PUBLIC ECONOMICS

CHAPTER ONE
Foundation of Public Economics

3/4/2023
By :Habtamu Legese (Asst.Prof)
Habtamu Legese (Asst.Prof) 1
 CHAPTER ONE
INTRODUCTION

What is Economics?

Economics can be defined in different ways. The

following are the major ones.

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Cont.
1) Economics is a social study of production, distribution, and
consumption of wealth or output.
2) Economics is a study of choice. Economic agents make
choice because of scarcity, constraints or limitations of
resources.
There are two major types of constraints or limitations.
i. Economic constraints or limitations includes
A. Costs of production
B. Opportunity costs
C. Income
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Cont.
ii. Non-Economic constraints : include climate conditions (such
as prevalence of drought), political factors (such as civil war or
conflict between countries) cultural factors, and religious factors,
customs and legal factors.
3) Economics is the study of decision-making.
a) What to produce
b) How to produce
c) For whom to produce
4) Economics is the study of wise and efficient use of limited
resources
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 Branches of Economics

What are the major branches of Economics?

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What are the major branches of Economics?
For example, from the point of view of elements of analysis,
economics has two major branches:
a) Microeconomics and
b) Macroeconomics
❖ Microeconomics deals with behaviors of individual economic
units such as consumers, producers, business firms and other
economic decision-making units.

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Cont.
Macroeconomics deals with aggregate units of national
economy such as national output or Gross National
Product (GNP), general price level, inflation and
national employment.

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ii) From the viewpoint of method of analysis
❖ Positive Economics is a branch of economics which is
concerned with the explanations of economic
conditions. It tries to answer the question “What?”

❖ Normative Economics is a branch of economics,

which deals with value judgment on economic
situation. It tries to answer questions like “What
should be?”

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iii) On the basis of the economic system a
country follows.

A) Command economy is the type economy where economic

variables (prices, output etc.) are controlled by the government.
B) Market economy is the type of economy where values of
economic factors are determined by market forces.
C) Mixed economy

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Economic variables and their relationship
C = f(S, Y, HHS)
 The variable on the left hand side (C) is said to be:
➢Endogenous variable,
➢Dependent variable or
➢Explained variable
▪ The variables on the right hand side are known as:
➢Exogenous variables,
➢Independent variables,
➢Explanatory variables or
➢Determinant variables

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 1.1. Definition of Public Economics
•Public economics studies the role of the
government in market economies, the rationale
of its intervention and the economic and social
effects in terms of the efficiency and equity
trade offs.
•Public finance, also called public economics or
the economics of the public sector, is the study
of government policy, both expenditure and
taxation.
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Cont.
•On the expenditure side of public finance,
we ask: why is the government the primary
provider of goods and services such as
highways, education, and transfers to the
unemployed, while the provision of goods and
services such as clothing, entertainment, and
property insurance is generally left to the
private sector?

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Cont.
•On the revenue side of public finance, we
ask: how much should the government tax its
citizens, and how should that amount be related
to the economic circumstances of those
individuals?
•What kinds of activities should be taxed or be
given tax relief in difficult times?
•What effect do taxes have on the functioning of
the economy?
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Cont.
• According to Dalton, “public finance is one of
those subjects which lie on the borderline between
economics and politics.
• It is concerned with the income and expenditure
authorities and with the adjustment of the one to the
other.”
• Harold Groves, an authority on the subject, defines
public finance as: “A field of inquiry that treats of
the income and outgo of governments (federal, state
and local).
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Cont.
• The term public sector economics is used here
interchangeably with public finance and public
economics.
• Public sector economics can be defined as the impact
of government revenues, expenditures and investment
decision on economic activity.
• The sources of revenue, as well as the factors
influencing public expenditures, also constitute a
substantial component of public sector economics.

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1.2 Nature of Public Economics
• The study of the government’s role in the economy
involves answering four questions:
A. When should the government intervene in the
economy?
B. How might the government intervene?
C. What is the effect of those interventions on
economic outcomes?
D. Why do governments choose to intervene in the way
that they do?

