Summary: Public Economics is the study of the public economy, i.e.

of economic questions which are not purely market, intra-household or intra-firm, with emphasis on logicintensive (scientific) analysis and on ethicalnormative questions. Public expenditures, taxes, regulations of many kinds, public production and prices, public debt and money, exchange rate policies, etc., are the variables to be chosen. With a public sector using 30 to 70 per cent of GNP in Western developed countries and much more in Eastern socialist ones with multifarious regulations, a vast array of bodies in between the purely public and the purely private, plus the global macroeconomic regulation of the market sector, the scope for Public Economics is a priori vast. But where the public sector must, or must not, lay its hands is the first question of Public Economics (not to intervene is a possible solution to the problem of what to do or how to do it). Institutionally, Public Economics is concerned with the behavior and existence of public bodies in the largest sense governments at all levels, quasi-public organizations such as public social insurance or health and education services in many countries, public firms and utilities, etc. Public Economics was then supplemented by the analysis of the possibilities and limitations of non-market decision-making, in particular of political and public administrative choices a research program referred to as Public Choice. This Old Public Economics, which was superseded in the 1980s by the New Public Economics. For Public Economics to reach its results, the problems it meets must be evaluated by ethical criteria, which are thus as important as technical and behavioral structures. To implement by public means what these impeded legitimate agreements would have decided if they had spontaneously emerged is the unavoidable ethical basis of modern Public Economics: it is unanimously desired at levels of both specific decisions and of general freedom-based principles. On the contrary, Public Economics is concerned with welfare and redistribution because people are, and one of its main tasks is to find out what transfers direct general agreements would have produced. Secondly, private contracts are made of two parts: the voluntary unanimous agreement between the parties, and the implementation which is obligatory under the threat of public force. In the implicit contracts which establish this public ethic, the first part does not show explicitly, and there remains only the second one, compulsory implementation: hence the apparent pure obligation in public actions such as taxation or regulation. In order to find out (or to make the public sector achieve) the content of these implicit, putative and tacit contracts, modern Public Economics draws upon theories of choice, exchange and bargaining, statistics, polls and observation of political processes, and it offers advice about those political structures or processes which would help to reveal the necessary information or achieve the right outcome (aspects of constitutions, referenda on public issues and their financing, optimal decentralization of public choices and levels of government, etc.). Each of these implicit contracts (called) liberal social contracts) determines a set of public actions and expenditures, and of taxes, which is desired by a group of citizens and violates no legitimate right of any citizen. We shall consider now the various elements that constitute Public Economics. The existence and analysis of collective concerns and consumption, and public goods, is central in Public Economics. If it displeases them it is a public bad, the decrease of which is a public good for them. A private profit-making agent can

