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Introduction Understanding Participatory Budgeting and Micro-economics
[This is a hypothetical, suppositional what-if application of participatory budgeting practices based on microeconomic principles in an imaginary community governed by direct democratic deliberation.]
It takes a micro-economic orientation and seen as being an important part of the imaginary City of Innovatitown’s Community Based Participatory Budgeting process.
It is designed to assist participants in the Community Based Participatory Budgeting process in gaining a basic understanding of the economic impacts that their decisions could have on both the local community’s economy and the ability of their city government to generate revenues to expend on programs and projects desired by the community.
This orientation is based on the Microeconomics Principles course taught by Dr. José J. Vázquez-Cognet of the University of Illinois at Urbana-Champaign through Coursea at https://www.coursera.org/courses.
Microeconomics Principles with Dr. Jose J. Vazquez-Cognet
A series of short videos are planned for which will provide a basic introduction for each microeconomic principle to be considered and how it relates to governmental expenditures and participatory budgeting.
This is not designed as a college level class in microeconomics and is not to be used as the primary basis of decision making. Rather, it is to be used as a platform to help better understand the possible long term impacts and potential unintended consequences of budgetary decisions on the local economy. Topics to be considered, among others to be added in the future, are:
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Gas Tax Elasticity - What is the potential impact of the City Government imposing a tax on gasoline on revenue generation, supply, demand and price of gasoline, impact on traffic congestion or the environment?
- Community Wealth - what are the investments of benefit to the community should make to increase the overall wealth of the community?
The orientation first looks at the roles of the free market and government in determining the factors that influence the community’s endeavor to allocate resources starting with the concept of the interaction between supply and demand curves to result in an equilibrium price. A theoretical point at which buyer and seller interests in a free market intersect to perfectly coincide so that the economy is operating as efficiently as possible and creating the greatest level of social economic welfare.
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Free Markets and Government
Those living in the United States commonly see free markets as a preferable way of distributing both private and public resources. Many say that in most, some would say all, cases free markets are able to increase or maximize social welfare better than government.
We usually decide though that we do not want to use the free market to address all of our needs or our total welfare in civil society which encompasses not only the economic realm but political, social, and other aspects of our lives. Particularly when addressing the community aspects of our lives, we look to some form of government to create rules and regulations for living together in a geographically designated area, to oversee the providing of common resources such as roads or sewer systems, and enhance the general welfare of the community by adding to the overall community wealth.
The government arguably has a place in intervening in the market when the supply and demand curves do not accurately illustrate the value perceived by consumers. This is usually debatable though. Government intervene all the time which means that markets are not completely free. The government can impose price ceiling, rent control, price laws, a minimum wage and other types of quotas. It can also impose tariffs for imports, or taxes. Where there is a government there is intervention.
As participants in a Community Based Participatory Budgeting process for the city, you are being tasked with not only allocating community resources through city government projects and programs but also considering the impacts those could have on the local economy using general principles of microeconomics.
So in developing a community based city government budget, how do we optimize the benefit by avoiding unnecessary interference in the market and maximize the beneficial impact in the community?
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The downloadable Interactive Supply and Demand chart demonstrates how changes in supply or demand, whether for price or quantity, can affect the overall curve for either thereby changing the equilibrium price point.
If supply and demand curve are well measured and they accurately describe what the value or cost is, then free markets will, in theory, generate the most welfare for society. This is because one won't be able to generate more welfare in society than at the point of price equilibrium. This perspectives is based on a number of factors.
Substitute and Complementary Goods
Economists speak of substitute goods and complementary goods. Substitute goods are ones which can be exchanged for each other. Chicken could be seen as a substitute for beef, both as cheaper and healthier substitute. Bread, potatoes and vegetables could be seen as complementary goods for both. What are substitute goods for the services and goods the community offers through city government that can be replaced by other resources? Is there a substitute good for a public road? Are there complementary goods related to public roads which would be a more efficient use of public funds such as public transportation?
Normal and Inferior Goods
Economist also speak of normal goods and inferior goods. A normal good is one with which one will demand for will increase if the consumer has an increase in income and all other factors remain the same. An inferior good is one for which demand is decreased as the income of the consumer goes up. An example could be buying ramen noodles when a student and eating at an expensive Italian restaurant. Ramen noodles are an inferior good and expensive restaurants are a normal good.
This seems to be different when paying for community based services through a governmental entity either through taxes or fees. Some may not appreciate having a fire department until their house is on fire or begrudge paying building permit fees to insure building standards. At the same time, waste of public resources or unnecessary bureaucratic red tape hurts the entire community.
Government would seem to require a different category as people do not buy more government when their income goes up. In reality, they may move to a better neighborhood or away to a better city. Public transportation could be seen as an inferior good but necessary for many and which could also potentially decrease congestion if its use were increased. Finding an optimal balance is a challenge.
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Community Wealth and Welfare
Measuring Public or Civic Consumer Surplus
One consideration is that we are attempting to measure the welfare of the community or happiness of people within that community based on benefits received in dollar terms. Some may believe that this is too limiting but the fact is that budgeting deals with allocating dollars and cents among a set of prioritized choices.