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 A. When should the government intervene in the
economy?
• There are two reasons why governments may want to intervene in market
economies: market failure and redistribution (Wolf, 1987).
• The first fundamental theory of welfare states that, a Pareto efficient allocation
of resources emerges if all producers and consumers act as perfect competitors
and if markets exists for every commodity.
• This theory further implies that, a competitive economy automatically allocates
resources efficiently without the need for any centralized direction (Hindriks
and Myles, 2013). If a market is efficient then there may be no need for
government intervention.
• A market is said to be efficient if the quantity of goods and services produced
and exchanged is such that the marginal benefit to all the members of the society
from the last unit of that good is equal to the marginal cost of all members of the
society(Betleys, 2000; Diamond and Dybvig (1983).

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 Cont.
• The failure of the market is therefore the strongest justification
for the role of the state in allocating economic resources. It does
not, however, imply that government intervention will necessarily
improve efficiency because there could be government failure too
(Datta-Chaudhuri, 1990; Black and Dollery, 1989; and Wolf, 1987).
• There are several areas where the competitive market system may
fail, suffice to say. Here we will just mention the factors that are
responsible for market failure, and discuss the details in the ensuing
lecture.
• These factors include: macroeconomic stability, market
imperfection externalities, public goods, individual failure and
information asymmetry (Wolf, 1987; Besley, (1994; (Akerlof,
1970, Stiglitz and Weiss 1986), Beges, 1994, Holman and Lorig
(2000) and Watts and Segal, 2009)
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Cont.
• Apart from market failure, the other reason for government
intervention is redistribution (Wolf 1987). Redistribution implies
the shifting of resources from some groups of society to others.
• The type of income distribution produced by the market may
be considered as unfair or unjust by the society. Viner
(1960) argued that government intervention in the free
market has come about largely because of the dissatisfaction
with the prevailing distribution of income.
• Wolf (1987) also observed that when left on its own, the free
market will produce less redistribution than is efficient
(that is, socially desirable).
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Cont.
• Such situation arises because of the free-rider problem that
characterizes externalities, public goods and incomplete
markets.
• Other factors such as land, capital and labour may also
not be equitably distributed and may give reasons for
government intervention by employing tools such as taxes
and other regulations.
• The intervention is needed to correct resource misallocation
by redistributing resources from groups that are deemed to
be “too well off” to those groups of the society considers
“not well off enough” (Gruber, 2016).
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Cont.
• However, redistribution of resources from one group
to another may result in efficiency losses.
• These losses occur because the act of redistribution
causes individuals to shift their behavior away from the
efficiency- maximizing point.
• For instance, if we tax the rich to distribute income to
the poor, then this tax may cause the rich to work less
hard and the poor to work less hard (Gruber 2016).
• Another form of redistribution is the existence of
merit and demerit goods.

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 Merit and Demerit Goods
• The idea of merit good was coined by economist Richard Musgrave
in the 1950s.
• He defined merit goods as goods for which the social benefits of
consumption outweigh private benefits, regardless of their
willingness and ability to pay.
Social benefit = private benefit + external benefit
• To understand the concept of merit goods, it is important to
distinguish them from public goods.
• Public goods are non-excludable and non-rival, meaning consumers
can’t be excluded from consuming them based on their ability to pay.
As a result, markets often fail to provide them, causing market
failure.
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Cont.
• On the other hand, markets do provide merit goods, although
they under-provide them. This leads to partial market failure.
• Consumption of merit goods benefits society as a whole. These
benefits outweigh the private benefits enjoyed by the individual
due to positive externalities.
• Healthcare and education are examples of merit goods. The
market provides both private education and healthcare but in
quantities that are not optimal.
• A consumer that consumes healthcare (merit good) also benefits
the community, as they are less likely to spread diseases (positive
externality).
• Therefore, the benefits to society outweigh the individual benefits.
If healthcare was only provided privately, fewer people would
benefit from it.