produce a public good if he can exclude the would-be beneficiaries from its benefit, so as to grant them access only in exchange for payment of a fee or price or toll. Costs to users by co-exclusion from other services, a case to be found notably when exclusion would be achieved by excluding from a complementary consumption, an important example being exclusion from a location (on private or public space) where the collective benefit can be received. It is right and legitimate if the concerned persons use only legitimate rights to reach and achieve the agreement. Not infrequently the sole information that taxes must not exceed willing nesses to pay and must not in total amount to less than cost defines them relatively precisely, in particular when beneficiaries have alternatives to the consumption of this public good. The practical application of the theory to determine the right amounts of public goods and the corresponding taxes requires the estimation of agents willingness to pay and potential bargaining power. Furthermore, in a poll asking people about the value of the public good to them (or of a variation of its quantity), they have no incentive to lie if they perceive that the public good produced and what they will pay are unrelated to their answer. Several types of social situations and psycho-social phenomena help to secure the spontaneous collective realization of public goods or, at least, the relatively truthful revelation of preferences for them. The economics of public goods is as old as that for private goods. In Paris in 1838, when Cournot was drawing a demand curve for a private good to theorize monopoly exploitation, Jules Dupuit drew one for a public good in order to choose the socially best quantity and financing of public works. The observation that the world exhibits few pure public goods, whereas collective concern is widespread, led to the analysis of the various mixtures of privateness and publicness, and of their consequences for public finance and action. The welfare of the person helped is a public good for the givers, and this situation is a special case of the public good questions. However, this category of public good is bound to be in a particularly unfavorable situation for spontaneous realization. As in the general public good case, each player must be forced to pay the corresponding optimal taxes although he prefers the whole system of these redistributive transfers to its absence. The determination of these transfers uses the whole gamut of means described in the general public good case. Social insurance against basic life contingencies (disease, old age, cost of children, unemployment, etc.) presently often use as much or more money than public budgets not counting them. The basic reason why they are often public involves the idea of fundamental insurance. This provides a reason for a second category of implicit insurances achieved by public transfers to people incurring the specific misfortune. More generally, transfers to people in need, for reasons of helping, solidarity or fairness, also imply some equalization of situations, and egalitarian feelings are very common in opinions about public policy actions. Freedom is equality of basic rights. Quite often, an external effect concerns several, or many, persons together, thus mixing externality and public good problems. A consequence of the public sectors duty to protect rights is its duty to rectify past violations of legitimate rights. The public debt is the means of making retro-payments, that is, payments when the payer exists later in time than the receiver: the receiver receives from the public sector which pays out of public borrowing, and the payer pays by later taxes used to redeem the public debt and meet its interest. This reason for public intervention and for public debt often intervenes with the other reasons for public intervention: the benefit

taxation to finance a durable public good implies public borrowing later redeemed thanks to contributions of beneficiaries which actualize their implicit basic agreement with the beneficiaries at other dates; a global reflation through deficit finance, when it works, is paid for by the future beneficiaries of higher employment, demand and capital formation, through taxes which will redeem the debt; there are also collective retro-gifts, inter-temporal implicit and in particular fundamental insurances, and intertemporal allocation of the values of natural resources. What the public sector must do is the whole of all the specific actions described above. In particular, ethical consistency in general requires taxes to be justified by expenditures. Institutionally and practically, however, taxes can be pooled and levied more or less as a single tax or as a relatively small number of taxes. The corresponding economy of administration must be balanced against the advantages of decentralized and specialized public services financed by the logically ear-marked right taxes, regarding the budget allocated to this service, the closeness of the public management to the users and its better knowledge and awareness of their needs; the better understanding by the taxpayers of the use of their money and of the benefit they derive from it and, therefore, their greater possibility of checking the use of public funds and of controlling the public service by political means. This tends to be the case for public goods which yield benefits according to some ownership or activity, for redistributive transfers due to collective gifts and in particular to fundamental insurance, for rectification compensations. To choose these taxes is thus equivalent to choosing the corresponding prices. Now, to choose prices is also a problem the government faces in the case of public firms or regulated industries. Public Economics is probably for many reasons the most paradoxical field of economics. It specializes in the public sector, yet it must for this reason involve the finest analysis of the market and of its problems. It probably contains Public Finance in scope, yet the latters tradition has a quite different, less analytical, style; and we could go on with Public Choice, Social Choice, the theory of constitutions, Political Economics, the theory of bureaucracy, Welfare Economics whether theoretical or applied, the essential benefit-cost analysis, the economics of socialisms, comparative economic systems, etc. Public Economics is founded on positive views of the public economy and of the market, yet its final aim is almost always normative. Public Economics central question to know what the public sector must do, when the markets work better, or if a hopeful third sector and reciprocity relationships would be a still better possible solution can hardly see its import challenged. Public Policy and Pakistan: Soon after the birth of Pakistan in 1947, its planners recognized Public Administration as an important instrument of development and social welfare. It was realized that the administrative system being a colonial legacy of the British was unable to meet the needs of an independent nation destined to develop as a modern welfare state. The need for fundamental reforms in the administrative machinery of Pakistan was expressed in the First Five Year Plan (1955-60) in these words: "The defects as well as the merits of the existing administrative system stem largely from the fact that it is a heritage from a colonial power, which reared upon certain indigenous institutions a super-structure adapted to the needs of ruling subject country. The combination yielded a system of Public Administration admirably suited to the

