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Public economics (or economics of the public sector) is the study of government policy through the lens of
economic efficiency In microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis ...
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 diffe ...
. Public economics builds on the theory of
welfare economics Welfare economics is a branch of economics that uses microeconomic Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, tha ...
and is ultimately used as a tool to improve
social welfare Welfare (or commonly, social welfare) is a type of government support intended to ensure that members of a society can meet basic human needs Maslow's hierarchy of needs is an idea in psychology Psychology is the science of mind and ...
. Public economics provides a framework for thinking about whether or not the government should participate in economic markets and to what extent it should do so.
Microeconomic theory Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Als ...
is utilized to assess whether the private
market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *Market (1965 film), ''Market'' (1965 ...
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 entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
and
expenditures Expenditure is 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. For students or paren ...
. This subject encompasses a host of topics notably
market failure In neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are driven by the supply and demand In microeconomics, supply and demand is ...
s such as,
public goods In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of pla ...
,
externalities In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...
and
Imperfect Competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market, resulting in market failure In neoclassical economics, market ...
, and the creation and implementation of government policy. Broad methods and topics include: * the theory and application of
public finance Public finance is the study of the role of the government A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, entertainment, and media Literature * ''Sta ...
* 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 A prototype is an early sample, mode ...
of
public policy Public policy is an institutionalized proposal to solve relevant and real-world problems, guided by a conception and implemented by programs as a course of action created and/or enacted, typically by a government A government is th ...
* distributional
effects Effect may refer to: * A result A result (also called upshot) is the final consequence of a sequence In mathematics Mathematics (from Greek: ) includes the study of such topics as numbers (arithmetic and number theory), formulas and rela ...
of taxation and government expenditures * analysis of
market failure In neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are driven by the supply and demand In microeconomics, supply and demand is ...
and
government failure Government failure, in the context of public economics Public economics (or economics of the public sector) is the study of government policy through the lens of economic efficiencyIn microeconomics, economic efficiency is, roughly speaking, a sit ...
. Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from
ideology An ideology () is a set of belief A belief is an attitude Attitude may refer to: Philosophy and psychology * Attitude (psychology) In psychology Psychology is the science of mind and behavior. Psychology includes the study of ...
. Examples of topics covered are
tax incidence In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant l ...
,
optimal tax Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law ...
ation, and the theory of
public goods In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of pla ...
.
Agnar Sandmo Agnar Sandmo (9 January 1938 – 31 August 2019) was a Norway, Norwegian economist at the Norwegian School of Economics (NHH). He made a series of important contributions in the study of disparities, Redistribution (economics), redistribution, insur ...
, 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 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 An economist is a professional and practitioner in the social science Social science is the branch The branches and leaves of a tree. A ...
, 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.
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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 an twenty-volume reference work on economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, ...
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 entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
,
Subsidies A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the ter ...
, and Government revenue, Revenue
JEL: H3
– Fiscal Policies and Behavioral economics, Behavior of Economic Agents
JEL: H4
– Public good (economics), 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 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 and addressing imperfect market conditions such as asymmetric information.


Public Goods

Pure public good, 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 good, 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, non-vaccination and more. Pigou describes as positive externalities, 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, 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 and James A. Mirrlees published a seminal paper that showed that even when lump-sum taxation 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 problem, 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 is known, was his work on the divergences between Marginal cost, marginal private costs and marginal social costs (externality, 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. 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 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).Introduction to Benefit-Cost Analysis
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See also

* Education economics * Health economics * Mixed economy * Public finance * Rawlsian utility, Rawlsian social welfare function * Welfare economics


Notes


References

* Anthony B. Atkinson, Atkinson, Anthony B., and 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
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: 1987, v. 2

: 2002. v. 3
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: 2007. v. 4
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* Nicholas Barr, Barr, Nicholas, 2004. ''Economics of the Welfare State'', 4th ed., Oxford University Press. * James M. Buchanan, Buchanan, James M., [1967] 1987. ''Public Finance in Democratic Process: Fiscal Institutions and Individual Choice'', UNC Press
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an
back cover.
* _____ and Richard A. Musgrave, Musgrave, Richard A., 1999. ''Public Finance and Public Choice: Two Contrasting Visions of the State. MIT Press
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* 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 * Jacques Drèze, 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. * Richard A. Musgrave, Musgrave, Richard A., 1959. ''The Theory of Public Finance: A Study in Public Economy'', McGraw-Hill. 1st-page reviews of James M. Buchanan, J.M. Buchanan

& Carl Shoup, C.S. Shoup

* _____ and Alan T. Peacock, ed., [1958] 1994. ''Classics in the Theory of Public Finance'', Palgrave Macmillan
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* Jean-Jacques Laffont, Laffont, Jean-Jacques, 1988. ''Fundamentals of Public Economics'', MIT Press
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* Myles, Gareth D., 1995. ''Public Economics'', Cambridge
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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) * George Stigler, Stigler, George J. and 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-previe
links.
* Joseph Stiglitz, 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. * Jan Tinbergen, 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) 244-26

* 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,