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What are demerit goods?
• Demerit goods are the opposite of merit goods, as
the social costs for the community are higher than the
private costs for individual consumption.
• Private costs include the costs incurred by the
individual for purchasing the good and the negative
impact of the good on the individual.
• Social costs include the negative externalities that
occur during the consumption of the good.
Social cost = external cost + private cost
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 Example
• Tobacco is a demerit good.
• It is harmful to the individual smoker and it also
creates negative externalities that impact society as a
whole, like secondhand smoke or litter from people
throwing their cigarette butts on the street.

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 B. How might the government intervene?
• There are several different approaches that the
government can use for intervention. These include:
1. Tax or subsidize private sale or purchase. One way
that the government can try to address failures in the
private market is to use the price mechanism, whereby
government policy is used to change the price of a good in
one of two ways:
I) through taxes, the government can raise the price of
private sales or purchases of goods that are overproduced,
or
II) through subsidies, which lower the price for private
sales or purchases of goods that are under produced.
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2. Restrict or Mandate Private Sale or Purchase. Alternatively, the
government can directly restrict private sale or purchase of goods that
are overproduced, or mandate private purchase of goods that are
under produced and force individuals to buy that good. An example is
motor insurance in Ethiopia where motorists are mandated to
purchase insurance or face penalty.

3. Public Provision. Another alternative is to have the government

provide the good directly, in order to potentially attain the level of
consumption that maximizes social welfare.

4. Public Financing of Private Provision. Finally, governments may

want to influence the level of consumption but may not want to
directly involve themselves in the provision of a good. In such
cases, the government can finance private entities to provide the
desired level of provision.
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C. What are the effects of alternative interventions?
• In assessing the effects of government interventions, policy
makers must keep in mind that any policy has direct and
indirect effects.
• The direct effects of government interventions are those
effects that would be predicted if individuals did not change
their behavior in response to the interventions whilst the
indirect effects are effects that arise only because
individuals change their behavior in response to the
interventions (Gruber, 2016).

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Cont.
• For instance, suppose that the government wants to provide
unemployment allowance to an estimated 400,000 people at an
average of US$ 300 per person per month. This intervention will
cost a total of US$ 120,000,000 and this is the direct effect of the
intervention.
• However, being unemployed is something that people can change
about themselves. By providing allowances to the unemployed,
the government provides strong incentives for those employed.
• Now suppose that 200,000 people who were employed but earn
less than US$300 decide to stop working, the government cost of
the program would increase to US$180,000,000 and this is the
indirect effect when people change their behavior in response to
the policy.
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 D. Why do governments do what they do?
• To answer this question, we will turn to the tools of political
economy. Political economy is the theory of how the political
process produces decisions that affect individuals and the
economy (Howard et al., 2010).
• Governments face enormous challenges in figuring out what
the public wants and how to choose policies that match those
wants.
• Politicians must consider a wide variety of viewpoints and
pressures, only two of which are the desire to design policies
that maximize economic efficiency and redistribute
resources in a socially preferred manner.
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 Cont.
• Three motivations that uphold the study of these
questions in public economics are :
• Practical relevance,

• Academic relevance and

• Methodological relevance (Gruber, 2016)

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 Practical Relevance
• The study of public economics has a host of practical relevance
as an integral part it is concerned with improving economic
welfare.
• Almost every economic intervention occurs through
government policy via two channels:
i) Price intervention such as taxes, subsidies, social insurance,
public goods and
ii). Regulation including minimum wages setting, regulations,
zoning, labor laws, minimum education laws and environmental
regulation etc.

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 Cont.
• The stakes in public economics are extremely large
because policies it employs are far reaching. For
instance, tax reforms immediately affect millions of
citizens.
• Finally, public economics deals with some of the
contentious debate on contemporary issues such as the
appropriate role of government in society regarding
the question of replacing public health insurance with
decentralized private insurance.

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Cont.
• Whereas one group hold the view that such a policy
will improve health outcomes and reduce costs, other
proposals argue that it will worsen health outcomes
and raise costs.
• In such an instance only one of the two views can be
appropriate. Thus, injecting science into these
debates has great practical relevance.

