Introduction to Public Sector Finance (Public Economics)

MDEF 612: PUBLIC SECTOR FINANCE

Dr. Edward Asiedu

University of Ghana Business School,Department of Finance

Oce Hours: Thursdays 10:00am - 1:00 pm (UGBS Main

Campus, Second Floor, S13)

Email: edasiedu@ug.edu.gh

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics)

Outline

1 Introduction to Public Sector Finance (Public Economics)

Introduction to Public Sector Finance

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Outline

1 Introduction to Public Sector Finance (Public Economics)

Introduction to Public Sector Finance

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Session Overview

The session provides an overview of public sector nance

(public economics), especially the role of government in the
economy, the rationale and limits of government intervention
according to economic theory, its eects in relation to
eciency and equity trade-os

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Session Outline

At the end of the session, the student should be able to

understand the following:
The role of government in the economy
Why governments intervene and the limits to the intervention
in accordance to economic theory

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Session Outline

At the end of the session, the student should be able to

understand the following:
The role of government in the economy
Why governments intervene and the limits to the intervention
in accordance to economic theory
Government intervention and its eects in relation to eciency
and equity trade-os

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Session Outline

At the end of the session, the student should be able to

understand the following:
The role of government in the economy
Why governments intervene and the limits to the intervention
in accordance to economic theory
Government intervention and its eects in relation to eciency
and equity trade-os
Size of government and its implication

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

The Role of Government in the Economy

Government (Public) intervention is generally widespread and

largely inuence our daily lives:
The government provides goods and services (health,
assistance, education, defence, environment, infrastructures,
etc.),

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

The Role of Government in the Economy

Government (Public) intervention is generally widespread and

largely inuence our daily lives:
The government provides goods and services (health,
assistance, education, defence, environment, infrastructures,
etc.),
Government denes the rules for socio economic
behaviour (legal structure and property rights, environmental
regulation and protection of natural resources, safety
regulations, employment regulations, etc.)

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

The Role of Government in the Economy

Government (Public) intervention is generally widespread and

largely inuence our daily lives:
The government provides goods and services (health,
assistance, education, defence, environment, infrastructures,
etc.),
Government denes the rules for socio economic
behaviour (legal structure and property rights, environmental
regulation and protection of natural resources, safety
regulations, employment regulations, etc.)
It ensures a stable economic environment

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

The Role of Government in the Economy

Government (Public) intervention is generally widespread and

largely inuence our daily lives:
The government provides goods and services (health,
assistance, education, defence, environment, infrastructures,
etc.),
Government denes the rules for socio economic
behaviour (legal structure and property rights, environmental
regulation and protection of natural resources, safety
regulations, employment regulations, etc.)
It ensures a stable economic environment
It nances its activities with taxation and this aects
individuals, households and rms decisions on labour demand
and supply, consumption and wealth creation.

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

The public sector has dierent roles in market economies:

Allocation of resources (eciency goal)

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

The public sector has dierent roles in market economies:

Allocation of resources (eciency goal)
Income Distribution (equity goal)

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

The public sector has dierent roles in market economies:

Allocation of resources (eciency goal)
Income Distribution (equity goal)
Stabilization of the economic cycle

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

The public sector has dierent roles in market economies:

Allocation of resources (eciency goal)
Income Distribution (equity goal)
Stabilization of the economic cycle
These roles interact with each other

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

Allocation role (eciency) due to market failure

The production of public goods or the public nancing of
private provision: i.e. all those goods and services which are
not produced (or would be produced ineciently) by the
market, due to market failures;
A Public good is a good that has the following attributes:
non-excludable
non-rivalrous
An important issue of a public good that often arises is the
free-rider problem
The regulation of market activities to support market
competition (property rights, legal system, restrictions )
Taxes and subsidies which change the market price of
goods/services

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

Redistributive role
The aim is to foster equity by shifting resources from some
groups in society to others and/or by changing initial
endowments through:

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

Redistributive role
The aim is to foster equity by shifting resources from some
groups in society to others and/or by changing initial
endowments through:
Monetary transfers (such as welfare benets to support the
income of the poor or the unemployed)

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

Redistributive role
The aim is to foster equity by shifting resources from some
groups in society to others and/or by changing initial
endowments through:
Monetary transfers (such as welfare benets to support the
income of the poor or the unemployed)

Transfers in kind (provisions of public services such as

education, health services, social services)

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

Redistributive role
The aim is to foster equity by shifting resources from some
groups in society to others and/or by changing initial
endowments through:
Monetary transfers (such as welfare benets to support the
income of the poor or the unemployed)

Transfers in kind (provisions of public services such as

education, health services, social services)

Taxes/subsidies (for example with progressive taxation or

exemptions)

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

Stabilization role
Smoothing over the business cycle and external shocks,
supporting full employment and controlling ination through:

