Actions of Government

Key Terms:

* Incentives
* Public choice theory
* Rational ignorance
* National Debt
* Taxes
* Government spending
* Budget deficit
* Gross Domestic Product (GDP)

Lesson Objectives

Economic reasoning helps us to answer the question of what things we should want and expect government to do: Government should do those things which it can do better than people can do without government. One criterion for determining what government should do is to consider whether the situation involves the free rider temptation. - The free-rider problem refers to situations in which non-payers cannot be excluded from benefits. Examples include national defense, street paving, fire protection, etc. - Coercion (by government) can overcome the problem by ensuring that all beneficiaries bear part of the cost. Like decision-makers in the market, public servants respond to incentives. Incentives in the political process may be different than those of the market. Elected public officials face different incentives than career government employees. The history of the federal budget deficit is a striking example of the disproportionate influence of special interest groups, who typically want increases in spending and/or reductions in taxes. Historically, balanced budgets were characteristic of American government until the Great Depression. In the years following the Depression, deficit spending has been the more common practice.

Farmers make up only 3% of the American population. Use public choice theory to explain why Congress consistently votes to continue farm price supports and subsidy programs that provide benefits to relatively few Americans and impose costs on many?

Definitions

Budget deficit - The condition that exists when, in any given year, the federal government's expenditures exceed the total of taxes, fees, gifts and other payments. The deficit is bond-financed and adds to the national debt.

Gross Domestic Product (GDP) - The final value of all goods and services produced within the domestic boundaries of the United States in a year.

Incentives - Rewards or punishments for behavior.

National debt - The cumulative total of past deficits and surpluses, financed by the issuance of interest-bearing securities. the debt is owed to the holders of such government securities.

Public choice theory - The application of economic analysis to the political arena made possible by the realization that elected officials, like private citizens, are motivated by self-interest. Officials whose self-interest lies in re-election are especially sensitive to the desire of special interest groups because of their ability to influence election outcomes through financial contributions and voter participation.

Taxes - Compulsory payments by individuals and businesses to government.