1. MARKET FAILURESROLE OF GOVERNMENT May 08, 2011

2. QUIZ 1. Give an example of a positive externality. Briefly explain why it is a positive externality. 2. Define a merit good.

3. QUIZ For the next items, identify what market failure/s is associated with each program. 3. PhilHealth 4. PAG-ASA 5. Anti-smoke Belching Law BONUS: As of 2011, the richest Filipino, ranked 173 in the 2011 Forbes World’s Billionaires list

4. MARKET FAILURES Imperfect Competition Public Goods Externalities Incomplete Markets Imperfect Information Unemployment Inflation

5. SOLUTIONS How do we solve market failures? Who gives us a hand when the invisible hand fails? 10 mins to discuss with group 2 mins to present in front

6. SOLUTIONS Imperfect Competition – regulation Public Goods – gov’t provision Externalities – penalties Incomplete Markets – govt provision, regulation Imperfect Information – gov’t provision Unemployment, Inflation – policies

7. GOVERNMENT INTERVENTION

8. GOVERNMENT INTERVENTION Distribution of income Individuals may not act in their best interest Examples: Smoking Not wearing seatbelts

9. GOVERNMENT INTERVENTION Merit Goods – goods that the government compels individuals to consume Seatbelts Elementary Education Paternalism -

10. Role of Government What is the role of the gov’t? How should they intervene in the market? Do we need a gov’t? DO YOU TRUST OUR GOVERNMENT?

11. The Price is Right…OR IS IT? Some components of the 2010 budget are listed. Give ‘bids’ on how much is appropriated for each. The bidder whose bid is closest to the exact amount receives a prize. Clue: PHP 1, 300,000 – 405,363,000,000 (0%-20%) Total 2010 budget: PHP 2,064,875,646,000

12. PHP 28,686,083,000 (1.39%) DEPARTMENT OF HEALTH

13. PHP 4,259,376,000 (0.21%) OFFICE OF THE PRESIDENT

14. PHP 126,930,988,000 (6.15%) DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS

15. PHP 161,405,905,000 (7.82%) DEPARTMENT OF EDUCATION

16. PHP 276,212,000,000 (13.38%) DEBT SERVICE - INTEREST

17. PHP 405,363,000,000 (19.63%) DEBT SERVICE - PRINCIPAL

18. PHP 681,575,000,000 (33%) TOTAL DEBT SERVICE

19. PHP 47, 685.89 EACH FILIPINO OWES

20. PHP 681,575,000,000 18,685,574 – 64-gb Ipads (with wifi+3g) 456,336 – 2010 Chevrolet Camaro 18,420,946 – Nikon D90 1,514,611 – Two-classroom school buildings 1,703,937 – Standard classrooms 1,363,150,000 – Armchairs 34,078,750 – Personal Computers 1,310,721 – Ateneo Graduates (8 sems)

21. PHILIPPINE DEBT Total: PHP 4,396,639 M = 50% of GNP Declining shares of the budget Education, Health, Agriculture, Agrarian Reform, Trade and Industry, etc. Collection shortfalls (2006) BIR and BOC = PHP 21.9B Delaying the release of funds  projects suffer Infrastructure dev’t slowing down, inability to produce jobs

22. Illegitimate Cases of Debt Compiled by Freedom from Debt Coalition Nationwide multi-sectoral coalition conducting advocacy work in the national, local and international arenas, to realize a common framework and agenda for economic development.

23. Textbook Scam Second Social Expenditure Management Project (SEMP2) improve basic social services by enhancing performance and governance in the social sector departments through systems improvement and reforms (in particular, procurement, financial management and information technology reforms).

26. Textbook Scam Conflict of Interest – Vibal group’s attempt to distort the bidding process. WatanaPhanit, Alkem, and two other publishing groups (SD Publishing and JTW) engaged in the bidding process are all partners of Vibal, World Bank intervention – pressure IABAC to reverse its earlier disqualification of Vibal due to conflict of interest

27. Textbook Scam Vibal monopoly – cornered 75.96% of the DepEd bids from 1999 to 2004, or P2,658,756,511 of P3.5 billion, under WB loans. Vibal’s qualification despite blunders (e.g. 316-page public elementary school textbook with 431 errors).

28. Textbook Scam Defective textbooks – At least 60,000 of the textbooks were found to contain inverted pages. At least 5 of the 6 books were found to have defects. As much as 170 factual errors in one textbook had been reported. Bribery to obstruct investigation – Sen. Lacson disclosed that there had been at least two pay-offs to stop the Senate proceeding.