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 Academic Interest:
• Public economics is typically the end point for many other
sub-fields in economic studies as in the case of
Macroeconomics, Development economics, Labor
economics and Corporate Finance questions which are
often motivated by public economics questions.
• Examples like Macroeconomic studies on costs of business
cycles and intertemporal models of household behavior and
Labor studies on employment effects of the minimum wage
can be cited.
• Such studies involve a blend of public economics and other
fields. Understanding public economics can help one to
work on relevant issues.

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 Methodology
• Public economics is at the frontier of a
methodological transformation in applied
microeconomics.
• Studies in public economics use data-driven
approach to answering important policy questions.
• Such studies combine a broad set of skills in applied
theory, applied econometrics and simulation
methods. Generally, topics in the course reflect a
broad set of methodological themes.
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Key economic questions in public economics
❑Efficiency:
➢What is produced, how it is produced and how much it is produced
(public vs private goods/services): given available resources make the
pie as large as possible
❑Equity
➢For whom it should be produced and who should pay for it: distribute
the pie in the most equitable way
➢How are decisions taken?
❑Trade offs:
➢an efficient outcome could be not equitable
➢an equitable outcome could be inefficient

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1.3 Why Limit Government intervention
• Government can tax, control and regulate but the eventual
outcome may be deepening market failure. The question of
why limiting government intervention arises and the
following are some of the reasons:
a) Government failure: Government failure can arise
because government may have limited control over
private market’s response to its action.
• For example, government’s rent control legislation can cause
supply of rental houses to decline as landlords divert their
investments elsewhere in response to the fall in their returns
from apartments.

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Cont.
b) Information problems: Due to information
problems it may be difficult for government to
determine what consumers preferences are, so that
determining what must be produced becomes difficult.
• There is also the difficulty of aggregating preferences
based on the number of people that are willing and
able to pay for a particular good or service.
c) Providing more public goods require more
distortionary taxation, which can lead to inefficiency
in production.
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Cont.
d) Deadweight loss of large governments: The
consequences of many actions of government are complicated
and often difficult to foresee.
e) Incentive effects: In the free market, individuals have a
profit incentive to innovate and cut costs, but in the public
sector, this incentive may be lacking.
• Therefore, government intervention can lead to inefficient
production. For example, state-owned industries have
frequently been inefficient, overstaffed and produce
goods not demanded by consumers.

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Cont.
f) Providing more social insurance can induce bad
incentive effects: Government intervention to provide health
care services, for instance, may be limited by tax revenue. It is
more likely that services will be rationed leading to longer
waiting lists and some treatments not available.
g) Additional redistribution leading to distortions in
incentives: Redistribution of income through the imposition
of taxes can have adverse effects on work, investment and
savings. This can create important trade-offs in any policy
analysis.

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1.4. Scope of Public Economics
•The older title of public finance have an
advantage in defining its scope. The notion
“finance” in public finance refers to the
budgeting, taxing, and spending activities of
government.
•Most activities of the government that are not
primarily budget-related (such as regulatory
activities) are left to other courses.
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Cont.
•This narrower definition, tie public finance to
microeconomics and to budget-centred issues of
taxing and spending for several decades.

•More recently, as public finance has evolved

into public sector economics, the scope of the
field has broadened beyond the components of
the budget.
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Cont.
• According to Musgrave (1959) , the scope of public
finance can be classified under the three main
functions of government budgetary policy, namely,
allocation, distribution and stabilization.

• The scope of public economics has been extended to

include five thematic areas, namely, i) public
revenue, ii) public expenditure, iii) public debt,
iv) financial management and v) economic
stabilization.
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 I) Public Revenue
• Public Revenue: Every government is expected to make
expenditure to meet the developmental needs of its citizenry.
• To achieve this objective adequate revenue must be
mobilized. The bulk of government revenue is obtained from
taxes, whilst other are also generated from non-tax sources
such as fees and penalties.
• Thus in the study of public finance an attempt is made at
studying the various types of taxes, the principles of
taxation, the incidence or burden of tax as well as tax
systems.

