Chapter 20- Public Finance in a Federal System Public economics
1 Chapter 20 – Public Finance in a Federal System Public Economics
Introduction This lesson will address questions related to different levels of government How should various responsibilities be allocated to different levels of government? Is decentralized government decision making desirable? Are locally raised taxes a good way to pay for services provided locally?
2 Introduction • This lesson will address questions related to different levels of government: – How should various responsibilities be allocated to different levels of government? – Is decentralized government decision making desirable? – Are locally raised taxes a good way to pay for services provided locally?
Background A federal system consists of different levels of government that provide public goods and services, and have some scope for making decisions Fiscal federalism explores roles of different levels of government, and how they relate to one another
3 Background • A federal system consists of different levels of government that provide public goods and services, and have some scope for making decisions. • Fiscal federalism explores roles of different levels of government, and how they relate to one another
Background The centralization ratio measures the proportion of total direct government expenditures made by the central government · See Table20.1 Incorrectly measures power if state and local governments are mandated to spend money on certain programs
4 Background • The centralization ratio measures the proportion of total direct government expenditures made by the central government. • See Table 20.1 • Incorrectly measures power if state and local governments are mandated to spend money on certain programs
Table 20.1 Table 20.1 Distribution of all US government expenditure by level of government (selected years) Federal State Local 1900 34.1% 8.2% 57.7% 1910 30.1 9.0 60.9 1920 39.7 9.8 50.5 19 163 51,2 1950 593 15.2 26.5 1960 57.6 13.8 286 1971 48.4 18.6 33.0 1980 54.9 18.1 27.0 1990 56.2 17.9 25.9 1999 5.2 20.9 27,9 SOURCE: Werner Pommerehne, Quantitative Aspects of Federalism: A Study of Six Countries, in The Political Economy of Fiscal Federalism, ed. W. Oates (Lexington, MA: D, C. Heath, 1977), P. 311, except for figures after 1980, which are computed from various editions of US Bureau of the Census Statistical Abstract of the United States
Table 20.1
Background A number of activities are primarily run at the state- and local-level Education Public safety Highways Public welfare
6 Background • A number of activities are primarily run at the state- and local-level. – Education – Public safety – Highways – Public welfare
Community Formation Think of communities as a club -a voluntary association of people who band together to share some kind of benefit
7 Community Formation • Think of communities as a club – a voluntary association of people who band together to share some kind of benefit
Community Formation Public park example Members of the club have identical tastes Can costlessly exclude nonmembers Will share equally the use of park and costs of park within the club
8 Community Formation • Public park example – Members of the club have identical tastes – Can costlessly exclude nonmembers – Will share equally the use of park and costs of park within the club
Community Formation For a park of a given size, the larger the club, the smaller the costs per person As more people join the club, congestion costs rise Community should expand membership until Marginal decrease in membership fee equals the marginal increase in congestion costs 9
9 Community Formation • For a park of a given size, the larger the club, the smaller the costs per person. • As more people join the club, congestion costs rise. • Community should expand membership until: – Marginal decrease in membership fee equals the marginal increase in congestion costs
Community Formation For a community of a given size, how large should the park be? Larger park yields greater benefits, but at a diminishing rate Community should expand park size until Each member's marginal benefit just equals the per-member marginal cost 10
10 Community Formation • For a community of a given size, how large should the park be? • Larger park yields greater benefits, but at a diminishing rate. • Community should expand park size until: – Each member’s marginal benefit just equals the per-member marginal cost