29. North Luzon Railways Project Connect Clark to Bonifacio to provide highspeed link to new international airport However, plans changed and gov’t opted to revive the Phil National Railways

30. North Luzon Railways Project Creditor: Chinese Export-Import Bank Loan amount: PHP 20.6B (USD503M) at 3% per annum, in 20 years (inclusive of 5-year grace period) Specified Contractor: China National Machinery and Equipment Corporation Part of loan agreement requires all contractors and suppliers be Chinese nationals

31. North Luzon Railways Project Illegal – no competitive bidding (RA9184), no prior concurrence by monetary board (Sec. 20, Art. VII of Constitution) Unviable – CNMEC is not a qualified contractor; it has not done any railway project of similar magnitude, nor does it manufacture railroad equipment

32. North Luzon Railways Project More expensive than 1998 NLRC project cost – everything is the same except the track gauge: CNMEC version is narrow while NLRC is standard; narrow gauges are actually cheaper than standard gauges

33. North Luzon Railways Project Onerous burden – Total project cost of USD503M was approved by NEDA USD82-107 earmarked as counterpart fund to be provided by RP gov’t through North Luzon Railways Corporation Unclear whether RP counterpart is intended to cover costs not revealed in original cost breakdown Large portion of relocation and resettlement costs hidden in NHA budget

34. National Broadband Network Project Telecom infrastructure to link all gov’t offices nationwide Conceptualized as part of GMA’s 2006 SONA Suspended indefinitely on Sept. 22, 2007 Cancelled on Oct. 2, 2007

35. National Broadband Network Project Creditor: Chinese Export-Import Bank Loan amount: PHP13.51B (USD329.5M) @3% per annum in 20 years Specified contractor: Zhong Xing Telecommunication Equipment Company (ZTE)

36. North Luzon Railways Project Irrelevant and unviable – already existing inter-connectivity infrastructures in place (PLDT, Telco); gov’t already has two broadband networks; no feasibility study was done by DOTC Not transparent, questionable process – Originally a BOT project but later became an Executive Agreement with no bidding

37. North Luzon Railways Project Disadvantageous to gov’t– originally PHP5.1B but ballooned to PHP19.3B Gov’t opted for the more expensive loan agreement Take-or-pay agreement Lost revenue from tax Onerous debt burden – total of USD527.2M USD329.48M – principal USD9.88MM – annual interest for 20 years

38. North Luzon Railways Project Violation of Phil Laws Procurement Law and BOT Law: Requires bidding for projects > PHP2M; unsolicited BOT projects requires Swiss challenge Graft and Corrupt Policies Act USD10M bribery to AHI to back out PHP200M offered to NEDA Dir. Gen. Romulo Neri USD130M commission of Abalos Omnibus Election Code – agreement was signed April 2007 during elections season

39. ECONOMIC ROLE OF GOV’T From birth to death Public Hospitals/Health Care Centers Public Schools Roads, highways, traffic lights SSS, PhilHealth Taxes – income, VAT, etc Constitution

40. MIXED ECONOMY Many economic activities undertaken by private firms, others by the government Government alters the behavior of the private sector through taxes, regulations and subsidies

41. PERSPECTIVES ON THE ROLE OF GOVERNMENT Mercantilists – gov’t should promote trade and industry (18th) Adam Smiths’ response – Wealth Laissez faire Government should and could stabilize the level of economic activity

42. GOVERNMENT FAILURES Limited information Limited control over private market responses Limited control over bureaucracy Limitations imposed by political processes

43. FUNDAMENTAL QUESTIONS What is to be produced? PPF – public goods and private goods How should it be produced? Privately or publicly? For whom should it be produced? Distribution of benefits How are choices made – collectively

44. How does the government get revenue to provide services to its people?

45. TAXATION Of two things you can be certain; death and taxes. -Benjamin Franklin. As old as gov’t itself 2 Kings 23:35: Jehoiakim paid Pharaoh Necho the silver and gold he demanded. In order to do so, he taxed the land and exacted the silver and gold from the people of the land according to their assessments

46. TAXATION Middle Ages – services to feudal lords Philippines – Polo y Servicio Exemption by paying falla Monetized taxes – payment in money instead of services 25% tax means working for gov’t 25% of your time

47. TAXATION Go to your groups and list down as many taxes as you can

48. FORMS OF TAXATION Direct Taxes Personal Income Tax Corporate Income Tax Transfer Tax- gift tax estate tax Indirect Taxes Sales tax Specific tax – import/export tax

49. DIRECT TAXES Personal Income Tax All taxable income net of deductions Exemptions if single Resident and non-resident citizens receiving income from sources within or outside the Philippines Aliens, whether resident or not, receiving income from sources within the Philippines

50. DIRECT TAXES Corporate Income Tax On businesses (firms) Corporations no matter how created or organized including partnerships Estates and trusts engaged in trade or business Progressive Tax – as taxable base increases, tax rate increases

52. DIRECT TAXES Transfer Tax Gift tax – imposed on right to transfer property during lifetime of transferer levied on donor Estate tax – imposed on right of an individual to transfer property at death

53. Levied on production and sales of goods and services Sales tax – imposed on all g/s exchanged in the country Tax rates vary by essentiality E-Vat INDIRECT TAXES

54. INDIRECT TAXES Specific tax – tobacco, alcohol, gas, oil, excise duties Export tax, import tax Regressive Tax – tax rate decreases as amount subject to taxation increases

55. DISTRIBUTION OF TAX Direct Taxes – more progressive Indirect Taxes – more regressive Philippines –in general progressive Argued that may be more regressive since indirect taxes are big Poorer individuals consume more of their income, therefore pay more indirect taxes

56. DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM Economic Efficiency – not interfere with efficient allocation of resources Administrative simplicity – easy and relatively inexpensive to administer Flexibility – able to respond easily (in some cases automatically) to changed economic circumstances

57. DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM Political responsibility – should be transparent Fairness – should be and should be seen to be fair, treating those in similar circumstances similarly and imposing higher taxes on those who can better bear the burden of tax