Public economics

Source: Wikipedia, the free encyclopedia.

Public economics (or economics of the public sector) is the study of government policy through the lens of

social welfare
. Welfare can be defined in terms of well-being, prosperity, and overall state of being.

Public economics provides a framework for thinking about whether or not the government should participate in economic markets and if so to what extent it should do so.

taxation and expenditures
.

This subject encompasses a host of topics notably

externalities and Imperfect Competition, and the creation and implementation of government policy.[1]

Broad methods and topics include:

Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from

public goods.[9]

Subject range

The Journal of Economic Literature (JEL) classification codes are one way categorizing the range of economics subjects. There, Public Economics, one of 19 primary classifications, has 8 categories. They are listed below with JEL-code links to corresponding available article-preview links of The New Palgrave Dictionary of Economics Online (2008) and with similar footnote links for each respective subcategory if available:[10]

JEL: H (all) – Public Economics
JEL: H0 – General
JEL: H1 – Structure and Scope of Government[11]
JEL: H2
Subsidies, and Revenue[12]
JEL: H3 – Fiscal Policies and Behavior of Economic Agents[13]
JEL: H4Publicly Provided Goods[14]
JEL: H5 – National Government Expenditures and Related Policies[15]
JEL: H6 – National Budget, Deficit, and Debt[16]
JEL: H7 – State and Local Government; Intergovernmental Relations[17]
JEL: H8 – Miscellaneous Issues.[18]

Market failures

The role of government in providing efficient and equitable markets is largely underpinned by addressing

asymmetric information
.

Public goods

Impure public goods.[21]
To visualize the public good's characteristic of non-excludability, it would be the inability to build a fence, barrier or wall that would block the good from consumption. In the modern era, digital replication allows several goods to be non-rivalry; since, people from all over the world can access it if you have access to the internet and a device.

Due to the two unique properties that public goods exhibit, being non-rivalrous & non-excludable, it is unlikely that without intervention markets will produce the efficient amount. It therefore, the role of government to regulate the production of public goods so as to create an efficient market equilibrium.[19]

Externalities

Externalities arise when consumption by individuals or production by firms affect the utility or production function of other individuals or firms.[22] Positive externalities are education, public health and others while examples of negative externalities are air pollution, noise pollution, non-vaccination and more.[23]

Pigou describes as

negative externalities
, such as the factory that destroys a great part of the amenities of neighboring sites.

The role of government is to address the negative external effects and societal deadweight loss created from inefficient markets[19]

Imperfect competition

Imperfect competition within markets can take many forms and will often depend on the barriers to entry, firms profit and production objectives and the nature of the product and respective market. [21] Imperfect competition will lead to a social cost and it is the role of government to minimize this cost.[24] Some notable imperfections include:

  1. Companies sell differentiated products
  2. There are barriers to exit and entry
  3. Suboptimal output and pricing

In its essence, the role of government is to address the issues that arise from these market failures and decide the optimal degree of intervention necessary. [19]

Taxation

Diamond–Mirrlees efficiency theorem

In 1971,

Joseph E. Stiglitz and Partha Dasgupta
(1971) have criticized this theorem as not being robust on the grounds that production efficiency will not necessarily be desirable if certain tax instruments cannot be used.

Pigouvian taxes

A.C. Pigou
(1877-1959).

One of the achievements for which the great English economist

social costs (externalities
). In his book, The Economics of Welfare (1932), Pigou describes how these divergences come about:

...one person A, in the course of rendering some service, for which payment is made, to a second person B, incidentally also renders services or disservices to other persons (not producers of like services), of such a sort that payment cannot be extracted from the benefited parties or compensation enforced on behalf of the injured parties (Pigou p. 183).

In particular, Pigou is known for his advocacy of what are known as corrective taxes, or

Pigouvian taxes
:

It is plain that divergences between private and social net product of the kinds we have so far been considering cannot, like divergences due to tenancy laws, be mitigated by a modification of the contractual relation between any two contracting parties, because the divergence arises out of a service or disservice to persons other than the contracting parties. It is, however, possible for the State, if it so chooses, to remove the divergence in any field by "extraordinary encouragements" or "extraordinary restraints" upon investments in that field. The most obvious forms which these encouragements and restraints may assume are, of course, those of bounties and taxes (Pigou p. 192).

Pigou suggested that the market failure of externalities can be overcome by the introduction of taxes. The government can intervene in the market, using an emission tax for example to create a more efficient outcome; this Pigouvian tax is the optimal policy prescription for any aggregate, negative externality.[25]

In 1960, the economist

property rights. This result is known as the Coase theorem
.