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II) Public Expenditure
• Public Expenditure: Government raises revenue with the
main aim of spending.
• So, another objective of public economics is to study the
principle of government expenditure making as well as the
main components of government expenditure.
• The expenditures are incurred productively or are diverted to
unproductive activities.
• The effects of public expenditure on economic growth and
income distribution are also studied.

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III. Public Debt
• Public Debt: Most often government expenditure exceeds total
revenue in a fiscal year.
• Government resorts to borrowing to finance the budget deficit.
This action creates public debt.
• Thus in public economics we study public debt in various
perspectives such as: the types of public debt available to
government, the size of and components of public debt, the debt
burden and what the interest rates on loans are.
• There are questions also about what type of bonds the
government have to issue to raise loans, how government will
repay debt and whether the loans raised through public debt will
be spent on productive activities or not etc.

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 IV) Financial Management
• Financial Administration: In addition to studying
how government mobilize revenue and make
expenditures as well as how it issues bonds to raise
loans, the study of public economics is also
concerned with studying the mechanisms which help
government to perform these tasks efficiently.
• Under financial management we study how budgets
are prepared in terms of budget estimates.

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V. Economic Stabilization
• Economic Stabilization: How to attain economic
stability and economic growth have become two major
objectives of government policy, which feature
prominently under public economics theory.
• This aspect analyses the various economic policies and
other actions of government needed to establish stability
in the economy.
• It should be emphasized here that the above parts are not
distinct and separate from one another, but they are
intimately related.
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 1.6 Recent developments in public finance
• The two recent developments in public finance are
public choice and behavioural economics.
• Public choice analyses the behaviour of elected
officials and bureaucrats in the public sector and
explores the policy implications of government
failure.
• Behavioural economics explores the effect of
behaviour that is not always rational and self-
interested on the outcome of both private and public
economic activity.
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Cont.
• Therefore, it is noteworthy that public finance has
developed from its narrow focus upon the collection
and spending of government revenues, to its present
concern.
• Currently, public finance concerned about every
aspect of government interaction with the economy.
• Public economics attempts to understand both how
the government makes decisions and what decisions it
should make.
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 Cont.
• To understand how the government makes
decisions, it is necessary to investigate the motives
of the decision-makers within government, how the
decision-makers are chosen, and how they are
influenced by outside parties.
• Determining what decisions should be made
involves studying the effects of the alternative
policies that are available and evaluating the
outcomes to which they lead.
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1.7. Public Finance and Private Finance
•The public sector comprises of all the
government owned organizations, all agencies
and state offices.
•The private sector on the other hand refers to all
the privately-owned businesses, companies,
partnerships and the profit and non-profit
corporations.
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 Cont.
•Public finance examines the effects or results of
the application of taxation and the expenditures
of all economic agents and the overall economy.

•On the other hand, Private Finance can be

classified into two categories the personal
finance and business finance.
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Cont.
• Personal finance involves financial planning at the lowest
individual level. It includes savings accounts, insurance
policies, consumer loans, stock market investments, retirement
plans and credit cards.

• Business Finance involves the process of optimizing finances

by business organizations. It involves asset acquisition and
proper allocation of funds.

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 Public Versus Private Finance
No Basis for Public finance Private finance
comparation
1. Income and Income adjusted according Expenditure adjusted
Expenditure to expenditure according to income
adjustment
2. Borrowing Can borrow both internally Can only borrow
and externally externally

3. Currency Controls currency wholly Has no right over

ownership currency
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No Basis for comparation Public finance Private finance

4 Present vs future income Investment done for Short term

long term benefit benefits expected

5 Objectives To create social To create profits

benefit
6 Pressure or compulsion Revenue can be Can’t be
to acquire revenue forcefully acquired forcefully
through taxation acquired
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N Basis for Public finance Private finance
o comparation
7 Big and deliberate Can make instant change Has no ability to make
changes deliberately instant change deliberately

8 Surplus budget Surplus budget is a vice in Surplus budget is virtue

this sector
9 Secrecy and Government gives the Private finance is generally
Publicity greatest publicity shrouded in secrecy

