Public economics ''(or economics of the public sector)'' is the study of government policy through the lens of
economic efficiency
In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts:
* Allocative or Pareto efficiency: any changes made to assist one person would harm another.
* Productive efficiency: no addit ...
and
equity
Equity may refer to:
Finance, accounting and ownership
* Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the dif ...
. Public economics builds on the theory of
welfare economics and is ultimately used as a tool to improve
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.
Microeconomic theory is utilized to assess whether the private
market
Market is a term used to describe concepts such as:
* Market (economics), system in which parties engage in transactions according to supply and demand
* Market economy
*Marketplace, a physical marketplace or public market
Geography
*Märket, a ...
is likely to provide efficient outcomes in the absence of governmental interference; this study involves the analysis of government
taxation
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
and
expenditures
An expense is an item requiring an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. Fo ...
.
This subject encompasses a host of topics notably
market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
s such as,
public goods,
externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
and
Imperfect Competition, and the creation and implementation of government policy.
Broad methods and topics include:
* the theory and application of
public finance
* Analysis and
design
A design is a plan or specification for the construction of an object or system or for the implementation of an activity or process or the result of that plan or specification in the form of a prototype, product, or process. The verb ''to design'' ...
of
public policy
Public policy is an institutionalized proposal or a decided set of elements like laws, regulations, guidelines, and actions to solve or address relevant and real-world problems, guided by a conception and often implemented by programs. Public p ...
*
distributional effects
Effect may refer to:
* A result or change of something
** List of effects
** Cause and effect, an idiom describing causality
Pharmacy and pharmacology
* Drug effect, a change resulting from the administration of a drug
** Therapeutic effect, a ...
of taxation and government expenditures
* analysis of
market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
and
government failure
Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. The costs of the government intervention are greater than the bene ...
.
Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from
ideology
An ideology is a set of beliefs or philosophies attributed to a person or group of persons, especially those held for reasons that are not purely epistemic, in which "practical elements are as prominent as theoretical ones." Formerly applied pri ...
. Examples of topics covered are
tax incidence
In economics, tax incidence or tax burden is the effect of a particular tax on the distribution of economic welfare. Economists distinguish between the entities who ultimately bear the tax burden and those on whom tax is initially imposed. The tax ...
,
optimal taxation, and the theory of
public goods.
[• Agnar Sandmo, 2008."public goods," ''The New Palgrave Dictionary of Economics'', 2nd Edition]
Abstract.
br /> • Serge-Christophe Kolm, 1987. "public economics," ''The New Palgrave: A Dictionary of Economics'', v. 3, pp. 1047-48.
• Anthony B. Atkinson
Sir Anthony Barnes Atkinson (4 September 1944 – 1 January 2017) was a British economist, Centennial Professor at the London School of Economics, and senior research fellow of Nuffield College, Oxford.
A student of James Meade, Atkinson vir ...
and Joseph E. Stiglitz, 1980. ''Lectures in Public Economics'', McGraw-Hill, pp. vii-xi.
• Mancur Olson
Mançur Lloyd Olson Jr. (; January 22, 1932 – February 19, 1998) was an American economist and political scientist who taught at the University of Maryland, College Park. His most influential contributions were in institutional economics, and i ...
, 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.
/ref>
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
''The New Palgrave Dictionary of Economics'' (2018), 3rd ed., is a twenty-volume reference work on economics published by Palgrave Macmillan. It contains around 3,000 entries, including many classic essays from the original Inglis Palgrave Diction ...
Online (2008) and with similar footnote links for each respective ''sub''category if available:
JEL: H (all)
– Public Economics
JEL: H0
– General
JEL: H1
– Structure and Scope of Government
JEL: H2
– Taxation
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
, Subsidies, and Revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
JEL: H3
– Fiscal Policies and Behavior of Economic Agents
JEL: H4
– Publicly Provided Goods
JEL: H5
– National Government Expenditures and Related Policies
JEL: H6
– National Budget, Deficit, and Debt
JEL: H7
– State and Local Government; Intergovernmental Relations
JEL: H8
– Miscellaneous Issues.
Market failures
The role of government in providing efficient and equitable markets is largely underpinned by addressing market failures
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
that may arise. Public Economics focuses on when and to what degree the government should intervene in the economy to address market failures. Some examples of government intervention are providing pure public goods such as defense, regulating negative externalities such as pollution
Pollution is the introduction of contaminants into the natural environment that cause adverse change. Pollution can take the form of any substance (solid, liquid, or gas) or energy (such as radioactivity, heat, sound, or light). Pollutants, the ...
and addressing imperfect market conditions such as asymmetric information
In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other.
