University of Benha Faculty of Commerce English Section ...

Dr. Walaa Wageh Diab PhD in Economics

MSc. in Economics. MSc. in Euro Mediterranean Studies.

University of Benha Faculty of CommerceEnglish Section Dept. of Economics

Check List (Lecture 1:5)

•  Public Finance: Definition and Importance (What &Why) •  The four Questions of Public finance •  Public Goods Vs. Private Goods •  Rationale of government Intervention •  Market Failure •  Negative &Positive Externalities •  What is the Role of Government? •  Political economy, and the economic ideologies? •  Fiscal Policy in the schools of Economic thoughts •  The Goals of any Macroeconomic Policy •  Economic Transformation •  The Functions of any Government According to Musgrave •  The growth of Asian countries and the role of government intervention in the

development Process. •  The Impact of the recent financial crisis •  Principles of public finance •  Fiscal Multiplier •  Value For Money

Dr. Walaa Wageh Diab

1.  Economic Transforma/on

2.  The Four Economic Ideologies

3.  Lorenz Curve

4.  General principles of public finance

Outline of Lecture (5)

•  The capitalist economic model relies on free market condi/ons to drive innova/on and wealth crea/on and regulate corporate behavior; this liberaliza/on of market forces allows for the freedom of choice, resul/ng in either success or failure.

•  The socialist-‐based economy incorporates elements of centralized economic planning, u/lized to ensure conformity and to encourage equality of opportunity and economic outcome.

•  The capitalist economic model emphasis on efficiency takes priority over equality, which is of liKle concern to the capitalist system. The argument is that inequality is the driving force that encourages innova/on, which then pushes economic development. In a capitalist economy, the state does not directly employ t h e wo r k f o r c e . T h i s c a n l e a d t o unemployment during /mes of economic recession.

•  The socialist-‐based economy The primary concern of the socialist model, in contrast, is an equitable redistribu/on of wealth and resources from the rich to the poor, out of fairness and to ensure "an even playing field" in opportunity and outcome. To achieve this, the state intervenes in the labor market. In fact, in a socialist economy, the state is the primary employer. During /mes of economic hardship, the socialist state can order hiring, so there is full employment even if workers are not performing tasks that are par/cularly in demand from the market.

Key Takeaways ²  Capitalism is a market-‐driven economy. The state

does not intervene in the economy, leaving it up to market forces to shape society and life.

²  Socialism is characterized by state ownership of businesses and services. Central planning is used to aKempt to make society more equitable.

²  Most countries are mixed economies, falling in-‐between the extremes of capitalism and socialism.

THE LORENZ CURVE

11 Copyright ACDC Leadership 2015

Measuring Income Distribution Review the process: •  The government divides all income earning

families into five equal groups (quintiles) from poorest to richest.

•  Each groups represents 20% of the population. •  If there was perfect equality then 20% of the

families should earn 20% of the income, 40% should earn 40% (and so on).

•  The government compares how far the actual distribution is from perfect distribution then attempts to redistribute money fairly.





3.  Lorenz Curve



20 40 60 80 100

100 80 60 40 20 0

Percent of Families

Perc

ent o

f Inc

ome

Perfect Equality

The Lorenz Curve


100

80

60

55

40

30

20 15

5 0

Percent of Families

Perc

ent o

f Inc

ome

Perfect Equality

Lorenz Curve (actual distribution)

15

The Lorenz Curve

20 40 60 80 100

100

80

60

55

40

30

20 15

5 0

Percent of Families

Perc

ent o

f Inc

ome

Perfect Equality


16

The Lorenz Curve

The size of the banana shows the degree of

income inequality.

20 40 60 80 100 Copyright ACDC Leadership 2015

Percent of Families

Perc

ent o

f Inc

ome

Perfect Equality


17

The Lorenz Curve

Area A

Area B

Gini Coefficient- Statistical

measurement of income distribution. Area A divided by the sum of areas A

and B (the size of the banana)

Copyright ACDC Leadership 2015

Area A

Area A + Area B The higher the ra/o the more inequality.

Gini Ra/os

•  Gini Ra/o by country

•  Gini Ra/o by state

How does the government work to reduce this inequality?

Percent of Families

Perc

ent o

f Inc

ome

Perfect Equality

21

TRANSFER PAYMENTS!

Government transfer payments

shift the Lorenz Curve toward more equality

Is that good or

bad?

Copyright ACDC Leadership 2015

Should we tax the rich to give to the poor?

• Pros • Cons




3.  Lorenz Curve



According to the Principle of Maximum Social Advantage or the principle of

maximum social benefit as explained by Professor Hugh Dalton, the state ought

to maximize social advantage or benefit from the resources at its command.

This principle is applied to determine whether the tax or the expenditure has

proved to be at the optimum benefit.

This principle is however based on the following assump/ons:-‐

1. All taxes result in sacrifice and all public expenditures lead to benefits.

2. Public revenue consists of only taxes and no other sources of income to the

government.

3. The government has no surplus or deficit budget but only balanced budget.

4. Public expenditure is subject to diminishing marginal social benefit and taxes are

subject to increasing marginal social sacrifice.

At point P2, the marginal social sacrifice S2Q2 is greater than marginal social benefit

P2Q2. Therefore, beyond the point P, any further increase in the level of taxation and

public expenditure may bring down the social advantage. This is because; each

subsequent unit of additional taxation will increase the marginal disutility or social

sacrifice, which will be more than marginal utility or social benefit. This shows that

maximum social advantage is attained only at point P & this is the point where marginal

social benefit of public expenditure is equal to the marginal social sacrifice of taxation.

Maximum Social Advantage is achieved at the point where the marginal social benefit of

public expenditure and the marginal social sacrifice of taxation are equated, i.e. where

MSB = MSS.

This shows that to obtain maximum social advantage, the public expenditure should be

carried up to the point where the marginal social benefit of the last rupee or dollar spent

becomes equal to the marginal social sacrifice of the last unit of rupee or dollar taxed.

University of Benha Faculty of Commerce English Section ...

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