PUBLIC ECONOMICS

L Hong Ph MSC, CERDI - France Faculty of International Economics, Foreign Trade University lyhoangphu@ftu.edu.vn

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Course outline

1. Introduction 2. Market Failures 3. Income Redistribution 4. Public Choice and Political Economy 5. Implication of taxation and redistribution policies

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Public Economics
3 credits = 15 sessions 3 credit tests

(1) Class attendance: 10% of grade (2) Mi term exam: 30% of grade (2 small tests) (3) Final Exam: 60% of grade

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

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I. Object

and methods to study

1, Object to study

What is Pub Eco?

The economic science which deal with the government intervention in the market economy
It studies how decisions are made It analyses what decisions should be made

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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.

Example: 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. alleviates these inequalities may raise welfare efficiency equity the correct trade-off between equity and efficiency

Redistribution of resources

Two conflicting aims

Optimal policy

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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 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 and 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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