Information asymmetry creates an imbalance of power in transactions, which can ...
.
Public goods
Pure public goods, or collective consumption goods, exhibit two properties; non-rivalry and non-excludability. Something is non-rivaled if one person's consumption of it does not deprive another person, (to a point) a firework display is non-rivaled - since one person watching a firework display does not prevent another person from doing so. Something is non-excludable if its use cannot be limited to a certain group of people. Again, since one cannot prevent people from viewing a firework display it is non-excludable. Due to these constraints, one of few examples of a "pure public good" is national defense - it is both non-rivalry and non-excludable. Another example, of a pure public good is knowledge. Consider a book. The book itself can be destroyed and thus is excludable. However, the knowledge obtained from the book is far more difficult to destroy and is non-rivalrous and non-excludable. In reality, not all public goods can be classed as 'pure' and most display some degree of excludability and rivalrous. These are known as Impure public goods. 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.
Externalities
Externalities arise when consumption by individuals or production by firms affect the utility or production function of other individuals or firms. Positive externalities are education, public health and others while examples of negative externalities are air pollution, noise pollution
Noise pollution, also known as environmental noise or sound pollution, is the propagation of noise with ranging impacts on the activity of human or animal life, most of them are harmful to a degree. The source of outdoor noise worldwide is main ...
, non-vaccination and more.
Pigou describes as positive externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
, examples such as resources invested in private parks that improve the surrounding air, and scientific research from which discoveries of high practical utility often grow. Alternatively, he describes negative externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
, 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
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. Imperfect competition will lead to a social cost and it is the role of government to minimize this cost. Some notable imperfections include:
# Companies sell differentiated products
# There are barriers to exit and entry
# 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.
Taxation
Diamond–Mirrlees efficiency theorem
In 1971, Peter A. Diamond
Peter Arthur Diamond (born , 1940) is an American economist known for his analysis of U.S. Social Security policy and his work as an advisor to the Advisory Council on Social Security in the late 1980s and 1990s. He was awarded the Nobel Memoria ...
and James A. Mirrlees
Sir James Alexander Mirrlees (5 July 1936 – 29 August 2018) was a British economist and winner of the 1996 Nobel Memorial Prize in Economic Sciences. He was British honours system, knighted in the 1997 Birthday Honours.
Early life and educa ...
published a seminal paper that showed that even when lump-sum tax
A lump-sum tax is a special way of taxation, based on a fixed amount, rather than on the real circumstance of the taxed entity. ation is not available, production efficiency is still desirable. This finding is known as the Diamond–Mirrlees efficiency theorem, and it is widely credited with having modernized Ramsey's analysis by considering the problem of income distribution with the problem of raising revenue. 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
One of the achievements for which the great English economist A.C. Pigou
Arthur Cecil Pigou (; 18 November 1877 – 7 March 1959) was an English economist. As a teacher and builder of the School of Economics at the University of Cambridge, he trained and influenced many Cambridge economists who went on to take chair ...
is known, was his work on the divergences between marginal
Marginal may refer to:
* ''Marginal'' (album), the third album of the Belgian rock band Dead Man Ray, released in 2001
* ''Marginal'' (manga)
* '' El Marginal'', Argentine TV series
* Marginal seat or marginal constituency or marginal, in polit ...
private costs and marginal social costs
Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. In other w ...
(externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
). 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
A Pigouvian tax (also spelled Pigovian tax) is a tax on any market activity that generates negative externalities (i.e., external costs incurred by the producer that are not included in the market price). The tax is normally set by the governmen ...
:
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.
In 1960, the economist Ronald H. Coase proposed an alternative scheme whereby negative externalities are dealt with through the appropriate assignment of property rights. This result is known as the Coase theorem.
Cost–benefit analysis
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. In 1958, Otto Eckstein
Otto Eckstein (August 1, 1927 – March 22, 1984) was a German-American economist. He was a key developer and proponent of the theory of core inflation , which proposed that in determining accurate metrics of long run inflation, the transitory pri ...
published ''Water-Resource Development: The Economics of Project Evaluation'', and Roland McKean
Roland Neely McKean (October 30, 1917 – April 15, 1993) is an American economist. He received his A.B. and Ph.D. degrees in economics from the University of Chicago. From 1951 to 1963, he was a research economist at the RAND Corporation, whe ...
