ECO 2013, week 4 notes
ECO 2013, week 4 notes Eco2013
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This 5 page Class Notes was uploaded by Lauren Carstens on Friday February 12, 2016. The Class Notes belongs to Eco2013 at Florida State University taught by Joan Corey in Spring 2016. Since its upload, it has received 12 views. For similar materials see Principles of Macroeconomics in Economcs at Florida State University.
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Date Created: 02/12/16
Macroeconomics Chapter 6: The Economics of Collective Decision Making Role for Government The government should… o 1. Protect individuals and their property rights (most people agree with this) o 2. Provide goods that cannot be easily provided by the market (Much more debate with this among economists) Just because the government gets involved, doesn’t mean things will get better Ex: When there is a market failure, the government should take over. However, this can usually lead to a government failure Size and Growth of the U.S. Government Size of government is indicated by government expenditures as a percentage of U.S. GDP (How much the government spends in relation to the U.S. spending) o 1930: 9.4% o 2015: 34.3% o Where is the government spending your money? Federal Spending Medicare and Health Social Security National Defense State and Local Spending Education Public Welfare and Health Administrative Expenses Transfer Payments: Transfers of income from some individuals to others (social security, unemployment benefits, welfare, etc.) o Not the government taking money and giving it to firemen or soldiers because that’s for doing a good thing o Ex: Taking money from younger people and giving it to older people o Ex: Taking money from people in higher economic status and giving it to people with a lower economic status They aren’t doing anything to get the money, they’re only getting it for being in that group o Transfer payments comprise nearly half of total government spending Economics of Voting 1. Rational Ignorance Effect: A rational individual can have little or no incentive to acquire the information needed to cast an informed vote o About 50% of registered voters choose not to vote o Marginal benefit of voting: the chance that your vote was the deciding vote multiplied by how much you care that your certain candidate wins (If they win by 5 votes, it didn’t matter is you voted, but if they won by 1, that’s chance) For some people, take into account that they could like voting or want to avoid the social pressure or use the minimax strategy Minimax strategy: Voting to avoid the potential scenario that your candidate loses by one vote and then hating yourself forever o Avoiding the worst possible outcome o Not many people live their lives this way so it doesn’t really count Marginal cost of voting: The cost of finding information yourself (information is costly), registering to vote and actually voting o For most people, the marginal cost outweighs the marginal benefits o Ex: Probability that your candidate wins by one vote is very close to 0 so even if you care a lot, when you multiply that by a number close to 0, the marginal benefit will be close to 0. The marginal cost will only be about 15 minutes, but that’s still more than 0. 2. Median Voter Theory: The idea that a vote maximizing politician in a two party system will be close to the middle so that there is little difference between candidates, and the preferences of the median voter will be represented o It’s more profitable to open an ice cream shop in the middle of a beach next to the other shop than to open it far from the other ice cream shop. Maximize foot traffic (only 25% will go to the far left or far right) o Politicians want to be closer to the middle of conservative and liberal to maximize voters When the Political Process Does Work When voters pay in proportion to the benefits they receive from a particular policy, then productive projects will be passed and unproductive projects will not be passed o When the benefits outweigh the costs for a majority of voters, the plan will be passed o User Charges: Requires people who use a service more to pay a larger share of the cost When the Political Process Does Not Work 1. Special Interest Effect o Remember that ½ of government spending is transfer payments Not all of this is for those who need it Special Interest Groups get together to collect money from the government (lobby the government for benefits) o Special Interest Effect: An issue that generates substantial benefits for a small group by generating minimal costs to a large group (In total, losses may exceed benefits, but they are spread out over many people) o Ex: If our class forms a special interest group and lobbies the government to tax every Floridian $1 per year, our class can get $19,000,000, or $38,000 per person per year. A lot of people (our 500-person class) are lobbying for the tax to be passed and not many will be fighting against it (the families throughout Florida don’t feel like coming here to fight against $1) so the politician (who just wants more votes) will pass the tax o How it this done? Logrolling: The practice of trading votes by a politician to get the necessary support to pass their own desired legislation Ex: A representative in Ohio: asks for $120 million to build tanks A representative in Washington: wants $3 million for fisherman subsidy A representative in Alaska: wants $2.6 million to build infrastructure Only people from their own state will care about their own policy Each representative goes to the representative from other states and promises to pass their policy if they also vote for their own. o Ex: Ohio asks Washington to vote for his policy if he also votes for Ohio’s policy and then they both have two votes instead of one Pork-barrel Legislation: A package of spending projects benefiting local areas financed through the federal government Politicians will help the local areas while hurting everyone else Ex: Save the hurt puppies bill: The bill has to go to every representative before coming back to the president o Each representative adds what they wanted money for to the bill o The president can’t take those additions out without also vetoing the initial bill The president passes the whole bill with each state’s additions. 2. Shortsightedness Effect o Shortsightedness Effect: Politicians will favor programs that generate current visible benefits, even if the long-term costs of the project outweigh the benefits People will favor programs that show immediate benefits as long as the costs will not be seen until way down the road Everyone keeps letting the next guy worry about debt Huge national debt Debt continues to increase despite whether a republican or democrat is in office 3. Rent Seeking o Rent Seeking: Actions taken by individuals and groups in order to use the political process to take the wealth of others “Using the government to get stuff that you did not necessarily earn” The more time these groups spend lobbying, the less time they are spending being productive in their industry People spend time trying to gain political favors instead of spending that time producing or bettering their production 4. Lack of Profit Motive o Lack of Profit Move: Unlike private firms, the public sector lacks the incentive to produce efficiently Comes down to who gets the costs and benefits at the end of the day Government officials do not have the incentive to be efficient because they don’t see the benefits personally Ex: If private firms operate efficiently, they make profit because they are keeping their customers happy; If they operate inefficiently, they will have losses and get shut down. -If the government operates efficiently, their budget might get reduced for the next year; If they operate inefficiently, their budget could expand
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