Public Sector Finance & Economics Flashcards
(176 cards)
1
Q
What are the reasons for government intervention?
A
- market-pareto efficient
- market failures
- property rights
- enforcement of contracts
- merit goods
2
Q
What are the four roles of Government
A
- allocative
- redistributive
- stabilisation
- regulatory
3
Q
Explain the allocative role of government
A
- provision of goods and services that would not otherwise be provided by the market system
- problem: how much of the good to supply and what should the consumer pay?
- mention public goods, externalities, and monopolies
4
Q
Explain the redistributive role of government
A
- the correction of the skewed distribution of income and wealth in an economy
- problem: difficult to measure utility from income
- efficiency cost?
5
Q
Explain the stabilisation role of government.
A
- the successful attainment of macro-economic growth rate, low unemployment and stability of the price level
- modern government is held responsible by the electorate for the economy’s performance
- achieved through fiscal policy
- in a small, open economy it is very difficult for us to stabilise
6
Q
Explain the regulatory role of government
A
- for the private market to work there needs to be an equitable arbitrator to define property rights and enforce contracts.
- if there were no property rights or contract enforcement there would be no incentive to work, save or invest.
- if government is weak, private enforcers emerge
7
Q
What is pareto efficiency / optimum
A
a situation where it is no longer possible to make one person better off without making anyone else worse off
8
Q
when can pareto efficiency be achieved
A
under certain restrictive assumptions through perfectly competitive markets
9
Q
what is pareto improvement?
A
a situation where it is possible to make at least one person better off without making anyone else worse off
10
Q
what is the impact of a market failure
A
it reduces efficiency and therefore welfare in an economy
11
Q
What is a private good?
A
- excludable
- rival in consumption
12
Q
what is a public good?
A
- non excludable
- non rival in consumption
13
Q
what is the free rider problem
A
a person who receives the benefit of a good but avoids paying for it
14
Q
why does the free rider problem occur?
A
- good is non excludable
- because people are not charged for their use of the public good, they have an incentive to free ride
15
Q
what is a common resource?
A
- non excludable
- rival in consumption
16
Q
what is the tragedy of the commons
A
- a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole
e. g. why medieval sheep farmers really needed the enclosures
17
Q
what are club / toll goods?
A
- excludable
- non rival in consumption
18
Q
what are mistakes that people make when thinking about public goods
A
- they are not just any goods provided by the state
- not only provided by the state. they can be provided by the private sector or charities.
19
Q
what might be the impact of technology on public goods?
A
it may become cheaper to exclude customers
20
Q
How to ration public goods?
A
- tolls
- taxation
- queuing
- rationing
21
Q
what does excludability mean?
A
the property whereby a person can be prevented from using a good
22
Q
what does rival in consumption mean?
A
the property whereby one person’s use diminishes other people’s use of a good
23
Q
What is the optimal provision of a public good?
A
0
24
Q
why is 0 the optimal provision of a public good?
A
- public goods are non excludable and non rival in consumption
- the marginal cost of an extra person is 0
25
in terms of a public good, what is the difference between the marginal cost in production and consumption
- an additional person adds to the marginal cost in production but not consumption
26
what is an externality?
- the uncompensation impact of one person's actions on the well-being of a bystander
- an example of a market failure
27
what is the social cost of a good? (externalities)
private costs of the producers
+ costs of those bystanders
= social cost
28
what does it mean to internalise the externality?
altering incentives so that people take account of the external effects of their actions
29
what is the definition of a positive externality?
an action of an individual or firm which confers benefits on others but for which the latter does not pay
30
what is the definition of a negative externality?
an action of an individual or firm which confers costs on others but for which the latter is not paid
31
what is the cost to society of a positive externality?
larger than the cost to the consumer(s)
32
what is the cost to society of a negative externality?
larger than the cost to the producer(s)
33
where is the social cost curve of a positive externality?
above the demand curve (takes into account the external benefits to society)
34
where is the social cost curve of a negative externality?
above the supply curve (takes into account the external costs imposed on society)
35
what quantity of a good with a positive externality should be produced?
where the supply curve crosses the social-cost curve
36
what quantity of a good with a negative externality shodl be produced?
where the demand curve crosses the social-cost curve
37
how is a positive externality internalised?
subsidy
38
how is a negative externality internalised?
taxation
39
what is the relationship between externalities and property rights?
the market fails to allocate resources efficiently because property rights are not well established
40
what is the Coase Theorem?
