In 2.2, the first economic function of government identified does not specify why certain goods and services are earmarked for provision by government, other than that governments are responding to the demands of the electorate. In other words, our approach is pragmatic – examine the list of services which governments provide and you will find that defence, law and order, and social services, such as education and health, are prominent.
An alternative approach, much favoured by economists, is to identify certain goods and services which, it is claimed, can only be provided by government. Leaving individuals to buy these services in the market would either result in such goods not being supplied at all or not in ‘sufficient’ quantities. Such goods are labelled ‘public’ or ‘social’ goods.
A ‘public’ good or service has two characteristics.
Consumption of the good by one person does not preclude consumption by another – unlike a ‘private’ good where consumption of, say, a toffee bar by one person denies its consumption by another. The good is ‘non-rival’ in consumption. Pricing a good with this characteristic would be inefficient because it would curtail the use of a good whose marginal cost is zero. The classical example is a bridge. Provided there is no congestion on the bridge, excluding consumers by charging would be inefficient if their use of the bridge involved no extra cost of providing the services of the bridge.
There is no way in which, once the good or service is provided, that its use can be denied to those who are not prepared to pay. The good has the characteristic of ‘non-excludability’. Pricing of the good would be impossible or prohibitively expensive to the producer. Charging people for walking down the street according to their use of the street, would be impossible. If beneficial use of the pavement can be had for nothing, there is no incentive for pedestrians to pay anything voluntarily. No private producer has an incentive to supply the service.
Here is a list of services commonly undertaken by governments:
police services
fire prevention
defence services
national parks
elementary education
lighthouses
waste collection
public housing
motorways
Identify
those services which have both characteristics of a public good.
those services which have one characteristic of a public good (specify which one).
those services which embody neither characteristic.
In Section 2.3, three measures which may be used to show the relative size of government were suggested. In the following table, you are supplied with data for the mythical state of Amnesia:
| Government budget item (billion) | 1980 | 2000 | |
| 1. | Current expenditure on goods and services | 100.0 | 150.0 |
| 2. | Expenditure on investment | 10.0 | 20.0 |
| 3. | Transfer payments | 50.0 | 70.0 |
| 4. | Debt interest payments | 20.0 | 20.0 |
| 5. | Subsidies | 10.0 | 5.0 |
| 6. | Gross domestic product | 330.0 | 510.0 |
| 7. | Total government employment (in millions) | 2.2 | 2.5 |
| 8. | Total working population | 10.2 | 10.3 |
Make the following calculations:
The percentage change in each item between 1980 and 2000.
The relative size of government (using the three measures in 2.3) in 1980 and 2000.
Comment on the results obtained in (i) and (ii) above.
A well-known Canadian Economics Institute offers a calculation designed to identify ‘tax freedom day’ in every Canadian state. This is done by calculating the average tax burden of taxpayers in each state and expressing it as a percentage of the average income of taxpayers. Thus, if the percentage is 25 per cent, ‘tax freedom day’ is the day after a quarter of the fiscal year has gone by, i.e. 1 July. If the percentage is 50 per cent then ‘tax freedom day’ is the day after one-half of the fiscal year has gone by, i.e. 1 October. In other words, the taxpayer with a 25 per cent burden is ‘working for him/herself’ after 1 July.
What significance, if any, do you think can be attached to this proposal?
(Two points to note: (a) The idea embodies an important value judgement, which, in the light of the discussion in Module 1, may excite comment from you; (b) While you can assume that the proponents have complete access to suitable data for all important taxes, this will not tell us anything about who bears the burden of the taxes.)
In conducting an empirical investigation of the determinants of government expenditure on current goods and services, statistical pundits commonly adopt the following procedure:
Identify the measure of government growth, the movements of which will depend on a number of separate and identifiable influences. The technical term for the measure is known as the ‘dependent variable’.
Identify the separate influences determining the growth in the dependent variable – known as the ‘independent variable’.
Devise a hypothesis concerning the relationship between the dependent variable and each independent variable, e.g. an increase in one independent variable produces a positive or negative change in the dependent variable, assuming the other independent variables do not vary.
Choose an appropriate test in order to determine whether or not available data support the hypothesis. (If you have read the Quantitative Methods Course, you would recognize that multi-regression analysis could be employed.)
You are provided with the following list of variables:
| I | Dependent variable | ||
| Gp | = | Government expenditure per head of population | |
| II | Independent variables | ||
| 1. | GDPp | = | Gross domestic product per head of population |
| 2. | p | = | Total population |
| 3. | Rg | = | Relative price of a unit of publicly provided goods (i.e. if Rg increases, the price of publicly provided goods relative to the price of goods supplied in the private sector increases) |
You are asked to help in the devising of suitable hypotheses by putting a (+) or (−) or a (?) opposite each independent variable A (+) means that you consider that a positive change in the independent variable will produce a positive change in the dependent variable A (−) means that you consider that a positive change in the independent variable produces a negative change in the dependent variable. A (?) means that you consider that the direction of change, in your opinion, is uncertain.
You are now asked to add two more independent variables of your choice and to add the appropriate sign.
You are asked to justify your choice of the sign in all five cases.
