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ECO3023S Notes 1
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Public Sector NotesWeek 1
Why study Public Sector Economics?
The government is a huge part of the economy:
• Government spending represents a large sector of the economy, in South
Africa and other countries
• This spending is financed with taxes or with debt, and these affect every facet
of the economy
• Many sectors of the economy are also directly affected by regulation
Spending, Taxes Deficits and Debts
Outflows = government spending
Inflows = tax revenues
• Revenues > Spending = Surplus
• Revenues < Spending = Deficit
• Each Rand of government deficit adds to the stock of government debt.
• That is, the deficit measures the year-to-year shortfall of revenues
relative to spending
• The debt measures the accumulation of past deficits over time
• These deficits must be financed by borrowing from either citizen
of one’s own local or national area, or by borrowing from citizens
of other areas or other nations
Distribution of Spending:
• Education
• Social Grants
• Health
Regulatory Role of the Government
The government regulates a wide range of economic and social activities:
• The South African Bureau of Standards (SABS)
• Standards for commodities, products and services
• The Health Professions Council of South Africa (HPCSA) statutory
body that sets and maintains standards for healthcare in the country
• The National Credit Regulator (NCR)
• responsible for the regulation of the South African credit industry
Four Questions of Public Economics:
1. When should the government intervene in the economy?
2. How might the government intervene?
3. What is the effect of those interventions on economic outcomes?
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, 4. Why do governments choose to intervene in the way that they do?
When should the Government intervene in the economy?
Recall the First Fundamental Theorem of Welfare Economics: The competitive
equilibrium, where supply equals demand, maximizes social efficiency.
• If markets deliver efficient outcomes, why should government do anything?
• Primary motive for government intervention is therefore market failure.
• Market failure: A problem that causes the market economy to deliver
an outcome that does not maximize efficiency
• Deadweight loss
Negative Externalities
Total cost > Social cost
• Suppose person with active TB does not get TB treatment
• Increased risk of passing TB to others
• If others develop active TB, they will have higher medical costs and worse
performance at job
• Total social cost of lack of treatment is higher than individual cost
• MDR-TB and XDR-TB
• Per patient cost of XDR 4x more than MDR, and 100x more than drug-
sensitive
• Drug resistant TB comprises only 2.2% of cases, but about 32% of the
total estimated 2011 national TB budget
From Social Efficiency to Social Welfare: The Role of Equity
• Second Fundamental Theorem of Welfare Economics: Society can attain
any efficient outcome by suitably redistributing resources among individuals
and then allowing them to freely trade
• Government intervene = equitable outcome
o Difficult in practice to redistribute like this
• Social welfare: The level of well-being in society
o Determined by both how much gets produced and how it is distributed
When Should the Government Intervene in the Economy?
• Even if the market is well-functioning, an efficient outcome is not necessarily
socially desirable.
• Redistribution is a second reason for government intervention.
• Redistribution: The shifting of resources from some groups in society to
others.
• Equity–efficiency trade-off: The choice society must make between the total
size of the economic pie and its distribution among individuals
• Can increased equity increase efficiency?
2
,How Might the Government Intervene?
• Tax or Subsidise Private Sale or Purchase
o Use the price mechanism, changing the price of a good to encourage
or discourage use
• Taxes raise the price for private sales or purchases of goods that are
overproduced
• Subsidies lower the price for private sales or purchases of goods that are
underproduced
• Restrict or Mandate Private Sale or Purchase
• Quotas restrict private sale of goods that are overproduced
• Mandates require private purchase of goods that are underproduced
• Public Provision - The government can provide the good directly
• Public Financing of Private Provision - Governments pays; private
companies produce
What Are the Effects of Alternative Interventions?
Interventions have direct and indirect effects
• Direct effects: The effects of government interventions that would be
predicted if individuals did not change their behaviour in response to their
interventions
• Cost of providing health insurance to 84% uninsured in SA
• Indirect effects: The effects of government intervention that arise only
because individuals change their behaviour in response to the interventions
• If the 16% with private health insurance drop their private coverage,
how does that affect the cost?
Why Do Governments Do What They Do?
• Governments do not always choose efficient or socially desirable outcomes
• Governments face enormous challenges in figuring out what the public wants
and how to choose policies that match those wants
• Political economy: The theory of how the political process produces decisions
that affect individuals and the economy
Why Study Public Economics Now? Policy Debates over Health Care, Social
Insurance, Education and Covid-19
Many heated policy debates concern the impact of major public programs:
• The role of social insurance, health care, and education are all contentious
subjects.
• How should government respond to Covid-19?
Health Care:
• About 17% of the population has medical scheme cover
• Remaining 83% mainly use public healthcare services
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, • Access to public healthcare has improved since 1994, especially targeted at
low income households
• But quality is a problem
• e.g. waiting times, insufficient staff, and rudeness of staff (Burger,
Bredenkamp, Grobler & Van der Berg, 2012)
• National Health Insurance (NHI)
• Movement toward universal health coverage in SA
Social Insurance:
SA social insurance system has two major components
Occupational insurance
• Conditional support for defined-risk events
• Unemployment Insurance Funds, the Compensation Funds, and Road
Accident Fund
• Occupational retirement insurance not legally required, or state
provided
• About 47% of labour force covered by pension fund
Social assistance (social grants/transfers)
• Means-tested payments by the state
• Child-support grants, Old-age grants, and Disability grants
• New grants due to Covid-19: Social relief of distress and Caregiver
grants
• Consideration of National Social Security Fund in SA
Education:
• Education is the largest single budget category – 20% of public spending
• But education outcomes disappointing
• South Africa is at or near the bottom of rankings of 57 countries in
Trends in International Mathematics and Science Study (TIMSS)
• 27% of pupils who have attended school for six years cannot read,
compared with 4% in Tanzania and 19% in Zimbabwe
• Historical context - Bantu Education Act of 1953
• Black pupils received about a fifth of the funding of white peers, and
were taught almost no Math’s or science
• “Jobs for sale” – Volmink report prepared for Department of Basic Education
(May 2016)
• teachers in some provinces appointed due to their affiliation with
SADTU
• Should we spend more on education?
• In South Africa public spending on education is 6.4% of GDP; the
average share in EU countries is 4.8%
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