- the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
- whatever the initial distribution of rights, the interested parties can reach a bargain in which everyone is better off and the outcome is efficient
41
what is the traditional way of looking at the reciprocal nature of externalities?
causes and fairness
42
what is the central question in terms of the reciprocal nature of externalities?
property rights
43
how does Coase look at the reciprocal nature of externalities?
efficiency
44
list 4 transaction costs
- identifying the parties with whom one has to bargain
- getting together with them
- actually bargaining with them
- observing and enforcing any bargain reached
45
what is the simple / Stigler version of the Coase Theorem?
if there are zero transaction costs, the efficient outcome will occur regardless of the choice of legal rule
46
what is the complex version of the Coase Theorem?
efficient laws and social institutions are the ones that place the burden of adjustment to externalities on those who can accomplish adjustment at least cost
47
what are some policy solutions to the externality problem
- regulation
- taxes
- subsidies
- marketable permits
- patents
48
what are the assumptions of the model of perfect competition?
- market participants have perfect information
- consumers know their preferences perfectly
- firms know the best available technology, the productivity of each worker, and the cheapest prices of all inputs
49
What is the impact of imperfect information?
inhibits prices and markets from performing its function of communicating important information about economic scarcity and coordinating production
50
in order to make an informed and optimal decision the economic agent must have perfect information. What is that.
information about the
- quality of the good
- price of the good
- future
51
what is the solution to imperfect information?
- usually regulation
| - where information failure is chronic the state may opt to produce the good or for a social insurance scheme
52
What are the consequences of asymmetric information?
- adverse selection
| - moral hazard
53
what is adverse selection?
occurs when there's a lack of symmetric information prior to a deal between a buyer and a seller
54
Explain the principal and agent problem?
- bureaucrats and politicians act as agents of the electorate
55
When does the principal and agent problem lead to inefficiencies
when
- there is asymmetric information between the agent and principal
- the goals of the agent and principal differ
- there are costs to the principal observing the actions of the agent
56
what is moral hazard?
occurs when there is asymmetric information between two parties and change in behaviour in one party after a deal is struck
57
What are the benefits of competition over monopoly?
- static benefits
- dynamic benefits
- equity benefits
58
What are the static benefits of competition over monopoly?
more output at lower price (eliminates deadweight loss)
59
What are the dynamic benefits of competition over monopoly?
- makes forms more efficient
- selection process - good firms grow, poor firms exit
- stimulates innovation
60
What are the equity benefits of competition over monopoly?
- small firms are protection from abuse of monopoly power
| - monopoly profits dkew distribution of wealth in society
61
What monopoly actions can firms take
- collective anti-competitive behaviour
| - single firm behaviour
62
name the three areas of a natural monopoly that are regulated?
- pricing
- access
- quality of service
63
give an important fact in terms of the regulation of professions
the profession should never be in the majority when it comes to regulation
64
what is government failure?
where activities of the State fail to promote efficiency
65
what are the two main sources of government failure?
- the procedures of a democratic system can lead to a pareto inefficient outcome
- the actions of the State are usually executed by a intermediary
66
What is the ethical voter model
voting involves some level of altruism
67
what is the median voter theorem
with single-peaked preferences the key to success is attracting the median voter
68
What does Arrow's impossibility theorem say?
cannot express the will of the people through voting system
69
Under Arrow's impossibility theorem, no voting system exists that satisfies ...
- transitivity
- non dictatorial choice
- independence of irrelevant alternatives
- unrestricted domain
70
What may the goals of the bureaucracy be?
- salary
- power
- personal presitige
- size of department
- increased budget
71
what interest groups are likely to successful?
- wealthy individuals or corporations
- interest / lobby groups which
- have small ish membership
- supply its members with a private good
- be reasonably homogenous so that policy conflicts are minimised
- have low organisational costs
- the payoff for success is large and certain
72
what are the two ways of accumulating wealth?