Beyond determining a theoretical equilibrium price based on the intersection between a consumer demand curve and a producer supply curve, microeconomics can also use the model of supply and demand to determines what is the welfare, the benefits, the happiness that society gets within the market. More specifically, whether a particular price or a particular distribution is really the one that generates the most welfare, at least as considered in economic terms by the market.
Economists presume that you are usually willing to buy something for more than you actually buy for it, because if your willingness was to pay is less, you wouldn't buy it. This may be difficult to measure quantitatively but we can understand by remembering how often we have bought something because we were so desperate to have it only to find it for a cheaper price later on. Even when we do shop around and find three different prices, we would have in many cases paid the highest price if we had not find one on a lower price. Having found the lowest price point, the difference between what we did pay and what we would have willingly paid is what economists call our consumer surplus.
We are using a theoretical measurement that economists use to measure welfare in the market. In the private market, a producer needs to find the highest possible equilibrium price based on consumer demand, thereby achieving the greatest level of producer surplus possible or the distance between actual cost and consumer willingness to pay. Consumers are trying to find the lowest cost to maximize the difference between what they are willing to pay and what they are actually paying. This is represented by the supply and demand curves as the area between demand and the price for consumer surplus and the area between supply and the price for producer surplus.
The formal economic definition of consumer surplus, which is derived from the demand curve, is the willingness of the consumer to pay minus the price. Actual consumer willingness though is hard to measure quantitatively.
Producer surplus, which is derived from the supply curve, is easier to measure. With producer surplus, there is actual money that can be measured making it more tangible. Willingness to sell something is measured how much additional is paid by the consumer over the price to cover what it costs to produce. If it costs $100 to produce and consumer demand allows it to be sold for $150, willingness to sell is then $50.
The equilibrium price will, at least in theory, illustrate how much consumer surplus, how much producer surplus and how much total surplus is optimally achievable, how much welfare, total welfare is created for the community?
The question is whether we can apply this concept to what people spend on government through taxes. The private market is made of buyers and sellers so total surplus in this market or economy will be whatever consumer surplus buyers are getting plus whatever producer surplus suppliers are getting at the price point equilibrium. Whether that is a true measure of the total welfare of the community is another question.
City Hall, beyond establishing certain reserve accounts and adapting to increasing costs in the private sector, should not need to provide programs or services beyond actual costs which are budgeted each year, so its so-called willingness to sell should be set at zero and that portion of welfare should be able to go over to the consumer side. Participatory Budgeting, coupled with a consideration of micro-economics is a means of insuring that this occurs in a manner that calls for the efficient use of public funds.
From a government services perspective then total welfare of the community is the aggregate welfare of the civic consumers. What is the consumer surplus for a member of a community paying taxes as a civic consumer of government products and services? Is it the willingness of the civic consumer to pay over the actual cost to be paid in taxes, at least in aggregate? While this is difficult to measure quantitatively in economic terms, one possibility is to measure it as a matter of Community Attachment as proposed by the Knight Foundation Soul of the Community study.
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Potential Impact of Taxes
Taxes on private transactions such as buying gasoline for your car from a gas station adds cost to that transaction. The economic elasticity of the demand gasoline will partially determine the impact that the extra cost a new or higher local tax will have on the equilibrium price for the per gallon cost of the gasoline. Other factors will determine whether it is the consumer or the producer that bears the brunt of that extra cost.
At any point that there is more cost, artificially imposed, either on the consumer or producer, than benefits realized will result in a reduction of total welfare. In the relation between buyer and producer, it is arguably an overall reduction in welfare. What must be considered in the Participatory Budgeting process is whether there is a sufficient gain in overall community welfare to warrant its recommendation.
The taxes may be used to fix roads within the community or to provide public transportation. We asked already if there was a substitute good for roads. Should roads be considered a complementary good for gasoline and automobiles? Do unmaintained roads induce families to move out of the community resulting in even greater loss of revenue.
No one asks for more road but they may ask for commutes of a shorter duration which is all too often addressed by creating more road in an attempt to reduce congestion. Basic roads may not be considered a normal good in that people don’t buy more when there income goes up, but they may be willing to spend money on express lanes, which could decrease the congestion in the other lanes. A reduction in automobile use could also be seen as an environmental benefit to the entire community.
The ability of the community to maintain the revenue stream to pay for the road repair or public transportation could also be have an impact on over the long term creating unintended consequences. Consumers could buy gasoline outside of the community creating a loss not only of the gas tax but sales tax as well. Cars are likely to get more fuel efficient reducing the revenue stream. If there is an environmental difference with the cost of gas, then consumers may seek cheaper gas that pollutes more. Costs of road repair and public transportation may go up faster than the inelastic limits of gasoline can absorb creating a backlash if increases are imposed in the future.
Is there a means by which to increase community wealth so that private concerns within the community do economically better thereby naturally generating more revenue for street repairs or create a greater willingness to fund such costs?
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