Cost–benefit analysis

Jules Dupuit (1804-1866).

While the origins of cost–benefit analysis can be traced back to Jules Dupuit's classic article "On the Measurement of the Utility of Public Works" (1844), much of the subsequent scholarly development occurred in the United States and arose from the challenges of water-resource development. In 1950, the U.S. Federal Interagency River Basin Committee's Subcommittee on Benefits and Costs published a report entitled, Proposed Practices for Economic Analysis of River Basin Projects (also known as the Green Book), which became noteworthy for bringing in the language of welfare economics.[26] In 1958, Otto Eckstein published Water-Resource Development: The Economics of Project Evaluation, and Roland McKean published his Efficiency in Government Through Systems Analysis: With Emphasis on Water Resources Development. The latter book is also considered a classic in the field of operations research. In subsequent years, several other important works appeared: Jack Hirshleifer, James DeHaven, and Jerome W. Milliman published a volume entitled Water Supply: Economics, Technology, and Policy (1960); and a group of Harvard scholars including Robert Dorfman, Stephen Marglin, and others published Design of Water-Resource Systems: New Techniques for Relating Economic Objectives, Engineering Analysis, and Governmental Planning (1962).[27]

See also

Notes

  1. The New Palgrave: A Dictionary of Economics, v. 3, pp. 1047–55. Table of Contents.
  2. Richard A. Musgrave, 2008. "public finance," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
       • _____, 1959.
    The Theory of Public Finance: A Study in Public Economy. J.M. Buchanan review, 1st page.
  3. ^ • Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, 34(1), pp. 9–41. Archived June 6, 2013, at the Wayback Machine
    From The New Palgrave Dictionary of Economics Online, 2008. Abstract links for:
       • behavioural public economics" by B. Douglas Bernheim and Antonio Rangel
       • "fiscal federalism" by David E. Wildasin
       • "hazardous waste, the economics of" by Hilary Sigman.
       • "nutrition and public policy in advanced economies" by Janet Currie.
  4. ^ The New Palgrave Dictionary of Economics, 2008, 2nd Edition. Abstract/contents links for:
      • "public finance" by Richard A. Musgrave
       • "consumption taxation" by James M. Poterba
       • "distributive politics and targeted public spending" by Brian G. Knight
       • "generational accounting" by Jagadeesh Gokhale
       • "nutrition and public policy in advanced economies" by Janet Currie
       • "progressive and regressive taxation" by William Vickrey and Efe A. Ok
       • "redistribution of income and wealth" by F.A. Cowell
       • "tax expenditures" by Daniel N. Shaviro
       • "taxation and poverty" by John Karl Scholz
       • "welfare state" by Assar Lindbeck.
       • social insurance and public policy by Jonathan Gruber.
  5. Joseph P. Newhouse

       • "mandated employer provision of employee benefits" by Jonathan Gruber
       • "public goods" by Agnar Sandmo
  6. Joseph E. Stiglitz, 2009. "Regulation and Failure," in David Moss and John Cisternino (eds.), New Perspectives on Regulation, ch. 1, pp. 11-23. Archived February 14, 2010, at the Wayback Machine
    Cambridge: The Tobin Project.
  7. ^ Gilbert E. Metcalf, 2008. "tax incidence," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  8. ^ Louis Kaplow, 2008. "optimal taxation," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  9. ^
    Anthony B. Atkinson and Joseph E. Stiglitz, 1980. Lectures in Public Economics, McGraw-Hill, pp. vii-xi.
       • Mancur Olson, 1971, 2nd ed.The Logic of Collective Action: Public Goods and the Theory of Groups, Harvard University Press, Description and chapter-previews links, pp. ix-x.
  10. ^ Of which a complete list with Wikipedia links is at JEL classification codes#Public economics JEL: H Subcategories
  11. ^ JEL: H11 – Structure, Scope, and Performance of Government
    JEL: H12 - Crisis management
  12. Subsidies
    JEL: H24 – Personal Income and Other Nonbusiness Taxes and Subsidies
    JEL: H25 – Business Taxes and Subsidies
    JEL: H26 – Tax evasion
  13. ^ JEL: H31 – Household
    JEL: H32 – Firm
  14. Project Evaluation; Social Discount Rate