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 1.8. Significance of Public Finance
1.4.1. Economic and Social Significance of Public Finance
• Governments do not only confine themselves to law and
order situation, but they also actively intervene in
economic matters to justify themselves as, ‘Welfare
States’.
• The Governments require money to spend it on the
welfare of citizens. The importance of public finance can
be justified on the following grounds-

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 Cont.
1. Protection to Infant Industries : The Government protects its infant
industries against foreign competition through various public finance
activities like imposition of heavy tariff duties on imports, putting
restrictions on imports, giving subsidies to keep the cost low etc.
2. Planned Economic Development : Public finance renders valuable
help in the planned economic development of the country. The
planning authorities fix the priorities of expenditure for the plan
period.
• The Government raises the necessary funds to implement the plans
through direct and indirect taxation. The government takes necessary
action to achieve the plan objectives, through fiscal measures.

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Cont.
3. Regulating Consumption Habits: Public finance
regulates the consumption habits of the people.
• It imposes taxes on items of consumption, the use of
which is to be discouraged such as wine, cigarettes,
tobacco etc, and allows concessions and rebates in
taxes if it likes to encourage the consumption of any
commodity.

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Example : Regulating Consumption Habits

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4. Reducing Inequalities
▪Public finance also plays a vital role in reducing social
inequalities, through its fiscal policies.
▪The Government can levy heavy taxes on the richer sections
of the society, and spend the income on providing various
facilities to poorer sections of the society such as; Providing
free medical facilities, Educational facilities, Cheap
housing, Cheap rations through fair price shops etc.
• Thus, on the one hand it reduces the purchasing power of the
richer sections and on the other hand, increases the
purchasing power of the poor sections of the society.

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 Cont.
5) Maintaining Balance of Trade: The Government always
restricts the imports only to the essential items: hence imports of
non- essential items are taxed heavily.
▪On the other hand, the Government encourages the exports of
its surplus production. It reduces the burden on export items
and supports them with subsidies and grants.
▪These operations restricting imports and encouraging exports
of the Government to maintain the balance of trade.

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 Cont.
6) Industrial Development. Public finance helps industrial development
of the country as follows-

i) Governments grant subsidies to enable them to increase the production

of different essential items.
(ii) Public finance induces the investment during the time of depression
through its taxation policy by allowing tax-rebates for investments in
desired direction.
(iii) The role of public finance in under-developed countries is to bring
economic stability to keep the level of consumption and investment
quite up to the level of production.

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 Cont.
(iv) To strengthen the economic development in developing
countries, it is essential to give highest priority to capital formation
because industrial development cannot be imagined without capital.

• For this purpose, there must be policies in the store of the

government to encourage people to save more by cutting their
wasteful expenditure.
•The capital formation, its speed and quantum will ultimately
affect the economic development of the country.

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 Cont.
(v) Industrial development of a country will bring in more employment
opportunities to people especially in under-developed countries.
The government may also provide more jobs through the deficit budget
which is an indispensable measure to increase the volume of employment
during depression.
Thus, it is evident that the government of a country can push up the industrial
and economic development of the country, provide more employment
opportunities, encourage investments and savings in the desired direction and
increase social benefits through public expenditure.

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1.7 Positive vs. Normative Economics
• In modern times the scope of public finance is widened to
embrace both positive and normative economic analyses:

• Positive economics and normative economics are two

standard branches of modern economics.

• Positive economics describes and explains various

economic phenomena, while normative economics focuses
on the value of economic fairness or what the economy
should be.