- engaging in productive activity
| - using political power to take wealth off someone else
73
why is rent seeking damaging to the economy
- opportunity cost
- visious circle
- monopoly distortions
74
what is corruption?
- the illegal use of public power for private gain
- the single greatest obstacle to economic and social development
- damages the incentives structure of society
75
How does corruption damage economic growth
- wastes tax-payers' money
- distorts policy
- undermines the rule of law
76
how does corruption occur?
- regulation
- authorisation / permits
- taxation
- transfers / subsidies
- financial repression
- government spending
- use of assets
- Ppublic Private Partnerships
77
how to reduce corruption?
- appointing high quality and honest officials
- leading by example
- strong informal norms of honesty and accountability
- ensure officials are paid apprioriately
- clear and unambiguous rules, laws, and bureaucratic processes
- appropriate and proportionate punishment for corruption
- open and free press
- FoI legislation
- separation of powers
- term limits on office
78
what are the standard measures of public finance?
G / GDP
Tax / GDP
Borrowing / GDP
Debt / GDP
79
What are the demand side theories on what pressure push public spending up?
- voters' preferences for public goods and services
- voters' preferences for redistribution of income
- risk aversion
- economic growth
- pressure groups
- urbanisation
80
What are the supply side theories on what pressure push public spending up?
- behaviour of bureaucrats
- behaviour of politicians
- fiscal illusion
- structure of government
- productivity differential (rising wage bull in the public sector)
81
what are the implications of rising expenditure?
- when does government become so large to the point of overriding individual liberty?
- does government improve welfare?
- emergence of public choice literature and recognition of government failure (government to governance shift)
82
What are the sources of finance?
- taxation
- borrowing
- charges for public services
- profits of State-owned enterprises
- sale of state assets
83
what are the risks of public finance?
- high levels of debt
- growing importance of corporation tax receipts
- very low capital spending base
- growth risks (brexit, trump, etc.)
- aging pressures
84
What is a budget?
- instrument of government policy
- contract between citizens and State
- resources raised vs allocation for delivery of services
85
What is a framework?
process to support a predictable, accountable, transparent and efficient conduct of fiscal policy at the national level.
86
Explain Ireland's national law on budgets
- no specific budgetary chapter in constitution or organic budget law
- constitution provides some fundamental principles
- Westminster model
87
What makes a strong budgetary framework?
- budgeting within fiscal objectives
- alignment with medium-term strategic plans and priorities
- performance evaluation and VFM
- quality, integrity, and independent audit
- transparents, openness and accessibility
- participative, inclusive and realistic debate
- fiscal risk and sustainability
- capital budgeting framework
- comprehensive budget accounting
- effective budget execution
88
what are the shortcomings of Ireland's traditional budget model
- highly centralised
- high levels of secrecy
- autonomous Ministers for Finance
- low level of constraint in terms of political processes for fiscal decisionmaking
- leads to procyclical decisionmaking
- one year focus
- incremental
89
List Ireland's budgetary reforms
- 2015 OECD review of parliamentary budget oversight
- annual budget process
- enhanced parliamentary engagement with budgetary process
- improved budget scrutiny and accountability
- EU dimension
- fiscal architecture strengthened
- better spending outcomes / evidence based policy formulatoin
90
what's the rational for the fiscal rules
- shared currency
- need fiscal rules to avoid spill over effects between Member States
- need for a rules-based framework
91
fiscal rules 1997
Stability and Growth Pact
92
fiscal rules 1998
preventive arm of SGP enters into force
93
fiscal rules 1999
corrective arm of SGP enters into force
94
fiscal rules 2005
Stability and Growth Pact 2.0 agreed
95
fiscal rules 2011
6 pack enters into force
96
fiscal rules 2012
fiscal compact agreed
97
fiscal rules 2013
2 pack enters into force
98
fiscal rules 2015
communication on flexibility
99
In terms of the division of labour, what's the role of the member states
- decide on tax and spending levels
100
In terms of the division of labour, what's the role of the European Commission
- assess compliance with rules
| - prepares analysis to guide council
101
In terms of the division of labour, what's the role of the Council of Ministers?
decisions on the application of the SGP
102
what's the aim of the preventive arm?