    JEL: H44 - Publicly Provided Goods: Mixed Markets

  15. JEL: H56 – National Security and War
    JEL: H57 – Procurement
  16. ^ JEL: H60 – General
    JEL: H61 – Budget; Budget Systems
    JEL: H62 –
    Sovereign Debt
    JEL: H68 – Forecasts of Budgets, Deficits, and Debt
    JEL: H69
    – Other
  17. ^ JEL: H71 – State and Local Taxation, Subsidies, and Revenue
    JEL: H72 – State and Local Budget and Expenditures
    JEL: H73 – Interjurisdictional Differentials and Their Effects
    JEL: H74 – State and Local Borrowing
    JEL: H75 - State and Local Government: Health; Education; Welfare; Public Pensions
    JEL: H76 - State and Local Government: Other Expenditure Categories
    JEL: H77 - Intergovernmental Relations; Federalism; Secession
  18. Governmental Property
    JEL: H83 – Public administration
    ; Public Sector Accounting and Audits
    JEL: H84 - Disaster Aid
    JEL: H87 – International Fiscal Issues; International Public Goods
  19. ^ a b c d Abelson, Peter (2012). Public Economics: Principles and Practise. North Ryde, N.S.W.: McGraw-Hill. pp. 67/68.
  20. ^ "Peter Suber, SPARC Open Access Newsletter, 11/2/09". legacy.earlham.edu. Retrieved 2020-10-30.
  21. ^ a b Myles, Gareth (2001). Public Economics. Cambridge: Cambridge University Press. pp. 255–256.
  22. .
  23. .
  24. – via ELSEVIER.
  25. .
  26. ^ A.R. Prest and R. Turvey, 1965. "Cost-Benefit Analysis: A Survey" The Economic Journal, 75(300) pp. 683-735.
  27. ^ Introduction to Benefit-Cost Analysis

References

  • Joseph E. Stiglitz
    , 1980. Lectures in Public Economics, McGraw-Hill
  • Auerbach, Alan J., and
    Martin S. Feldstein
    , ed. Handbook of Public Economics. Elsevier.
1985, v. 1. Description and preview.
1987, v. 2. Description.
2002. v. 3. Description.
2007. v. 4. Description.
  • Barr, Nicholas, 2004. Economics of the Welfare State, 4th ed., Oxford University Press.
  • Buchanan, James M., [1967] 1987. Public Finance in Democratic Process: Fiscal Institutions and Individual Choice, UNC Press. Description, scrollable preview, and back cover.
  • _____ and
    Musgrave, Richard A., 1999. Public Finance and Public Choice: Two Contrasting Visions of the State. MIT Press. Description and scrollable preview links.
  • Coase, Ronald. "The Problem of Social Cost" Journal of Law and Economics Vol. 3 (Oct. 1960) 1-44
  • Diamond, Peter A. and James A. Mirrlees. "Optimal Taxation and Public Production I: Production Efficiency" The American Economic Review Vol. 61 No. 1 (Mar. 1971) 8-27
  • Diamond, Peter A. and James A. Mirrlees. "Optimal Taxation and Public Production II: Tax Rules" The American Economic Review Vol. 61 No. 3 (Jun. 1971) 261-278
  • Drèze Jacques H., 1995. "Forty Years of Public Economics: A Personal Perspective," Journal of Economic Perspectives, 9(2), pp. 111-130.
  • Dupuit, Jules. "On the Measurement of the Utility of Public Works" in Readings in Welfare Economics, ed. Kenneth J. Arrow and Tibor Scitovsky (1969)
  • Haveman, Robert 1976. The Economics of the Public Sector.
  • Kolm, Serge-Christophe, 1987. "public economics,"
    The New Palgrave: A Dictionary of Economics
    , v. 3, pp. 1047–55.
  • Feldstein, Martin S., and Robert P. Inman, ed., 1977. The Economics of Public Services. Palgrave Macmillan.
  • Musgrave, Richard A., 1959. The Theory of Public Finance: A Study in Public Economy, McGraw-Hill. 1st-page reviews of J.M. Buchanan[1] & C.S. Shoup[2]
    .
  • _____ and Alan T. Peacock, ed., [1958] 1994. Classics in the Theory of Public Finance, Palgrave Macmillan. Description and contents.
  • Laffont, Jean-Jacques, 1988. Fundamentals of Public Economics, MIT Press. Description.
  • Myles, Gareth D., 1995. Public Economics, Cambridge. Description and scroll to chapter-preview links.
  • Oates, Wallace E., 1972. Fiscal Federalism, Harcourt Brace Jovanovich, Inc.
  • Pigou, A.C. "Divergences Between Marginal Social Net Product and Marginal Private Net Product" in The Economics of Welfare, A.C. Pigou (1932)
  • Ramsey, Frank P. "A Contribution to the Theory of Taxation" in Classics in the Theory of Public Finance, ed. R.A. Musgrave and A.T. Peacock (1958)
  • Paul A. Samuelson
    , 1963. "A Dialogue on the Proper Economic Role of the State." Selected Papers, No.7. Chicago: University of Chicago Graduate School of Business.
  • Starrett, David A., 1988. Foundations of Public Economics, Cambridge. Description. Scroll to chapter-preview links.
  • Stiglitz, Joseph E., 1994. 'Rethinking the Economic Role of the State: Publicly Provided Private Goods' Unpublished.
  • _____, 1998. "The Role of Government in the Contemporary World," in Vito Tanzi and Ke-Young Chu, Income Distribution and High-Quality Growth, pp. 211-54.
  • _____, 2000. Economics of the Public Sector, 3rd ed., Norton.
  • Tinbergen, Jan, 1958. On the Theory of Economic Policy.

