The role of government in society
PUA 5305, Public Finance and Budgeting 1 Cou rse Learning Outcomes for Unit I Upon completion of this unit, students should be able to: 1. Assess the relationship of historical and contemporary finance -budgeting theory to real -world public administration issues. 1.1 Explain the relationship between externalities and efficiency. 6. Consider the impact of citizen influence on the budgetary process at various levels of governance. 6.1 Explain how the needs of certain groups of individuals can determine how government spends its money. Required Unit Resources Chapter 1 : Individuals and Government Chapter 2 : Efficiency, Markets, and Governments Chapter 3 : Externalities and Government Policy In order to access the following resource, click the link below. The Idea Channel (Producer). (2018). Externalities from transaction costs (Segment 5 of 10) [Video file] . Retrieved from https://libr aryresources.columbiasouthern.edu/login?auth=CAS&url=https://fod.infobase.com/PortalPl aylists.aspx?wID=273866&xtid=138076&loid=485365 The transcript for this video can be found by clicking the “Transcript” tab to the right of the video in the Films on Dem and database. Unit Lesson Welcome to the course! You have made a huge commitment to improve the community around you by utilizing a comprehensive approach to the use of public funds in such a way as to improve the quality of life for your neighbors and businesses. This course will help you understand the various theories regarding public finance and budgeting and realize the real -world application of these theories. You are going to grow and stretch and become a better le ader because of your work he re. In this unit, the economic role of government is explored. Major economic government activities and services include provision for national defense, Social Security, unemployment insurance, court systems, Medicare and Medicaid, public education, infrastructure, and health care. These annual government expenditures and many others would be virtually unobtainable without the assistance of the government. For example, it would cause an extreme financi al burden for one individual to fund a public expenditure such as education. Similarly, it would be difficult for an individual to provide 24 -hour protection of his or her property. Therefore, conventional wisdom suggests government can better supply these non -market rationings. The government sector has an enormous impact on UNIT I STUDY GUIDE Economic Basis for Government Roles Front of U. S. Capitol Building (Noclip, 2007) PUA 5305, Public Finance and Budgeting 2 UNIT x STUDY GUIDE Title the economy. Subsequently , resources are needed to finance government functions, activities, and services. Government expenditures are financed mainly by taxes (Hyman, 2014). This sys tem of financing illustrates how all parts of society , such as health, education, family, economy, and politi cs, fit together and are interdependent. The supply of individuals’ demands through the payment of taxes (reducing private goods) creates a relatio nship between individuals and government organizations. Collectively, individuals make up a society. Democratic societies determine government functions and allocations of resources through a political process. Therefore, government’s role represents a dic hotomy of providing goods and services as well as regulating private economic activity (Hyman, 2014). Government’s role is necessary to provide more services easier to individuals, while redistributing income, reducing waste, and increasing society’s healt h and longevity of life. The role of government lessens the impact of market fallacies and increases market efficiency. For example, President Obama’s 2014 education budget proposal incorporated an increase of Pell Grant and work -study revenue to be awarde d to universities serving minorities. However, due to budget shortfalls, congressional leaders continue considering cuts to Pell Grants (De rvarics, 2013). Debates and recommendations for streamlining eligibility guidelines place this as a front -burner issu e for some members of Congress as well members of society (Gay, 2014) . Chapter 2 provides insights into approaches that can be utilized to evaluate economic performance and market efficiency , measured through po sitive and normative theories. The p ositive approach asserts a cause and effect relationship linking to economic activity objectively. The positive approach has the ability to make recommendations that will achieve certain outcomes , while the normative approach cannot. In contrast, the non -objective , normative approach can define relevant issues and policy, while the positive cannot. Therefore, each approach has a dependency on the other. For example, let’s assume congressional leaders want to test the a rgument that increases in Pell Grant funding are needed by less -affluent college students to achieve their goals. Utilizing a positivist approach , the argument could be supported by analyzing statistical data (quantitative) and measuring the income eligibility of current students receiving Pell Grant s. The use of statistical data implies that one can be positive or sure of the objective results. In contrast, a normative argument supporting the need for the Pell Grant strives to describe the benefits (qualitative) of creating diverse populations in educ ational environments. Normative arguments can include supporting statements of the benefits and practices that foster collegiate success of underrepresented students. Normative theories rely on opinions and value judgments, while positivist theories can be utilized to test efficiency. Characteristics of efficiency include avoiding waste in production, thereby achieving optimality . Additionally, efficiency promotes freedom to trade in the market. The criterion of efficiency is based on the idea that individ uals should be allowed to pursue their self -interest as long as no one is harmed (Hyman, 2014). Conditions required for market efficiency include establishing benefits and costs analys es. Markets are organized for the purpose of allowing mutually gainful trades between buy ers and sellers (Hyman, 2014). Characteristics of perfectly competitive markets include privately owned resources, market transactions, economic power dispersion, information, and unrestricted resources . However, inefficiency in markets e xists , resulting in other options needed to provide goods and services. This inefficiency requires government intervention. Governments can employ numerous instruments to affect private market outcomes , including creating and disseminating information, reg ulating private activity, mandating actions by individuals or firms, and financing/delivering public services through public facilities and staff (Reksulak & Shughart , 2012). Let’s consider the impact of the housing bubble of 2009. This dilemma resulted i n many homeowners being dislocated as well as an increas e in bankruptcy filings. Homeowners found themselves virtually unprotected against subprime mortgages in the market (Escobari, Damianov, & Bello, 2015). Spillover effects impacted the value of other h omeowners residing in the neighborhoods. This market inefficiency resulted in government intervention. The intervention created a new mortgage product that pr even ts the abuse of home purchasers. The loss of efficiency or market failure can result from mon opolistic power, taxes, and government subsidies. The market activities of dominant players, altering market participation, and distortions in market behavior trickle down through the system and cause market failure. All give rise to government’s role in t he market to maintain efficiency and effectiveness. However, some argue that equity a nd efficiency should be evaluated PUA 5305, Public Finance and Budgeting 3 UNIT x STUDY GUIDE Title when analyzing resource allocation. Additionally, critics argue that the market system caters to those with the ab ility to pay (Hyman, 20 14). Chapter 3 demonstrates market base d approaches and the costs or benefits of transactions not reflected in prices , known as externalities (Hyman, 2014). Positive externalities are benefits not considered by buyers or sellers. Participants in the marke t sometimes fail to consider the ne gative impact on third parties. For example, environmental pollution can have negative impacts on public health . In 1990, the Exxon Valdez oil spill was visible, and the effects of it were immediate, resul ting in oily carcasses of wildlife along the beach shore. However, the reported long -term impact was that increased mortality of wildlife could linger on for four years or more , while other reports indicated some wildlife could be impacted up to 30 years. As a result, the Oil Pollution Act of 1990 set a liability cap of $75 million for damage caused by oil spills (Plummer, 2010). Therefore, government’s role in ext ernalities is to implement laws to protect the public from harmful market activity. Let us consider the Deepwater Horizon Gulf Oil Spill of 2010. This environmental incident exacerbated debates on removing the cap from the 1990 Oil Pollution Act (Plummer, 2010).