Download Government as an Economic Unit

Government as
an Economic Unit
Week 2
The Subject of Public Finance
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It is concern with
Economic of public sectors
Or
The public economy
Public Finance: studies the economic
activity of government as unit.
Government as a Unit
Analogous to person
• Analyzing economic activity of an individual:
• First Stage:
• 1- How an individual earn an income and how
much it is?
• 2-How income is spent?
• Second Stage:
• How an individual makes decisions or choices
among the possible alternative? For Example:
• 1-Why work at one job instead of another?
• 2- What criteria determine purchases?
• The pervious analogy can be both helpful and
misleading.
• The first stage is very similar. We need to gather the “fact”
about the public finance.
• How government secure its revenue and how these
revenues are spent.
• As for the second stage some important differences
appear.
• We need to examine the way in which governmental
decisions are made. Here the analogy breaks down.
• Governmental decision are reached as a result of many
individual participating in political process, Not only one as
in the case of individual person.
Government Finance
• A third Stage: The government decision
has an impact on the whole economy. As
compared to individual who has little
affect.
• A final Stage: evaluation of the impact.
Not like individual government activities
affect all of the individual in society
What is Government
• The conception of government is related to
the examination of the decision process.
• Two ways of looking at government:
• First : as unitary being (similar to private
person)
• Second as democratic state
What is Government
• private persons direct their activity toward maximizing
their “utility”. This assumption help predict the individual
behavior.
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• The difficult to apply to governmental action.
• How can “social utility” be defined?
• Does a projected outlay of 30 Million SR on urban
reconstruction, financed by central government
represent an increase in “social utility”? Or a decrease?
• There is no “fiscal brain” when we consider government
decision.
What is Government
• In a dictatorship, we may reduce public
finance to a study of private finance.
However, people will impose constraints
on the freedom of the dictator.
• Government as ruling group. Still it must
reckon with reaction of those outside it.
The government remains as an entity that
is divorced from the people.
What is Government
• Public finance of democratic governments. Here
the unitary conception of state doesn’t apply,
• However, Many approaches to the evaluation of
government action on unitary conception of
government.
• Attempts to evaluate government activities in this
framework are hampered by the arbitrariness of
any definition of social welfare
What should
government maximize?
• Early scholars in public finance assumed
that the utility of separate persons could
be added up to produce “social utility”.
• It is impossible to compare the utilities of
among different individuals or to measure
externally the utility of each.
• If this is possible the goal of taxation would
be to reduce social utility as little as
possible!
What should
government maximize?
• Lets assume:
• It may be possible to drive certain guidelines for tax and expenditure
decision which are widely accepted by individual in society.
• That all individual in society identical in their preferences.
• The additions to total utility caused by the addition of incremental
units of income diminish as more income is added. (diminishing
marginal utility of income).
• On the basis of such assumption, certain principles of public finance
be driven. Such as progressive tax.
What should
government maximize?
• A second approach : Public interest
• Exist a part from the interests of individual
citizens.
• This approach is observed in discussion of
budgetary decisions.
• It is often argued that “national interest”
demand a particular outlay on defense and
a given level of expenditure on domestic
program.
What should
government maximize?
• A third approach: social interest
• Scholar introduce their own explicitly
stated preference scheme.
• Such evaluation are inherently personal ,
not scientifically objective.
The Government As Mean of
Individual Action
• We approach government differently when we
begin to consider it not as unitary being which
act independently from its citizen.
• But as a mean through which private citizen
make decisions collectively.
• Here we must discard all attempts at defining
‘social utility” or “social interest” independently of
individual’s own preferences.
• We try to examine the condition under which
individuals will choose to sacrifice privately
enjoyed goods and services in return for
publicly provided goods and services.
• Representative government become the ideal
type