MS run prudent medium term fiscal policies
103
what's the aim of the corrective arm?
correct excessive government deficits (gross policy error)
104
what's the objective of the preventive arm?
close to balance or in surplus
105
what's the objective of the corrective arm
deficit: 3% of GDP
debt: 60% of GDP or approaching at a satisfactory pace
106
what's the operationalisation of the preventive arm
medium term budgetary objectives
107
what's the requirement of the preventive arm
at the MTO or on the path towards it
108
what's the assessment of the preventive arm
structural balance + expenditure growth
109
what's the assessment of the corrective arm
effective action methodology
110
what's the process of the preventive arm
european semester
111
what's the process of the corrective arm
Excessive Deficit Procedure
112
how is the preventive arm enforced
significant deviation procedure
113
how is the corrective arm enforced
sanctions
114
what's the medium term objective
- avoid pro-cyclical fiscal policies
- country specific
- Ireland's is a structural balance of -0.5% of GDP
115
what's the expenditure benchmark
- circumvent uncertainty surrounding the structural balance
| - helps ensure sustainable expenditure trends
116
what's an excessive deficit procedure
involves a set of procedures designed to ensure a timely and durable correction of the gross policy error
117
when was ireland in an edp
2009 - 2015
118
what's the structural balance
pays attention to economic ctcle
119
what's accrual accounting
- recognition of economic events at the time at which they occur, regardless of when the related cash receipts and payments change hands
- recognition of all stocks of assets and liabilities in balance sheet
120
what are the benefits of accrual accounting
- transparency
- accountability
- comprehensive
- more complete picture of the financial position of the public sector as a whole
121
what are the limitations of accrual accounting
- no guarantee that its potential benefits will be realised
- satisfaction with regards to objectives beyond transparency and accountability is uneven
- accruals reforms are lengthy projects
122
what three things has the move to accrual accounting taken account of?
- wider reform agenda
- recommendations from the IMF Fiscal Transparency Report
- developments at EU level concerning the future implemntation of harmonised accounting standards
123
mention two points about broader accruals accounting
- 3/4 of OECD countries are using accrual accounting with some adopting accrual budgeting as well
- however, questions are increasingly being raised regarding the cost and usefulness of accrual reforms, who impacts on public management and performance are not obvious to make stakeholders
124
what's the definition of taxation?
a compulsory payment to Government for which no benefit is received
125
give examples of direct v indirect taxation
PAYE v VAT
126
explain tax incidence
formal (legal) v effective (actual) burden
127
list 3 types of tax
- progressive tax
- proportional tax
- regressive tax
128
what are the functions of a tax system
- finance public expenditure
- equity and redistribution
- raise revenue efficiently
- corrective taxation
- macroeconomic stabilisation
- growth and competitiveness
129
what are the economic principles of taxation?
- avoid distorting economic behaviour
- equity
- stability of revenues
- simplicity of tax design
- neutrality
- "correcting" "market failure"
130
what's the OECD hiererachy of taxes which affect economic growth
- corporation taxes
- personal income taxes
- consumption taxes
- property taxes
131
how does tax impact behaviour and outcomes?
- most economic models outline in broad terms how an agent reacts to prices
- price elasticities of supply and demand
- taking pure economic rents does not create a distortion
132
what's an economic rent
- a payment to a factor of production over and above what is needed to bring it into use
133
what is equity in taxation
fairness
134
what is horizontal equity
treat people the same / not distinguish by characteristic
135
what is vertical equity
more you earn the more you pay
136
what is efficiency in taxation
don't distort economic behaviour
137
what's a corrective tax
want to change behaviour
138
what's simplicity in taxation
- cost of compliance
| - cost of administration
139
what's tax expenditure
reduces tax obligations with respect of a benchmark tax
140
what's the rational for intervention via a tax expenditure
- generally a form of corrective taxation
| - intervention hinges on existence of a market failure
141
what are the department of finance (2014) guidelines for ex ante evaluation?