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
Operations research ( en-GB, operational research) (U.S. Air Force Specialty Code: Operations Analysis), often shortened to the initialism OR, is a discipline that deals with the development and application of analytical methods to improve deci ...
. In subsequent years, several other important works appeared: Jack Hirshleifer
Jack Hirshleifer (August 26, 1925 – July 26, 2005) was an American economist and long-time professor at the University of California, Los Angeles.
He received a B.S. from Harvard University in 1945 and a Ph.D. in 1950. He worked at the RAND C ...
, 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
Robert Dorfman (27 October 1916 – 24 June 2002) was professor of political economy at Harvard University. Dorfman made great contributions to the fields of economics, statistics, group testing and in the process of coding theory.
His paper†...
, Stephen Marglin
Stephen Alan Marglin is an American economist. He is the Walter S. Barker Professor of Economics at Harvard University, a fellow of the Econometric Society, and a founding member of the World Economics Association.
Background
Marglin grew up in ...
, and others published ''Design of Water-Resource Systems: New Techniques for Relating Economic Objectives, Engineering Analysis, and Governmental Planning'' (1962).Introduction to Benefit-Cost Analysis
/ref>
See also
* Education economics
* Health economics
* Mixed economy
* Public finance
* Rawlsian social welfare function
* Welfare economics
Notes
References
* Atkinson, Anthony B., and Joseph E. Stiglitz, 1980. ''Lectures in Public Economics'', McGraw-Hill
* Auerbach, Alan J., and Martin S. Feldstein
Martin Stuart Feldstein ( ; November 25, 1939 – June 11, 2019) was an American economist. He was the George F. Baker Professor of Economics at Harvard University and the president emeritus of the National Bureau of Economic Research (NBER ...
, ed. ''Handbook of Public Economics''. Elsevier.
: 1985, v. 1
Description
an
preview.
: 1987, v. 2
: 2002. v. 3
Description.
: 2007. v. 4
Description.
* Barr, Nicholas, 2004. ''Economics of the Welfare State'', 4th ed., Oxford University Press.
* Buchanan, James M., 967
Year 967 ( CMLXVII) was a common year starting on Tuesday (link will display the full calendar) of the Julian calendar.
Events
By place
Europe
* Spring – Emperor Otto I (the Great) calls for a council at Rome, to present the ne ...
1987. ''Public Finance in Democratic Process: Fiscal Institutions and Individual Choice'', UNC Press
Description
scrollabl
preview
an
back cover.
* _____ and Musgrave, Richard A., 1999. ''Public Finance and Public Choice: Two Contrasting Visions of the State. MIT Press
Description
and scrollable previe
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
& C.S. Shoup
* _____ and Alan T. Peacock
Sir Alan Turner Peacock DSC, FBA, FRSE (26 June 1922 – 2 August 2014) was an English economist.
Early life
Alan Turner Peacock was born in County Durham in 1922. He was the son of the scientist Alexander David Peacock, who in 1926 became Pr ...
, ed., 958
Year 958 ( CMLVIII) was a common year starting on Friday (link will display the full calendar) of the Julian calendar.
Events
By place
Byzantine Empire
* October / November – Battle of Raban: The Byzantines under John Tzimiskes ...
1994. ''Classics in the Theory of Public Finance'', Palgrave Macmillan
Description
an
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)
* Stigler, George J. and Paul A. Samuelson
Paul Anthony Samuelson (May 15, 1915 – December 13, 2009) was an American economist who was the first American to win the Nobel Memorial Prize in Economic Sciences. When awarding the prize in 1970, the Swedish Royal Academies stated that he "h ...
, 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-previe
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
Jan Tinbergen (; ; 12 April 19039 June 1994) was a Dutch economist who was awarded the first Nobel Memorial Prize in Economic Sciences in 1969, which he shared with Ragnar Frisch for having developed and applied dynamic models for the analysis of ...
, 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) 244-26
* 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 Douglas Hague, 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) 46-7
* 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) 215-24
* Lihndahl, Erik. "Just Taxation: A Positive Solution" in ''Classics in the Theory of Public Finance'', ed. R.A. Musgrave and A.T. Peacock (1958
* 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
* Niskanen, William A. "The Peculiar Economics of Bureaucracy" ''The American Economic Review'' Vol. 58, No. 2 (May 1968) 293-30
* 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), 387-8
* Tiebout, Charles M. "A Pure Theory of Local Expenditure" ''The Journal of Political Economy'' Vol. 64, No. 5 (Oct. 1956), 416-42
* 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
Journal of Public Economics
{{Authority control
Public economics,