Public economics (or economics of the public sector) is the study of government policy through the lens of economic efficiency and equity. 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 is likely to provide efficient outcomes in the absence of governmental interference; this study involves the analysis of government taxation and expenditures.
This subject encompasses a host of topics notably market failures such as, public goods, externalities and Imperfect Competition, and the creation and implementation of government policy.Serge-Christophe Kolm, 1987. "public economics," The New Palgrave: A Dictionary of Economics, v. 3, pp. 1047–55. Table of Contents.
Broad methods and topics include: the theory and application of public finance• 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. Analysis and design of public policy• Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, 34(1), pp. 9–41. 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. distributional effects of taxation and government expenditures 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. analysis of market failure The New Palgrave Dictionary of Economics, 2008, 2nd Edition. Abstract links for: • "market failure" by John O. Ledyard • "bureaucracy" by Mancur Olson • "health insurance, the economics of" by Joseph P. Newhouse • "mandated employer provision of employee benefits" by Jonathan Gruber • "public goods" by Agnar Sandmo and government failure.• Sharun W. Mukand, 2008. "policy reform, political economy of," The New Palgrave Dictionary of Economics 2nd Edition. Abstract. • James M. Buchanan, 2008. "public debt," The New Palgrave Dictionary of Economics 2nd Edition. Abstract. • Mrinal Datta-Chaudhuri, 1990. "Market Failure and Government Failure," Journal of Economic Perspectives, 4(3), pp. 25-39.. • Kenneth J. Arrow, 1969. "The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Non-market Allocations," in Analysis and Evaluation of Public Expenditures: The PPP System. Washington, D.C., Joint Economic Committee of Congress. PDF reprint as pp. 1-16 (press +). • Joseph E. Stiglitz, 2009. "Regulation and Failure," in David Moss and John Cisternino (eds.), New Perspectives on Regulation, ch. 1, pp. 11-23. Cambridge: The Tobin Project.
Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from ideology. Examples of topics covered are tax incidence,Gilbert E. Metcalf, 2008. "tax incidence," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. optimal taxation,Louis Kaplow, 2008. "optimal taxation," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. and the theory of public goods.• Agnar Sandmo, 2008."public goods," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. • 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, 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.
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:Of which a complete list with Wikipedia links is at JEL classification codes#Public economics JEL: H Subcategories JEL: H (all) – Public Economics JEL: H0 – General JEL: H1 – Structure and Scope of GovernmentJEL: H11 – Structure, Scope, and Performance of Government - Crisis management JEL: H2 – Taxation, Subsidies, and RevenueJEL: H21 – Efficiency; Optimal taxationJEL: H22 – IncidenceJEL: H23 – Externalities; Redistributive Effects; Environmental taxes and SubsidiesJEL: H24 – Personal Income and Other Nonbusiness Taxes and SubsidiesJEL: H25 – Business Taxes and SubsidiesJEL: H26 – Tax evasion JEL: H3 – Fiscal Policies and Behavior of Economic AgentsJEL: H31 – HouseholdJEL: H32 – Firm JEL: H4 – Publicly Provided GoodsJEL: H40 – GeneralJEL: H41 – Public goodsJEL: H42 – Publicly Provided Private GoodsJEL: H43 – Project Evaluation; Social Discount RateJEL: H44 - Publicly Provided Goods: Mixed Markets JEL: H5 – National Government Expenditures and Related Policies JEL: H51 – Government Expenditures and HealthJEL: H52 – Government Expenditures and EducationJEL: H53 – Government Expenditures and Welfare ProgramsJEL: H54 – Infrastructures; Other Public Investment and Capital StockJEL: H55 – Social security and Public PensionsJEL: H56 – National Security and WarJEL: H57 – Procurement JEL: H6 – National Budget, Deficit, and DebtJEL: H60 – GeneralJEL: H61 – Budget; Budget Systems JEL: H62 – Deficit; SurplusJEL: H63 - Debt; Debt Management; Sovereign DebtJEL: H68 – Forecasts of Budgets, Deficits, and DebtJEL: H69 – Other JEL: H7 – State and Local Government; Intergovernmental RelationsJEL: H71 – State and Local Taxation, Subsidies, and RevenueJEL: H72 – State and Local Budget and ExpendituresJEL: H73 – Interjurisdictional Differentials and Their EffectsJEL: H74 – State and Local BorrowingJEL: H75 - State and Local Government: Health; Education; Welfare; Public PensionsJEL: H76 - State and Local Government: Other Expenditure CategoriesJEL: H77 - Intergovernmental Relations; Federalism; Secession JEL: H8 – Miscellaneous Issues.JEL: H80 – GeneralJEL: H81 – Governmental Loans, Loan guarantee, Credits, and Grants; BailoutsJEL: H82 – Governmental PropertyJEL: H83 – Public administration; Public Sector Accounting and AuditsJEL: H84 - Disaster AidJEL: H87 – International Fiscal Issues; International Public Goods
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 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, 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'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