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 Positive economics
• Positive economics is a stream of economics that
focuses on the description, quantification, and
explanation of economic developments,
expectations, and associated phenomena.
• It relies on objective data analysis, relevant facts,
and associated figures.
• It attempts to establish any cause-and-effect
relationships or behavioral associations which can
help ascertain and test the development of economic
theories.
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 Cont.
• Positive economics is objective and fact-based
where the statements are precise, descriptive, and
clearly measurable.
• These statements can be measured against tangible
evidence or historical instances. There are no
instances of approval-disapproval in positive
economics.
• Positive economics was popularized by the
economist Milton Friedman, who said that
economic science should objectively analyze data
without any bias or agenda.
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3/4/2023 Habtamu Legese (Asst.Prof) 77
 Normative Economics
• Normative economics focuses on value-based judgments aimed at
improving economic development, investment projects, and the
distribution of wealth.
• Its goal is to summarize the desirability of various economic
developments, situations, and programs by asking what should
happen or what ought to be.
• Normative economics is subjective and value-based, originating
from personal perspectives or opinions involved in the decision-
making process.
• The statements of this type of economics are rigid and prescriptive
in nature.

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• One of the most famous normative
economists is Amartya Sen, a Nobel
prize winner who devoted his career to
studying development economics.

• Economic growth without investment in

human development is unsustainable,
and unethical.
Amartya Sen

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Is Positive Economics Better Than Normative
Economics?
• Both types have their place, and on their own both
also have flaws (imperfection).

• Integrating positive and normative economic

statements together is often required in order to
create the policies of a country, region, industrial
sector, institution, or business.

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 Cont.
•On the positive side, it uses applied
econometric tools to discover the consequences
of policy on economic outcomes and the well-
being of individuals.
•On the normative side, it builds on the theory
of welfare economics to provide a framework
for evaluating government policies and how to
improve them.
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1.8. Structure of the Public Sector
Local Government: Number of
Municipalities

General
State Government: Number of states and
Government provinces

Central Government

Budgetary Central Government: Judiciary, Legislature, Ministries,

Presidency and government agents

Extra Budgetary Units: Other government entities part of central

government and not covered in the budget.

Social Security Fund: National Social Security

Figure 1.1: Classifications of General Government

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Source: IMF Government Finance Manual 2001,Washington, (2001)
 Figure 1.2: Classifications of the Public Sector
Source: IMF Government Finance Manual 2001,Washington, (2001)
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Individual Assignment One
1. Write an article review on
Economic functions of government (historical
perspectives) and the concept of government and the
state

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• Basic Readings:
• Gruber Chapters 1, 2, and 3 (including appendix) Rosen &
Gayer chapters 1 & 3
• Hindriks & Myles chapter 1
• Howard, M. M., A. La Foucade & E. Scott
• Other Readings
• Besley, T. (1994). How do market failures justify
interventions in rural credit markets?. The World Bank
Research Observer, 9(1), 27-47.
• Black, P. A. and B. E. Dollery, (1989), “Market Failure and
Government failure”,

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 Cont.
• Datta-Chaudhuri, M. (1990). Market failure and government failure.
Journal of Economic Perspectives, 4(3), 25-39.
• Diamond, Douglas W., and Philip W. Dybvig. 1983. "Bank Runs, Deposit
Insurance, and Liquidity." Journal of Political Economy 91(June):401-19.
• Holman H, Lorig K (200) “Patients as partners in managing chronic
disease. Partnership is a prerequisite for effective and efficient health care”
[Editorial]. British Medical Journal 2000, 320(7234):526-7
• Musgrave, R. A. (1959). Theory of public finance; a study in public
economy.
• Stiglitz, J and A. Weiss, (1980) “Credit Rationing in Markets with
Imperfect Information, Part II: A Theory of Contingency Contracts,” (1980
mimeo, Bell Labs and Princeton University The European System of
National and Regional Accounts (ESA 2010)
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Cont.
• The IMF (2001) Government Finance Statistics Manual 2001(GFSM
2001), Washington, (2001)
• Viner, Jacob (1960) The Intellectual History of Laissez Faire, Journal
of Law and Economics, 45–69
• Watts, J. J., & Segal, L. (2009). Market failure, policy failure and other
distortions in chronic disease markets. BMC health services research,
9(1), 102.
• Wolf, C. Jr. (1987). Market and Non-market Faiture: Comparosin and
Assessment. Journal of Public Policy. Vol. 7 (1). PP. 43 – 70.

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 Thank You
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