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Lectures in
By
Prof. Dr. Younis El Batrik
THE FIELD OF PUBLIC FINANCE
Fundamental Economic Facts
 The Scarcity of Resources
 The necessity of economizing
 Choices
Private wants/ collective wants
Public finance is particularly concerned with the satisfaction of collective
wants
National resources are divided between the private and the public sector
(Gov.)
The field of public finance is studying and analysing both sides of the
government financial activities (Expenditures/ Revenues)
The public and private sectors are complementary
The Modern economy is a mixed economy
The public sector is complex with numerous activities
The classic theory of Adam Smith the government's activities are limited
The Economic and social objectives
of the modern government include:
Provision of public goods and services
Full employment of resources
A stable value of money
Steady economic growth
Satisfactory balance of payments
Reasonably equitable distribution of income and wealth
Minimum standard of individual welfare
The Government objectives in the field
of public finance
Provision of public goods
Redistribution of income and wealth
Stabilization of level of activity at full employment without inflation
Balanced and steady growth of national product
The Necessity of Public Sector
- Classical theory “ laissez- faire “
Two economic groups:
1- Producers
2- Consumers ( suppliers of inputs)
Two Markets:
1- Outputs market
2- Inputs or factors market
In outputs markets:
The consumer
the ratio of marginal utility per price for particular
commodity is equal to the ratio of marginal utility per price of other
commodities
MU1
=
P1
MU2
---------=
P2 =
MUm
Pm
In intputs markets:
The producer
are equal
MP1
=
P1
marginal product of all inputs relative to its prices
MP2
---------=
P2 =
MPm
Pm
This equilibrium reflects the most efficient use of resources
-But this requires perfect competition in all markets (inputs & outputs)
- What about the social welfare?
THE CIRCULAR FLOW MODEL
$
Demand
$
Consumers and
Suppliers of inputs
Supply
Intput Markets
Output Markets
Firms
Input owners
Consumers
0
Firms
0
Q Output
Q intput
Demand
Supply
Firms
$
$
Based on some assumptions:
1- The market price and quantity are determined by equilibrium of
demand and supply
2- The price and quantity of specific resources are determined by
equilibrium of firms demand for resources and owners supply
3- Capability of reducing and increasing quantities of supply
according to the changes of prices
4- Prices in the inputs markets continually adjust to the equilibrium
of market demand (firms) and market supply (resources)
5- Organization of production is determined by consumers
sovereignty
6- The price system allows to declare consumers tastes so
producers can adjust their productions and achieve maximum
profits
The Necessary Conditions for perfect Competition
Basic Assumptions:
-The motive is self interest
- Freedom of choice
- Private Property
- Reliance upon private price mechanism
- Limited role of government
Pareto Optimum
Perfect competition maximizes economic welfare
-The consumer preferences
outputs are automatically
allocated to maximize utility
- Any reallocation of inputs or outputs will reduce allocative
efficiency
- Allocative efficiency
optimal welfare situation = Pareto
Optimum
The pareto optimum accepts whatever distribution of income
arises out of free market system
first best
isolated
from social and political justice
The value of equity is disregarded
THE NEED FOR GOVERNMENT INTERVENTION
The Deficiencies of the Price System:
1- Divergence between private and social costs and benefits
2- Diffusion of benefits
3- Loss of consumers sovereignty
4- Inequality of distribution of income and wealth
5- Unemployment
6- Insufficient scale of provision of capital
The Economic Intervention of Government
- The theory of market failure
- J. M. Keynes: The general theory of employment, interest and
money (1936)
- The periodic booms and slumps of private enterprises (trade
cycle)
- The need of various actions of government to stabilize the
national economy