IBE 316 Economic Policy Stiglitz: Economics of the Public Sector

Chapter 10: The Analysis of Expenditure Policy

Keisuke OTSU
Sophia University FLA

Spring 2008

OTSU (Sophia University FLA)

IBE 316

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Midterm

Average 22.7/30 (76%)!

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IBE 316

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Overview
Focus Questions

What are the major steps in the analysis of a public expenditure program? What are some of the reasons why the actual eects of a government program are dierent from those that are intended, or those that are apparent at rst sight? Why are some programs said to be ine cient? How in practice are the distributional impacts of a program assessed? What is meant by the trade-o between equity and e ciency? Why might an understanding of the political process be relevant for an understanding of the design of government programs?

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IBE 316

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Need for Program

The program history and the circumstances under which it arose s

who pressed for its passage? what were the perceived needs that it supposedly addressed?

Long term care insurance (passed in 2000)

aging Japanese society care insurance should be dierent from medical insurance

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IBE 316

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Market Failures

Is the need related to a market failure?

imperfect competition public goods externalities incomplete markets imperfect information unemployment and other macroeconomic disturbances

Even if the economy is e cient the government may want to intervene

distribution of income may be unequal individual may need help to make welfare decisions s

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IBE 316

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Alternative Forms of Government Intervention

Public production
How should it be distributed? (free, below cost, at cost)

Private production with taxes and subsidies

Who should be taxed/subsidized? (consumer, producer)

Private production with regulations

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The Importance of Particular Design Features

What is the eligibility standard?

When eligibility standards are loose, some undeserving individuals will qualify When eligibility standards are tight, some deserving individuals will not qualify

Design of eligibility standards may aect individuals behavior

income criteria for public assistance

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IBE 316

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Private Sector Responses to Government Programs

Government programs have

immediate impact long run eects

Private activities may oset public actions

food stamps in 1999 (Obuchi administration) private actions maybe crowded out by government programs

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E ciency Consequences
Income and Substitution Eects and Induced Ine ciency

Income and substitution eects

Income eect: change in consumption when budget increases Substitution eect: change in consumption when relative price changes

Food stamps
Income eect: increase consumption of food and other goods

Subsidizing food consumption (price subsidy)

Income eect: increase consumption of food and other goods Substitution eect: relative price of food falls so increase consumption of food and reduce consumption of other goods

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IBE 316

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E ciency Consequences
Income and Substitution Eects and Induced Ine ciency

Price subsidies will cause ine ciency

The total government payment for price subsidy is greater than the amount of food stamps that are needed to make the consumer equally better o The dierence between values of the price subsidy and the food stamps is dead weight loss The eect on food consumption is stronger with price subsidy

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Distributional Consequences

Incidence of a program: who actually benets from or hurt by the program The actual incidence is often dierent from what was intended

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Distributional Consequences
Evaluating the Distributional Consequences

How do dierent groups in society aected?

intertemporal distribution eects in social security systems progressive (regressive) distribution eect: when a program benets s accrue disproportionately to the poor (rich)

Who are the real beneciaries?

support for higher education

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IBE 316

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Distributional Consequences
Fairness and Distribution

Notions of "fairness" are not well dened

a couple who love children limit the number of children to two for nancial reasons has to support educational fees for people who have ten children and can aord college t double income families have less social security returns than single income families

OTSU (Sophia University FLA)

IBE 316

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Distributional Consequences
Equity-E ciency Trade-os

Is there possibility of Pareto improvement? Usually there is trade-o between e ciency and equity
more progressive tax systems reduce marginal incentives to work

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Public Policy Objectives

It is di cult for the government to specify all objectives or to articulate them in the form of a set of regulations or standard
e ciency equity a rmative action?

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Political Process

It is insightful to study the political process of expenditure programs because we can understand why the program looks the way it does Programs respond at least in part to the desires and perceptions of voters The design of programs may aect the extent to which they are subjected to political pressures or corruption

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