requirements of a government engaged largely in the primary functions of collection of revenue, administration of justice, and maintenance of law and order. Under the stress of social and economic change, some alternations were made in this system from time to time, but, fundamentally and broadly, the methods and outlook of the public service, the tasks they performed, and the procedures they followed remained unchanged. The inevitable result has been that, with the independence and the shift of emphasis from regulating the life of the community to positive action for promoting its welfare, the system has become outdated and seriously inadequate. The same plan identified the following Public Administration requisites for the purposes of national development: 1. A streamlined organization at the Center and in the provinces 2. Central planning machinery 3. Panning and development departments in the provinces 4. Statutory public corporations and authorities vested with autonomy to implement special programs 5. A revitalized district administration directed towards development 6. Democratically constituted local self-government institutions 7. A rational system of financial administration 8. Public service policies designed to maintain an efficient corps of workers 9. A progressive look on the part of public service. In Pakistan, public policy and public opinion have never been as divorced from each other as they are today. Much of the unhappiness among Pakistanis emanates from this policy drift away from what the people at large would like to see happening. At the intellectual level, discussions are difficult to hold objectively because reflections of mass dissatisfaction regularly trespass into the discourse. An otherwise objective analyst will allow himself to become derailed because his ear is cocked to what the public feels about the subject he is discussing. The mismatch between what the government does and what the people want is so great that a new rhetoric of standing equidistant from policy and public passions has become fashionable among people who should be rendering useful advice. Good-governance theories tell us that the state must rule on the basis of a social contract, and the governments elected by the people must deliver what the people want. But the truth is that not even dictators are free of the burden of bringing to fruition the dreams of the masses among whom they seek acceptance. If one were to judge the present governments policies in the light of this principle then it is doing everything wrong. The people of Pakistan generally hate the United States. They see that the government has become Americas major ally in foreign policy and is acting against the interests of the Muslims as Ummah and as Pakistanis. This anti-Americanism may have a variety of leftwing and rightwing origins. The mismatch on internal policies is the ricochet effect of foreign policy which dominates the Pakistani mind and leads to a poor understanding of conditions at home, especially in the sphere of economics. That the Arab states are siding with the US offends the Arab public, but that doesnt matter because there is no democracy there. In Europe, that fact that after defying the US at the United Nations Security Council, France went right back with the approval of Germany to give a Security Council mandate to the American troops in Iraq in 2004, doesnt bother the European citizen

too much because foreign policy is not normally an electoral issue there. But in Pakistan a great deal is still tied to foreign policy. The mismatch and the heat it produces can be attributed to the general Third World feeling which the Pakistani public also shares: that policy should be honour-based and not made subservient to foreign powers. But the fact is that in practical politics no policy can be honour-based, otherwise the weak state would constantly be insulted. The big powers make global policy and the weaker states adjust to it in such a way that they benefit from it. A lack of supple response to what happens at the global level may harm the state beyond repair. A state that listens too carefully to public passions and ignores its own raison detat will come to grief. Indeed, a less than powerful state simply cannot afford to be internationally isolated through a pursuit of policies popular at home. That is why in Pakistan, when a series of sovereign but isolationist policies were followed for over a decade, the blowback came with the start of the millennium from its Afghan and Kashmir policies, and the condition of cooperating with the global consensus aimed at forcibly ending Pakistans isolationism. Can a state endure international isolation? Yes, if it is powerful like the United States, but even then one cant rule out some price the superpower might have to pay for its current globally unpopular actions. But no, if the state is weak as in Pakistan. Some tough conditions of living in todays world were always there even though they were somewhat postponed for half a century by the Cold War. Economic policy belongs in this condition. The Pakistani people have never approved of the anti-people economic policies which governments in Islamabad have been compelled to adopt. Foreign policy actions today are equally unpopular. But going by the popular consensus will certainly hurt the public interest in the long run.