Principles of Macroeconomics / Unit 15 MAC 1419 worked example, 60 to 90 seconds
Public or Private, and Which Kind
The idea
Classify an act of investment by who does it and which of the three kinds it builds, then say which way it moves the identity and long-run supply. Six boxes exist: physical capital, human capital and technology, each done privately or publicly. Public investment appears in the identity as borrowing and in the growth model as capital.
In practice
A firm builds a factory: private physical capital, financed from the investment term, raising potential output. A government builds a port: public physical capital, financed by borrowing, raising potential output, and competing with private borrowers for funds. A household pays for a degree: private human capital. A government funds schools: public human capital, which the study at 1407 found crowded private investment in rather than out. A firm runs a laboratory: private technology. A government funds basic research: public technology, with spillovers that private firms could not capture and so would underprovide.
Where people slip
The last case is the strongest argument in this unit for public investment, and it is an argument about spillovers rather than about generosity: a firm cannot capture the full return on basic research, so it invests less than the return to the economy would justify. That is a statement about incentives and it does not establish that any particular programme is worth its cost.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it · Sources for Principles of Macroeconomics