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Fiscal

The document analyzes micro models of public sector growth, focusing on the actions of governments and their impact on the economy. Key models discussed include the Meltzer-Richard Model, which emphasizes income redistribution through electoral processes, and Baumol's Unbalanced Productivity Growth Model, which advocates for balanced investment across sectors to promote sustainable growth. Additionally, the Brown and Jackson Expenditure Model explores the relationship between campaign spending and election outcomes, highlighting factors that influence public goods demand and government expenditure.

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8 views2 pages

Fiscal

The document analyzes micro models of public sector growth, focusing on the actions of governments and their impact on the economy. Key models discussed include the Meltzer-Richard Model, which emphasizes income redistribution through electoral processes, and Baumol's Unbalanced Productivity Growth Model, which advocates for balanced investment across sectors to promote sustainable growth. Additionally, the Brown and Jackson Expenditure Model explores the relationship between campaign spending and election outcomes, highlighting factors that influence public goods demand and government expenditure.

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NAMES: ADEDAYO AYOMIDE PAUL

MATRIC NO: 180901506


DEPARTMENT:ECONOMICS:
COURSE CODE: ECN463
COURSE TITLE: FISCAL POLICY AND MANAGEMENT

QUESTION: ANALYZE MICRO MODELS OF PUBLIC SECTOR GRIWTH

MICRO MODELS OF PUBLIC SECTOR GROWTH


Micro models of public sector growth are economic theories that concentrate on the actions of specific actors, such as governments, in
relation to a larger economy.
Typically, these models look at how numerous elements, including taxes, rules, and public spending, can affect the expansion and effe
ctiveness of the public sector.
These models can be used to influence policy debates and provide information for policy decisions involving public sector transformat
ion.
These models are explained below:

THE MELTZER-RICHARD MODEL


Meltzer and Richard made a profoundly significant prediction concerning income inequality and redistribution based on the Median
Voter Theorem. The Meltzer-Richard Model highlights the significance of elections in promoting social and economic equality
(Meltzer & Richard, 1981). With universal suffrage and majority rule, they employ the MedianVoterTheorem, which demonstrates that
the median voter is the decisive voter (Roberts, 1977). In order to support their claim, they also cite research on income distribution
that demonstrate how the distribution is tilted to the right, that is, how the mean income is higher than the median income. The
underlying premises are that redistribution is a unidimensional policy area and that all citizens pay a flat tax rate to fund it.

BAUMOL'S UNBALANCED PRODUCTIVITY GROWTH MODELS


According to the Baumol imbalanced growth model, economic growth is most successful when investments are evenly distributed among th
e many economic sectors.
That is to say, the economy should place equal emphasis on investing in sectors that are experiencing moderate growth as well as those that
are critical to long-term sustainability.
According to Baumol, it was not a sustainable method to prioritize manufacturing growth while ignoring other industries like agriculture and
services.
The balanced growth model promotes investing in a variety of industries to diversify the economy and build a strong and robust one.
Policymakers and economists should consider the balanced growth model since it emphasizes the necessity for investment in education,
healthcare, and other critical sectors. It also suggests that countries should focus on creating a more equitable distribution of wealth to
support sustainable economic development.

Government expenditure may increase as a result of increasing input costs in the public sector relative to those in the private sector.
Baumol's model divides the economy into two broad sectors:
Progressive Sector: This sector is characterised by technologically progressive activities (e.g. innovation, capital formation, scale
economies) which result in output level increases. There are also cumulative employee productivity increases, which justify
subsequent wage/salary increases
Non-progressive Sector: This sector is characterised by sporadic changes in productivity. Labour is often the end product. e.g.
lecturers

This sector is primarily service-oriented, with the public sector being a large component (e.g education, health etc.)
Technological advances do not have as great an effect upon productivity in this sector as in the progressive sector. Despite such
differences, Baumol argues that there cannot be too big a wage/salary differential between the two sectors, or all employees would
want to join the progressive sector. This raises costs in the non-progressive sector, resulting in increased government expenditure.
Also, if production in the non-progressive sector has to be maintained relative to the progressive sector, this will require a greater
number of employees in the former, with potentially negative consequences for economic growth.

Criticisms
Baumol's model has been criticised for underestimating the opportunities for technological advancement in the public sector. However,
reference to the share of government expenditure taken up by employee remuneration illustrates that many government services are
dominated by labour inputs.

BROWN AND JACKSON'S MICROECONOMIC MODEL

By examining the relationship between campaign spending and election outcomes, the Brown and Jackson Expenditure Model is an
economic framework used to forecast the outcomes of political elections. According to the model, election results are significantly
influenced by campaign spending and voters make informed decisions based on information from campaign materials. According to
the model, campaign expenditure has a diminishing marginal return, which means that the number of votes gained decreases with each
extra dollar spent on a campaign.
On the other hand, detractors contend that the model oversimplifies the complexity of political campaigns and the numerous variables
that might affect voter behavior.
Despite these drawbacks, the model is a helpful resource for comprehending the connection between campaign expenditures and
election outcomes.
The purpose of this type of model is to study the factors that influence the demand/supply of public goods and services.
Brown and Jackson developed the model to derive the levels of publicly provided goods and services by taking into account the
following factors:

1. Tastes
2. Income
3. Tax rate of median voter
4. The cost of such goods and services.

However, some factors that have an influence upon the demand for and supply of such goods, and thus on the level of government
expenditure include:

Changes in the service environment: e.g. increase in the crime level ma y result in perceived deterioration in implementation of law and
order, despite increase in spending levels.

Population growth: e.g. size, density, age structure etc. For pure public goods, the marginal social cost of one additional consumer is
zero. However, this is not the case for mixed and merit goods, where expenditure must be increased or standards of provision will
drop. On the other hand, the unit costs of provision could potentially drop if the cost is shared by more taxpavers.

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