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

Stabilization role
Smoothing over the business cycle and external shocks,
supporting full employment and controlling ination through:
Business Cycle is the uctuation of economic activities around
the long-run growth path of an economy(the expansion and
contraction of real GDP over time).
Fiscal policy (transfers and taxation, automatic stabilizers,
public expenditures)

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

When Should the Government Intervene in the Economy

Stabilization role
Smoothing over the business cycle and external shocks,
supporting full employment and controlling ination through:
Business Cycle is the uctuation of economic activities around
the long-run growth path of an economy(the expansion and
contraction of real GDP over time).
Fiscal policy (transfers and taxation, automatic stabilizers,
public expenditures)

Support to productive activities

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Eects of Government Intervention

Behind public intervention in modern market economies is the

market failures and to
need to correct actual or perceived
ensure equitable distribution of resources

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Eects of Government Intervention

Behind public intervention in modern market economies is the

market failures and to
need to correct actual or perceived
ensure equitable distribution of resources
However government intervention may also produce negative
direct and/or indirect eects ( government failures) due to:
Limited information

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Eects of Government Intervention

Behind public intervention in modern market economies is the

market failures and to
need to correct actual or perceived
ensure equitable distribution of resources
However government intervention may also produce negative
direct and/or indirect eects ( government failures) due to:
Limited information
Limited control on private markets responses to public
intervention

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Eects of Government Intervention

Behind public intervention in modern market economies is the

market failures and to
need to correct actual or perceived
ensure equitable distribution of resources
However government intervention may also produce negative
direct and/or indirect eects ( government failures) due to:
Limited information
Limited control on private markets responses to public
intervention
Limited control over the public bureaucracy

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Eects of Government Intervention

Behind public intervention in modern market economies is the

market failures and to
need to correct actual or perceived
ensure equitable distribution of resources
However government intervention may also produce negative
direct and/or indirect eects ( government failures) due to:
Limited information
Limited control on private markets responses to public
intervention
Limited control over the public bureaucracy
Limitations imposed by the political process

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

What are the Eects of Public Intervention

Need to consider direct and indirect eects of public

intervention on individuals and markets:
Direct eects are those expected assuming that the
behaviour of economic agents do not change as a consequence
of government intervention

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

What are the Eects of Public Intervention

Need to consider direct and indirect eects of public

intervention on individuals and markets:
Direct eects are those expected assuming that the
behaviour of economic agents do not change as a consequence
of government intervention
Indirect eects are those that arise because agents change
their behaviour in response to the intervention (for example
increasing taxation may reduce labour supply)

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Key Economic Questions in Public Economics

Eciency:
What is produced, how it is produced and how much it is
produced (public vs private goods/services): given available
resources make the pie as large as possible

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Key Economic Questions in Public Economics

Eciency:
What is produced, how it is produced and how much it is
produced (public vs private goods/services): given available
resources make the pie as large as possible
Equity
For whom it should be produced and who should pay for it:
distribute the pie in the most equitable way

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Key Economic Questions in Public Economics

Eciency:
What is produced, how it is produced and how much it is
produced (public vs private goods/services): given available
resources make the pie as large as possible
Equity
For whom it should be produced and who should pay for it:
distribute the pie in the most equitable way
Trade os:
an ecient outcome could be not equitable
an equitable outcome could be inecient

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Theoretical Tools Needed for Public Economics

Consumer theory (utility maximization)

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Theoretical Tools Needed for Public Economics

Consumer theory (utility maximization)

Production theory

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Theoretical Tools Needed for Public Economics

Consumer theory (utility maximization)

Production theory

Equilibrium and social welfare theory

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Big Themes

Eciency and Equity Concerns of markets-market failures and

public good problems

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Big Themes

Eciency and Equity Concerns of markets-market failures and

public good problems

Size and nature of public sector intervention-Government

failure

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Big Themes

Eciency and Equity Concerns of markets-market failures and

public good problems

Size and nature of public sector intervention-Government

failure

Public Debt stock and its implication

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Big Themes

Eciency and Equity Concerns of markets-market failures and

public good problems

Size and nature of public sector intervention-Government

failure

Public Debt stock and its implication

Public expenditure

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Big Themes

Eciency and Equity Concerns of markets-market failures and

public good problems

Size and nature of public sector intervention-Government

failure

Public Debt stock and its implication

Public expenditure

Taxation

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Big Themes

Eciency and Equity Concerns of markets-market failures and

public good problems

Size and nature of public sector intervention-Government

failure

Public Debt stock and its implication

Public expenditure

Taxation

Local Government Finance

Dr. Edward Asiedu Public Sector Finance

Introduction to Public Sector Finance (Public Economics) Introduction to Public Sector Finance

Big Themes

Eciency and Equity Concerns of markets-market failures and

public good problems

Size and nature of public sector intervention-Government

failure

Public Debt stock and its implication

Public expenditure

Taxation

Local Government Finance

Social Protection and Social Security

Dr. Edward Asiedu Public Sector Finance