Further reading

  • Arrow, Kenneth J. Social Choice and Individual Values. (1970)
  • Atkinson, Anthony B. "On the Measurement of Inequality" Journal of Economic Theory 2 (1970) 244-263 [3]
  • Auerbach, Alan J. and Laurence J. Kotlikoff. Dynamic Fiscal Policy. (1987)
  • Boiteux, Marcel. "On the Management of Public Monopolies Subject to Budgetary Constraints" Journal of Economic Theory 3 (1971) 219-240
  • Corlett, W.J. and D.C. Hague. "Complementarity and the Excess Burden of Taxation" The Review of Economic Studies Vol. 21 No. 1 (1953–1954) 21-30
  • Dalton, Hugh. "The Measurement of Inequality of Incomes" The Economics Journal Vol. 30, No. 119 (Sep. 1920) 348-361
  • Edgeworth, F.Y. "The Pure Theory of Taxation" The Economic Journal Vol. 7 No. 25 (Mar. 1897) 46-70 [4]
  • Feldstein, Martin. "Social Security, Induced Retirement, and Aggregate Capital Accumulation" The Journal of Political Economy Vol. 82 No. 5 (Sep.-Oct. 1974) 905-926
  • Fisher, Irving. "Income in Theory and Income Taxation in Practice" Econometrica Vol. 5 No. 1 (Jan. 1937) 1-55
  • Fisher, Irving. "The Double Taxation of Savings" The American Economic Review Vol. 29 No. 1 (Mar. 1939) 16-33
  • Gini, Corrado. "Variability and Mutability" in Memorie di Metodologica Statistica, ed. E. Pizetti and T. Salvemini (1955)
  • Harberger, Arnold. "The Incidence of the Corporation Income Tax" The Journal of Political Economy Vol. 70 No. 3 (Jun. 1962) 215-240 [5]
  • Lihndahl, Erik. "Just Taxation: A Positive Solution" in Classics in the Theory of Public Finance, ed. R.A. Musgrave and A.T. Peacock (1958) [6]
  • Lorenz, M.O. "Methods of Measuring the Concentration of Wealth" American Statistical Association Vol. 9 No. 70 (Jun. 1905) 209-219
  • Musgrave, Richard A. "A Multiple Theory of Budget Determination" (1957) [7][dead link]
  • Niskanen, William A. "The Peculiar Economics of Bureaucracy" The American Economic Review Vol. 58, No. 2 (May 1968) 293-305 [8]
  • Niskanen, William A. Bureaucracy and Representative Government. (2007)
  • Orshansky, Mollie. "Children of the Poor" Social Security Bulletin Vol. 26 No. 7 (July 1963)
  • Orshansky, Mollie. "Counting the Poor: Another Look at the Poverty Profile" Social Security Bulletin Vol. 28 No. 1 (Jan. 1965)
  • Samuelson, Paul. "The Pure Theory of Public Expenditure" Review of Economics and Statistics, XXXVI (1954), 387-89 [9]
  • Tiebout, Charles M. "A Pure Theory of Local Expenditure" The Journal of Political Economy Vol. 64, No. 5 (Oct. 1956), 416-424 [10]
  • Wicksell, Knut. "A New Principle of Just Taxation" in Classics in the Theory of Public Finance, ed. R.A. Musgrave and A.T. Peacock (1958)

External links