Fundamental Principles of

Public Finance
Troy University
PA6650- Governmental Budgeting
Chapter 1
 What’s the Difference Between
Public and Private Sector?
• Similarities & Differences
– Sources of funds
– What funds get spent on
– Decision making
– Oversight and management control
– Legal issues
– Freedom of information
– Measure of success
 Why Do Governments Exist?
• Governments make rules for markets
• Governments enforce rules
• Governments provide public goods

WHY?
 Market Failure
• Governments exist to provide valuable
services that businesses or individuals are
unwilling or unable to provide
independently
 The Tragedy of the Commons
• New England – 1600s
• Grazing of animals in the town square
• Commons were overgrazed and destroyed

Can you think of a similar situation today?

The Elements of Nonappropriability
• Concepts
– Exhaustion or Rivalry
– Exclusion
– Alternate use and joint use

• 2 big questions
– Is the exclusion of the goods feasible?
– Is consumption individual or joint?
 4 Categories of Resources
PRIVATE GOODS TOLL GOODS
•Food •Turnpikes
•Clothing •Toll bridges
•TV Sets •Motion pictures

(alternate use, exclusion feasible) (joint use, exclusion feasible)

COMMON-POOL RESOURCES PUBLIC GOODS

•Aquifers •National defense
•Fishing grounds •System of justice
•Petroleum reserves •Vector control

(alternate use, exclusion not feasible) (joint use, exclusion not feasible)
 Nonappropriability
• Nonexhaustion/nonrivalry (air

• Free Riders
 Externalities
• Positive and Negative Unintended
Consequences

• Good outcomes
– Vaccines result in less exposure to those who
have not been innoculated)

• Bad outcomes
– (alligators in the swamp after draining)
 Failure of Competition
• Incomplete markets / imperfect information
– Government testing of drugs, flood insurance
– Adverse selection (HMOs rejecting cancer clients)
– Moral hazard (flood insurance to those in flood zones)
• Economic stabilization
– Preventing unemployment, inflation
– Increasing standard of living
• Redistribution
– Corrects perceived injustices
 Privatization
• Arguments supporting
– Smaller government
– Operating efficiency and response to clients
– Cash

• Arguments against
– Loss of government capability
– Possible monopolistic manipulation
 Government Production &
Government Provision
Government Provision Government Provision
with Government with
Production Private Production

Private Provision with Private Provision with

Government Production Private Production
 Building Social Decisions from
Private Preferences
• Public choice theory – individuals are the best judges of
their own well being

• The welfare of the community depends upon the welfare

of individuals in that community

• Pareto Principle – If at least one person is better off from

a policy action and no person is worse off, then the
community as a whole is better off and the action should
be taken

• Tale of 3 projects – Pages 17 and 18

 Political Science
• Difference between liberal and
conservative?

• Differences between capitalist, socialist,

and communist?
 Politics, Representation, and
Government Finance
• Parties don’t know what citizens want

• Citizens don’t know what government has

done

• There is an overall scarcity of knowledge

 Politics, Representation, and
Government Finance
• Some people are more politically important
than others

• Specialists appear

• Imperfect information results in bribery

• Voters make uninformed choices

 The Layers of Government
• Express Powers
• Implied Powers
• Tenth Amendment
• Dillon Rule / Home Rule
• Hierarchy of Power
 Political Science Quiz
• Republic
• Democracy
• Representative Democracy
• Unitary government
• Source of federal power
• Source of state power
• Source of local power
Do You Know Your Government
• Cabinet members
• Vice President / Speaker of House
• U.S. Senators
• U.S. Representatives
• Supreme Court Justices
• Other agencies
 Conclusion
• Why do governments exist?
• What are the objectives of governments?
• What are the results of our system of
government?
• How are federal/state/local governments
constrained?