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Public Economics_chapter 1

The document outlines a course on Public Economics, detailing its structure, evaluation components, and key topics such as the role of government, market failures, and redistribution. It emphasizes understanding government intervention in the economy, the effects of taxation, and the political economy influencing government actions. The course aims to explore the balance between efficiency and equity in public finance.

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5 views

Public Economics_chapter 1

The document outlines a course on Public Economics, detailing its structure, evaluation components, and key topics such as the role of government, market failures, and redistribution. It emphasizes understanding government intervention in the economy, the effects of taxation, and the political economy influencing government actions. The course aims to explore the balance between efficiency and equity in public finance.

Uploaded by

manas.juve
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Public Economics

GP-CU-PECO-2008

Introduction
Week 1

Tirtha Chatterjee
Tentative outline of the course

• Overview- week 1
• Tools of Public Finance- week 2 and 3
• Theoretical tools
• Role of Government
• Externalities- Week 5
• Public Goods- Week 6
• Political Economy- week 7
• Insurance- week 10 and 11
• Taxation – week 12 and 13

Tirtha Chatterjee
Evaluation components

Components Weightage (%)


Internal- Attendance and class participation 10
Internal Assignments – in class (best 2 out of 3) Class test 1 (chapter 2 & 5) 20
Internal Assignments – in class (best 2 out of 3) Class test 2 ( chapter 7 & 9) 20
Internal Assignments – in class (best 2 out of 3) Class test 3 (whole syllabus) 20
End term-In class exam 50

Tirtha Chatterjee
Chapter 1: Why study Public Finance
Gruber, J, Public Finance and Public Policy, 7th Ed., New York, Worth Publishers

Tirtha Chatterjee
Goal of public finance

• To understand the proper role of the government in the economy.

Expenditure side Revenue side


What is the level of Government expenditure? Has it increased/ How much should the government tax its citizens
decreased over the years
What should be the distribution of expenditure- which sector What is the distribution of revenue sources- direct
should Government focus? and indirect taxes
Why is the government primary provider of highways, What kinds of activities should be taxed or be
education & transfers to unemployed & provision of clothing, given tax relief in difficult times?
entertainment, and property insurance is left to private sector?
Will more spending solve problems?- health, education What effect do taxes have on the functioning of
the economy?

Tirtha Chatterjee
The four questions of Public Finance

• When should the government intervene in the economy?

• How might the government intervene?

• What is the effect of those interventions on economic outcomes?

• Why do governments choose to intervene in the way that they do?

Tirtha Chatterjee
When should the government intervene in the economy?

• The answer to when should the government intervene is derived from why
• No need for Government intervention if outcomes are efficient without intervention
• Theoretically competitive market equilibrium is the most efficient outcome for society
• Maximizes the gains from efficient trades.
• Free adjustment of prices and supply equals demand.
• Scenarios like market failures and requirement of redistribution make Government
intervention critical

Tirtha Chatterjee
Market Failures

• Market failures cause market economy to deliver an outcome that does not maximize
efficiency.
• Example health insurance
• Seems like a case of standard textbook competitive market
• supplied by a large number of insurance companies & demanded by a large number of households.
• In the market equilibrium, supply should equal demand
• But we know that many people do not buy health insurance
• Individual buys health insurance when value> cost
• Implies that there are people who do not value insurance enough to pay for it

Tirtha Chatterjee
Market Failures

• But people falling ill could lead to others contracting the disease
• Social value of insurance is not just self health improvement but of others as well.
• Ideally insurance has to be purchased if the total social value exceeds the cost of that
insurance.
• Total here includes both self and others with whom I have contact
• But people do not consider social cost
• This is a case for Government intervention

Tirtha Chatterjee
Redistribution

• Think of economy as a pie


• It is important to understand how the pie is distributed
• Average size of each person’s slice of the pie
• Government intervention can correct resource misallocation by market
• Redistribution is the shifting of resources from some groups in society to others.
• But this could lead to inefficiency
• If we tax the rich to distribute money to the poor, this may cause the rich to work less and the poor
to work less hard
• Equity–efficiency trade-off.

Tirtha Chatterjee
How might the Government intervene?

• Tax or subsidise- incentivise of disincentivise consumption/production


• Restrict or Mandate Private Sale or Purchase to ensure certain level of
production/consumption
• Public Provision of a good to attain consumption that maximizes social welfare
• Public Financing of Private Provision to ensure certain level of
consumption/production

Tirtha Chatterjee
Political Economy of Government intervention

• Often we see Governments don’t spend according to economic judgement


• Political economy determines what and why
• Governments face enormous challenges in figuring out what the public wants and how
to choose policies that match those wants.
• Government failures also possible
• All Government interventions might not be beneficial
• One needs to understand if in practice, will the government actually reduce or solve the problem?
• Or will government failures cause the problem to grow worse?

Tirtha Chatterjee

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