- what objective does the tax expenditure aim to achieve
- what market failure is being addressed
- is a tax expenditure the best approach to address the market failure
- what economic impact is the tax expenditure likely to have
- how much is it expected to cost
142
what are the Department of Finance (2014) guidelines to ex post evaluation?
- is the tax expenditure still relevant
- how much did the tax expenditure cost
- what was the impact of the tax expenditure
- was it efficient
143
what's the accessibility for beneficiaries of tax expenditure
simple, because of their automatic nature
144
what's the accessibility for beneficiaries of direct spending
more complex, requiring selection
145
what are the administrative and compliance costs of tax expenditures
high, if exemptions are properly monitored
146
what's the administrative and compliance costs of direct spending
medium due to necessity of selection and allocation
147
what are the possible abuses of tax expenditure
evasion, avoidance and rent seeking
148
what are the possible abuses of direct spending
arbitrariness, inefficiency and capture of the allocating body
149
what's the flexibility of tax evasion
work with permanent laws, thereby generating stability but also inertia
150
what's the flexibility of direct spending
work with budgets, evaluation and regular reallocations
151
what's the transparency and accountability of tax expenditure
the automatic nature does not contemplate control of mechanisms of accountability
152
what's the transparency and accountability of direct spending
must be approved by legislature, as with all government expenditure
153
what's the expenditure control of tax expenditure
expenditure determined ex post, uncertain and unlimited which can cause fiscal imbalances
154
what's the expenditure control of direct spending
programmed and controlled spending limited by budget law
155
what's the equity of tax expenditure
only potential taxpayers benefit, with the highest income often benefiting the most
156
what's the equity of direct spending
discretion can provide more equitable access enhancing targeting of beneficiaries
157
what's Ireland's highest tax expenditure
€865m exemption of investment income and gains of approved superannuation funds
158
what's the policy cycle of evaluation of public projects
- identifying issues
- policy analysis
- policy instruments
- consultation
- coordination
- decision
- implementation
- evaluation
159
what's the expenditure lifecycle?
- appraisal
- planing / design
- implementation
- projects / programme completion
160
What's the type of analysis when the estimated cost is €0.5m or less?
Simple Assessment
161
What's the type of analysis when the estimated cost is €0.5m to €5m?
Single Appraisal
162
What's the type of analysis when the estimated cost is €5m to €20m?
multi criteria analysis
163
What's the type of analysis when the estimated cost if over €20m?
Cost Benefit Analysis
164
What's a Cost Benefit Analysis?
a study that compares the costs and benefits to society of providing a public good
165
What's the method of a Cost Benefit Analysis?
- clearly defined set of objectives for the project
- statement of alternatives
- statement of the constraints that impinge on the project, together with a listing of those alternatives that do not fall within the constraints
- in respect of each chosen alternative (next questions)
166
For a CBA, in respect of each chosen alternative ...
- benefits and costs expected over the economic life of the project and underlying assumptions
- quantification of benefits and costs
- statement of projected cash flows or cost / benefit balance sheet
- calculation of the decision criteria and sensitivity test
- identification of the distributional effects of the costs and beenfits
- assessment of the pay back period
- recommendation
167
what's discounting
allows benefits and costs that occur in different time period to be comparable by expressing their values in present terms
168
what's a counterfactual
a comparison between what actually happened and what would have happened without the intervention
169
What's Net Present Value?
sum of discounted benefits less sum of discounted costs
170
what's deadweight
what would have occurred anyway without the intervention
171
what's displacement
occurs when the creation of a positive programme outcome in one area leads to a loss of this activity in another area
172
what's additionality?
what the intervention delivers above and beyond what would have happened anyway
173
attribution
what proportion of the outcome can be directly attributed to the intervention
174
what's financial analysis
only considers financial cash flows whereas economic analysis in the form of a CBA examines all costs and benefits for society and not just the direct financial flows arising from the project
e.g. construction of a sports stadium, road investment
175
what's a Cost Effectiveness Analysis?
if you can establish prices, use CBA. If not, CEA
| e.g. health technology, housing
176
What's a Multi Criteria Analysis?
establishes preferences between project options by reference to an explicit set of criteria and objectives
e.g. social housing provision
