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PUBLIC ECONOMICS

L Hong Ph PhD
Faculty of International Economics, Foreign Trade University
lyhoangphu@yahoo.com - 0944904968
Home add: 605, Building 3-3, Me Tri Ha Urban Area, District of
Nam Tu Liem, Hanoi
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Public Economics

A short introduction
about
me...

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Public Economics

and

You?

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Course outline

1. Introduction
2. Government and Economic efficiency
3. Government and Economic Equity
4. Public Choice and Political Economy
5. Other Issues

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Public Economics
3 credits = 15 studying days
3 credit tests

(1) Class attendance: 10% of grade

(2) Mid- term exam (or assignment): 30% of
grade
(3) Final Exam: 60% of grade

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INTRODUCTION

INTRODUCTION

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CHAPTER I

INTRODUCTION TO PUBLIC ECONOMICS

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Structure of the chapter

I.
II.
III.
IV.

Object and methods to study

Reference documents
Generality about the Government
Four major problems of Pub Eco

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I. Object

and methods to study

1, Object to study

What is Pub Eco?

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The economic science which deal with the

government intervention in the market
economy in order to enhance economic
efficiency and economic equity.

Public Economics

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2. Methods to study
a, The method of positive analysis
Positive analysis is about explaining
why there is a public sector, how
government policies are chosen and
how these policies affect the economy.

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Analysing effect of the corporate tax on inward

investment are examples of positive analysis.

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2. Methods to study

b, The method of subjective/normative analysis

Normative analysis investigates what the best

policies are, and aims to provide a guide to good
government.
Example: should the level of pensions be indexed to
average wages.
Example: When we consider the construction of a bridge,
with the method of subjective analysis, we will find
whether there is other better solutions: ex buy barge,
ships instead of bridge

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Q&A: True or False?

1.

2.

3.

4.

5.

Normative statements describe how the world is, while

positive statements prescribe how the world should be.
Positive statements are descriptive, while normative
statements are prescriptive.
Positive statements can be evaluated using data alone,
but normative statements cannot.
"Society would be better off if the welfare system were
abolished" is a normative statement, not a positive
statement.
"Other things equal, an increase in supply causes a
decrease in price" is a normative statement, not a
positive statement.

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II. THE FOUR QUESTIONS

OF PUBLIC ECONOMICS

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?

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1. When Should the Government

Intervene in the Economy?

Normally, competitive private markets provide

efficient outcomes for the economy.
Generally hard to justify government intervention
in markets. But two main justifications are:

Market failures: Problems that cause a market economy

to deliver an outcome that does not maximize efficiency.
Redistribution: The shifting of resources from some
groups in society to others.

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1. When Should the Government Intervene?

a, Efficiency
b, Equity

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Market failure: efficiency unachievable

Market failure arises when efficiency is not
achieved.
Sources of market failure:

monopoly
public goods
externalities
asymmetric information

Market failure may justify additional government

intervention

it must be tested whether intervention is beneficial

government cannot always improve upon the unregulated
economy

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When there is no equity:

=>Redistribution
Government intervention also motivated by

inequality of income
inequality of opportunity
inequality of wealth.

Redistribution of resources

alleviates these inequalities

may raise welfare

Two conflicting aims

efficiency
equity

Optimal policy

the correct trade-off between equity and efficiency

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2. How Might the Government Intervene?

If the government wants to intervene in a market, there

are a number of options:
Using the price mechanism with taxes or subsidies.
The government can directly restrict the private
sale or purchase of goods that are overproduced.
Mandate that either individuals or firms provide the
good.
The government can mandate the private purchase
of goods that are under produced and force
individuals to buy that good.

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Public Provision

The government can provide the good directly, in order to

potentially attain the level of consumption that maximizes
social welfare. Ex: the Medicare program for elderly
citizens.

Public Financing of Private Provision

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Governments may want to influence the level of

consumption but may not want to directly involve
themselves in the provision of a good.
Medicare prescription drug cards, where private companies
administer the drug insurance.

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3. What Are the Effects

of Alternative Interventions?

Much of the focus of empirical public economics is

assessing the direct and indirect effects of
government actions.
Direct effects of government actions assume no
behavioral responses and examine the intended
consequences of those actions.
Indirect effects arise because some people change
their behavior in response to an intervention. This
is sometimes called the law of unintended
consequences.

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4. Why Do Governments Do What

They Do?

Governments do not simply behave as benign actors who

intervene only because of market failure and redistribution.
Political economy: the theory of how the political
process produces decisions that affect individuals and the
economy
Tools of political economy helps us understand how
governments make public policy decisions.

Just as market failures can lead to market inefficiency, there are a

host of government failures that lead to inappropriate government
intervention.

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Why Do Governments Do What They

Do?

For example, substantial variation across developed

countries in health care delivery suggests efficiency
and redistribution are not the only considerations.

U.S.: Private health insurance

Canada: National public health insurance
Germany: Mandates private health coverage
U.K.: Free national health care
Thailand?

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II. Reference documents

1.

2.

3.

4.

5.

PGS,TS.Phm Vn Vn, ThS. V Cng, Kinh t

cng cng, Nxb Thng k, 2006
Joseph Stiglitz, Economics of the public sector ,
Third Edition, 2000
Jean-Jacques Laffont, Fundamentals of Public
Economics, MIT Press, 1998
Donijo Robbins, Handbook of Public Sector
Economics, Marcel Dekker/CRC Press 2004
David Schultz, Encyclopedia of Public
Administration and Public Policy, Facts On File
Inc.; 2004

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III. Generality about the Government

1.

2.

3.

The Government and major roles in

the market economy
Governments failures when
intervention in the market economy
Generality of Government role in the
history of economic theories

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1. The Government and major roles in

the market economy
a, Definition of Government

An organization that is the governing

authority of a political unit.

Elected by the society, the government

regulated individual behavior in this
society (= regulator), and its activities
are for a better society.

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b, Functions of the Government

Maintaining legal and social framework

Stabilizing the economy

Providing public goods and services

Maintaining competition

Correcting for externalities

Redistribution income

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2, Government failure when

intervention in the market economy

Government failure refers to situations

where allocative efficiency may have been
reduced following government intervention in
markets designed to correct market failure.

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Government failure if Asymmetric

information

Imperfect information:

Lack of knowledge of:

Prices
Value
Costs
Benefits
Long term effects
Behavioural changes
External costs and benefits

Value of producer and consumer surplus

all mean less than efficient allocation may result from

government intervention.

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Government failure if there is own interest

Public Choice Theory:

Politicians, bureaucrats and others acting on

behalf of the public may act in their own self
interest as utility maximisers.
The invisible hand may not work in the provision
of public goods.
Rent seeking or Log rolling - two important
concepts.

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3. Generality of Government role in

the history of economic theories

Since XVth to XVIIth century

Since XVIIth to XXth century
Since the late of 30s to 70s of the XXth
century J.M.Keynes
The years of 1980 of the XXth century:
the neoliberalism
Since the decade of 1990: the mixed
economy

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