Economics of the Public Sector

Lecture 1: Introduction

Alfa Farah

Department of Economics
Diponegoro University

The 2nd Semester of 2019/2010

The Role of Government

I At the center of our country’s political life are some basic

economic questions:
I How does the government affect the economy?
I What should the government do?
I Should the government do more than it is currently doing, or
less?
I Should it change what it is doing, and how it is doing it?
I Different perspectives on the role of government
I Limited role of government - Adam Smith
I Greater role of government - Karl Marx

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The Role of Government

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Government Failures
Major reasons for systemic failures of the government to achieve
its stated objectives
I Limited information
The consequences of any action by the government are
complicated and difficult to foresee
I Limited control over private market responses
The government has only limited control over the
consequences of its actions
I Limited control over bureaucracy
Those who design legislation have limited control over the
implementation of the government programs
I Limited imposed by the political process
Politicians may act to further special private interests, more
generally political process are complicated and need not yield
efficient outcomes.

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Analyzing Public Sector

I Economics is the study of scarcity, how resources are allocated

among competing uses
I Public Sector Economics focuses on choices between public
and private sectors and within the public sector
I It is concerned with four basic issues:
I What gets produced
I How it gets produced
I For whom it gets produced
I The process by which these decisions are made
I In studying public sector, economists consider both positive
and normative aspects
I Positive economics looks at the scope of government activities
and the consequences of government policies
I Normative economics attempts to evaluate alternative policies
that might be pursued

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Analyzing Public Sector

Example, 1% increase in the tax of restaurant service

I Positive
I The effect of the tax on the price charged by the restaurant.
Will the price increase or will the restaurant absorb some of
the price rise?
I Prediction on how restaurant consumption decrease and who
will be affected by the policy
I Normative
I Should the government increase tax?
I Evaluation on the benefits of the tax revenue, the distortion it
induces in consumption, the inequity causes by the fact that
proportionately more of the tax is borne by lower income
individuals

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