. Projections suggest that health care will consume almost half of our GDP within the next century.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.3
Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education
Chapter 1 Why Study Public Finance?
It 1980
It 2003
0% 34%
28% 0%
55% 4% 7%
5% 5%
62%
Pension
Family benefit
Labour market
Health
Housing
Pension
Family benefit
Labour market
Health
Housing
US 1980
US 2003
0% 32%
46%
0% 44%
53% 8% 7%
5% 5%
Pension
Family benefit
Labour market
Health
Housing
Pension
Family benefit
Labour market
Health
Housing
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.3
Why Study Public Finance Now? Policy Debates over Invecchiamento della Popolazione Social Security, Health Care, and Education
ChapterPercentuale 1 Why di Study Public Finance? ultrasessantenni
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
US
NETHERLAND
LUXEMBURG
PORTUGAL
DENMARK
BELGIUM
FINLAND
IRELAND
SWEDEN
FRANCE
GERMANY
AUSTRIA
GREECE
SPAIN
2000
2050
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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ITALY
UK
1.3
Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education
Chapter 1 Why Study Public Finance?
Education
There is an enormous dissatisfaction with our current educational system, highlighted by the dismal performance of U.S. students on international tests.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.3
Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education
Chapter 1 Why Study Public Finance?
Education
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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1.4
Conclusion
Chapter 1 Why Study Public Finance? It is clear from the facts presented here that the government plays a central role in the lives of all Americans. It is also clear that there is ongoing disagreement about whether that role should expand, stay the same, or contract. The facts and arguments raised in this chapter provide a backdrop for thinking about the set of public finance issues that we explore in the remainder of this book.
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
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