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Chapter 2

POLS 3470 Chapter Notes - Chapter 2: Consumer Protection, Human Capital, Externality

Political Science
Course Code
POLS 3470
Tim Mau

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Chapter 2 (Hale) The Role of Government in the Economy: Economic
 Purpose of economic policies: foster conditions that enhance the economic well-
being of individual citizens and the broader society
 Public policies most effective in promoting increased prosperity by providing
stable and adaptable framework of rules that enable individuals, business and
other organizations to pursue economic well-being in ways that contribute
directly/indirectly to collective well-being of society
 Successful economic policies involve a multi-dimensional balancing act
 Seek to promote overall economic growth while ensuring vast majority of
citizens have opportunity to share (directly/indirectly) in benefits of growth
 Organization of government of geographic concentration of industry may shift
focus of policy-making to emphasize sectoral or regional effects
· sustainability important in economic policies
 macro-economic policy sustainability refers to capacity to balance current
consumption of goods and services with investments that will increase future
economic opportunities
o also the ability of govs to combine improvements in citizens’
material living standards with environmental preservation and related
quality-of-life issues
Major Concepts and Objectives of Economic Well-Being
 debated on both normative and empirical grounds
 government economic policies have traditionally addressed 4 major goals:
1. the promotion of sustainable economic growth and improved living
2. the promotion of economic efficiency including measures to offset
the effects of market or gov behaviour that undermine the efficient
operation of the economy (market failure and gov failure)
3. the provision of public goods
4. promoting “fairness” and “equity”
· govs are encouraged to facilitate structural changes in economic environment
o large-scale technological change
o changes in forms of business organization
o trends towards continental and global economic integration
· govs don’t “create” economic growth
 economics influenced by neo-classical economic tradition emphasize conditions
necessary to achieve economic efficiency and growth as a precondition of
improved living conditions
 aggregate economic growth reflected in national income or GDP may be any
combination of:

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o growing populations
o rising participation rates in the paid labour force
o increased levels of capital investment
o increased efficiency in use of labour, capital and technology
· Economist Pierre Fortin: “there are only 4 ways private households and
corporations can get richer: putting more people to work, producing more
output per worker, retaining a larger fraction of domestic income after tax,
transfer and net foreign payments and by cashing in on higher relative export
 Social democratic economists emphasize the distributive effects of economic
policies (including impact on employment levels and degree which lower and
middle income earners share in general prosperity)
· Economic changes involve mix of gains and losses some better off than others
 John Rawls’ insistence the economic policies give priority to improve the well-
being of the least well-off members of society economic losses tend to weigh
heavily on those with less to lose
 Promotion of greater economic equality has taken 4 main forms:
1. Provision of direct financial assistance through a variety of income
transfer programs
2. A redistributive tax system with varying degrees of “leakage”
3. Improved public services designed to provide basic social needs and
improved opportunities
4. Promotion of high levels of employment and job creation
 Redistribution may contribute to both economic and social benefits
 Deadweight loss: Emphasizing redistribution over promotion of economic
growth may reduce overall economic efficiency and output because of high
marginal tax rates imposing losses greater than the benefits
 Economists argue in favour of designing tax systems that generate max benefits
to recipients in return for the least cost to society (administrative costs and tax-
induced distortions in decision-making)
 Recent efforts to integrate economic and social policy goals to be made to
complement and reinforce each other (rather than mutually contradictory)
· Challenge of Pareto efficiency: (allocational efficiency) achieving an allocation of
resources so that its impossible to make anyone better off without making
someone else worse off
· Increasing management efficiency/productivity is central to improvements in
living standards as it increases the range of choices available to participants in
the marketplace
o Capacity to increase overall economic output relative to additional
units of input
o Includes labour, capital and technology
 Increased industrialization and growing competition in international markets
forces business and govs to increase productivity in order to be able to improve
citizens; living standards while maintaining current levels of profits and gov
revenues for provision of public standards
 Neo-classical economics the prosperity can’t be taken for granted and rational

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decision-making requires the recognition of trade-offs in choices among
competing goods in order to make the most available economic resources and
expand overall size of economic pie
Firms and Profits, Supply and Demand
 corporations: organizations incorporated under the terms of relevant federal or
provincial laws
 incorporation limits the liability of the firm’s owners or shareholders to the
amount of capital invested in the firm rather than making them personally liable
for the company’s debts
· private business corporations exist to produce goods & services for profit the
revenues resulting from business activity should be greater than the costs of
carrying on business
 capital gains: profit returns comparable to or greater than other potential
investment with similar levels of risk
 economic markets involve a complex mixture of economic actors who perform a
variety of roles:
o workers (producers)
o consumers
o sellers
o buyers
o borrowers
o lenders (investors)
· risk-reward trade-offs is one of many ways in which individuals and businesses
carry out economic activity subject to the principles of supply and demand
 market participants balance relative risks and benefits
· govs may influence the activity of markets in many ways:
o making rules that increase/decrease costs of transactions or shift from
one economic actor to another
o provide or require the provision of information that enables market
participants to make more informed decisions on supply, quality and
value of product and services
o provide incentives (subsidies/tax breaks) for certain economic
activity and disincentives for others
o direct gov participation in supply of goods and services in ways that
can either encourage/discourage innovation and competition from
other suppliers
o rationing the supply of particular services traditionally under gov
control or financed from public funds
o redistribution of income between individuals/groups or to balance
current spending/consumption with both voluntary and “forced”
savings social insurance programs, to provide for future income
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