THE ECONOMIC BASIS

FOR GOVERNMENT
ACTIVITY
INDIVIDUALS & GOVERNMENT
(PUBLIC FINANCE)

INDIVIDUALS, SOCIETY &

GOVERNMENT
What would it be like to live in a nation
without government?

- disorganized society
- No police / fire protection
- Poor roads (economy is compromised)
- No publicly funded schools
- No health care and medicare

Benefits We Get from

Government Activities

We all benefit from government activities

and expenditures
Citizens benefit from the many goods and
services made available by governments,
but they also pay the costs of these services
We differ in our views about what
governments should and should not do
because our valuations of the benefits we
get from government differ and because of
variation in the amount of taxes and other
costs each of us pay.

PUBLIC FINANCE
Is the field of economics that
studies government activities
and the alternative means of
financing these government
activities.

GOVERNMENTS
Are organizations formed to
exercise authority over the
actions of people who live
together in a society and to
provide and finance essential
services

POLITICAL INSTITUTIONS
Constitute the rules and generally
accepted procedures that evolve in
a community for determining what
government does and how
government outlays are financed
Such democratic institutions as
majority rule and representative
government - offer citizens an
opportunity to express their desires

HOW GOVERNMENT ALLOCATE

RESOURCES BETWEEN GOVERNMENT &
PRIVATE USE

The real cost of government goods and

services is the value of private goods
and services that must be sacrificed
when resources are transferred to
government use.
Private Goods & Services are those
items, such as food and clothing that are
usually made available for sale in
markets.
Government Goods & Services

PRODUCTION-POSSIBILITY
CURVE
Illustrates the trade-off between
government and private goods and services
This curve gives the alternative
combinations of government goods and
services and private goods and services
that can be produced in an economy given
its productive resources and technology and
assuming that resources are fully employed.

HOW GOVERNMENT GOODS AND

SERVICES ARE DISTRIBUTED
Non-Market Rationing the methods
used by government to distribute
government goods and services.
This means that government goods and
services are not made available to persons
according to their willingness to pay and
their use is not rationed by prices.
In some cases, the services are available to
all, with no direct charge and no eligibility
requirements, while others have.

The Mixed Economy

A Mixed Economy is one in which
government supplies a considerable
amount of goods and services and
regulates private economic activities
Government use taxes and subsidies to
affect incentives to use resources
Provisions of a significant amount of
goods and services takes place through
political institutions which often compel

Pure Market Economy

Virtually all goods and services would be
supplied by private firms for profit and
all exchanges of goods and services
would take place through markets
Prices are determined by free interplay
of supply and demand
Buyers are not compelled to purchase
something they do not want.

CIRCULAR FLOW IN THE MIXED

ECONOMY

GOVERNMENT EXPENDITURES
BASIC CATEGORIES
I. Government Purchases are those that
require productive resources (land, labor and
capital) to be diverted from private use by
individuals or corporations so that such
resources can be used by government. Example:
supply for national defense, garbage disposal
II. Government Transfer Payments constitute
a source of income support to recipients who are
not required to provide any service in return for
income received. Example: SSS pensions

THE GROWTH OF
GOVERNMENT EXPENDITURES

Group Activity
1. Use a production-possibility curve to show
the cost of increasing government provision of
medical services.
2. As productive resources and technological
know-how increase, a nations productionpossibility curve shifts outward. Use a
production-possibility curve to show how
resource growth and improvements in
technology can allow a nation to increase its
production of government goods and services