Download Field of Public Finance

Field of Public Finance
Anderson Chapter 1
Definition
• Public finance is field of study in economics that is concerned with
the financial activities of the public sector—that part of the economy
controlled by governments.
• Richard Musgrave definition: “The complex of problems that center
around the revenue-expenditure process of government is referred to
traditionally as public finance.”
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Questions
• We want to know:
• What activities are sensible for governments to carry on,
• The right quantities of public goods and services that
should be provided,
• And the best method of paying for those services.
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3
Levels of Government
• We care about public sector activity at all levels:
• Federal
• State
• Local
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4
Explanation of Public Economics From the
Handbook of Public Economics
• We attempt to explain why government behaves as
it does, how its behavior influences the behavior of
private firms and households, and what the welfare
effects of such changes in behavior are.
• Notice the why, how, and what aspects of this
statement.
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5
J. M. Keynes on the Problems to
be Solved
• “The political problem of mankind is to combine
three things: economic efficiency, social justice,
individual liberty.”
• Tradeoffs between efficiency and distribution
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6
Musgrave’s Economic Roles of
Government
• Allocation
• Distribution
• Stabilization
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Allocation Role of Government
• Allocate resources in public sector.
• Involves making decisions on public expenditure
programs to provide the public goods and services
citizens desire at tax/fee rates they are willing to
pay.
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Distribution Role of Government
• Given output of economy (measured in GDP or
other terms), the question is who receives the
benefit of that production?
• If the distribution provided by the market
mechanism is unacceptable, there is a role for
government to redistribute income or wealth.
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Stabilization Role of Government
• Stabilize output, employment, and prices.
• Purview of macroeconomics course, hence we will
not put emphasis on this role in this course.
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