User:Nick Gardner /Sandbox: Difference between revisions

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The major component of the cost of public expenditure is the foregone benefit that could have been obtained from other uses of the resources involved. If the product or service could otherwise be provided under fully competitive conditions, its provision can be presumed to result on a net loss on the grounds that  a greater  benefit can be presumed to be foregone




but there can also be costs arising from the "crowding-out" of private-sector investment. It has been argued that when  government bonds are used to finance consumption rather than investment, the total of the country's investment is diminished, leading in time to a loss of potential output. Crowding-out is seldom complete, however, but depends upon a range of factors including elasticities of demand for investment and for money <ref> See Frederick Fourie: ''How to Think and Reason in Economics'', Juta 2001</ref>. During a recession, however,  crowding-out may to some extent be offset by  "crowding-in" as government spending makes up for the deficiency in private sector spending, leading to a recovery of demand and an increase in private-sector investment.  The balance between crowding out under particular circumstances is a matter of controversy <ref> See "The Crowding-out Controversy" on page 248 of William Baumol and Alan Blinder: ''Economics, Principles and Policy'', Harcourt Bruce Jovanovich, 1979 </ref> .


 
The quantification  of the economic effects of public expenditure is subject to errors and uncertainties arising from the practical difficulty of determining the preferences of those affected and the intellectual obstacles to the aggregation of their gains and losses of economic welfare<ref> See "The Social Welfare Controversy"[http://en.citizendium.org/wiki/Welfare_economics/Tutorials#The_social_welfare_controversy]</ref>. In contrast, social welfare is necessarily maximised, according to the theorems of [[welfare economics]], by market forces operating under conditions of ''perfect competition'' and ''flexible prices''. For those reasons, it is generally presumed that social welfare is reduced if the public sector controls the provision of   goods and services that could otherwise be supplied by the private sector.
 
 
 
 
====Accountable effects====
Public expenditure may be expected to affect a country's accounting aggregates such as its [[gross national product]] and its rate of economic growth. Investment in the infrastructure may be expected to affect transport costs, and the maintenance of publicly-owned assets may be expected to affect their future running costs. Spending on health and education may be expected to affect future output as a result of its effect upon [[human capital]],  and there is some evidence to suggest that reductions in income inequality resulting from social expenditure can increase [[social capital]]<ref>Kawachi, Kennedy, Lochner and Prothrow-Stith. ''Social Capital, Income Inequality, and Mortality'', American Journal of  Public Health. 1997 Sep;87(9):1491-8.[http://www.ncbi.nlm.nih.gov/pubmed/9314802](abstract)</ref>, although it has also been suggested that it can have output-reducing consequences arising from its effects upon motivation.
 
====Non-accountable effects====
Public expenditure  also has effects that are not reflected in conventional measures of economic growth because they do not involve increases in measurable output. Social expenditure and spending on health and education, in particular,  generate welfare increases over and above those resulting from their effects on economic activity. No measures are available of the extent to which people
benefit from reduced anxiety, better health or more enjoyable leisure - all of which are increases in economic welfare.
 
====Net economic effect====
On the other side of the account are the foregone benefits from the employment of the same resources in other ways - some of which might have been used to generate physical output.
 
The assessment of the balance of benefits gained and loss is the subject of [[cost-benefit analysis]] - which it would be impracticable to perform on other than a disaggregated case-by-case basis. Moreover, the absence of a consistence  to measure  aggregate welfare that (as demonstrated by Arrow's ''[[impossibility theorem]]'') limits the feasibility of drawing such a balance 
 
 
 
 
 
Under normal circumstances, private sector spending on government bonds is to some extent at the expense of spending on private sector bonds, with the consequence that some private-sector investment is "crowded out". To the extent that government bonds are used to finance consumption rather than investment, the total of the country's investment is diminished, leading in time to a loss of potential output. Crowding-out is seldom complete, however, but depends upon a range of factors including elasticities of demand for investment and for money <ref> See Frederick Fourie: ''How to Think and Reason in Economics'', Juta 2001</ref>. During a recession, crowding-out may to some extent be offset by "crowding-in" as government spending makes up for the deficiency in private sector spending, leading to a recovery of demand and an increase in private-sector investment.  The balance between crowding out under particular circumstances is a matter of controversy <ref> See "The Crowding-out Controversy" on page 248 of William Baumol and Alan Blinder: ''Economics, Principles and Policy'', Harcourt Bruce Jovanovich, 1979 </ref> .
 
 
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Revision as of 09:40, 3 November 2009

The major component of the cost of public expenditure is the foregone benefit that could have been obtained from other uses of the resources involved. If the product or service could otherwise be provided under fully competitive conditions, its provision can be presumed to result on a net loss on the grounds that a greater benefit can be presumed to be foregone 


but there can also be costs arising from the "crowding-out" of private-sector investment. It has been argued that when  government bonds are used to finance consumption rather than investment, the total of the country's investment is diminished, leading in time to a loss of potential output. Crowding-out is seldom complete, however, but depends upon a range of factors including elasticities of demand for investment and for money [1]. During a recession, however,  crowding-out may to some extent be offset by  "crowding-in" as government spending makes up for the deficiency in private sector spending, leading to a recovery of demand and an increase in private-sector investment.  The balance between crowding out under particular circumstances is a matter of controversy [2] .

The quantification of the economic effects of public expenditure is subject to errors and uncertainties arising from the practical difficulty of determining the preferences of those affected and the intellectual obstacles to the aggregation of their gains and losses of economic welfare[3]. In contrast, social welfare is necessarily maximised, according to the theorems of welfare economics, by market forces operating under conditions of perfect competition and flexible prices. For those reasons, it is generally presumed that social welfare is reduced if the public sector controls the provision of goods and services that could otherwise be supplied by the private sector.

  1. ↑ See Frederick Fourie: How to Think and Reason in Economics, Juta 2001
  2. ↑ See "The Crowding-out Controversy" on page 248 of William Baumol and Alan Blinder: Economics, Principles and Policy, Harcourt Bruce Jovanovich, 1979
  3. ↑ See "The Social Welfare Controversy"[1]
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