Class Notes

Week 5

Public Sector

The public sector is the part of the economy that is owned by and operated for the benefit of the entire society. The public sector is controlled by the government. Public institutions are publicly owned such as schools and courts. The public sector can account for 40-50% of the economy.

Milton Friedman is a strong proponent of laissez faire economics or “leave it alone” economics. In other words, Friedman suggests that government should NOT interfere with the economy. For example, when the government raises a tariff on goods, US consumers wind up paying more.

John Kenneth Galbraith opposes Friedman’s conclusions and states that the government should actively seek to protect the economy and the consumers from the tyranny of the invisible hand.

Public Sector Contributions

1. Promotes competition in the private sector. (see Clayton Anti-trust Act)
2. Enforces property rights. (The rules that define ownership and use of property.) Contracts are legal agreements between parties.
3. Provides public goods (roads, education, military).
4. Deals with negative externalities through regulations and laws. (air pollution)
5. Redistribution of income. (takes money to make money)

Public Sector Problems

1. Abuse of public goods (graffiti at school, litter at a park, stealing library books).
2. Special Interest Groups / Lobbyists – groups which seek to affect the working of government
3. Problem of size – The government can become too big and too unwieldy to work efficiently.