Lecture Notes I: Introduction to Public Economics Jai Leonard I.

Carinan

Lecture Notes I Introduction to Public Economics I. Introduction A. Public Finance -is the study of the financial activities of governments and public authorities. It describes and analyzes the expenditures of government and the techniques used by governments to finance its expenditures. -It interest in studying the institution and decision making process that help mold the observed behavior of people acting through government. -It deals with the economic role of government as a response to market failures, its limitation in responding to such failures, the design and evaluation of expenditure and tax program, and short & long term consequences of the deficit in the economy. B. Government -refers to the individual who are institutions, local, provincial, national, senate, courts, etc who are elected or elected. The government has the ability to C. Economic Role of Government 1. Prints money 2. Grants patient & issues copyright (intellectual property rights) to encourage innovation and creativity. 3. Levy taxes 4. Run public service offices (post office, highways, transportation, social security, etc) D. Activities of the Government 1. Subsidizing hospital 2. Subsidizing education 3. Social security system, medicare, Philhealth, and anti-poverty programs. 4. Collection of taxes 5. Providing employment opportunities in government and in private sectors. 6. Housing program (PAGIBIG) 7. Infrastructure program 8. Provides legal structure to settle disputes 9. Environmental regulation 10. Safety regulation responsible for running public office of the president, congress, are appointed by someone who is use compulsion in running state.

Lecture Notes I: Introduction to Public Economics Jai Leonard I. Carinan

E. Different Perspective on the Role of Government 1. Mercantilists View Economic nationalism - Favorable balance of trade - Govt. should actively promote trade and industry. 2. Doctrine of laissez Adam smith, John Stuart Mill, Nassau Senior - Govt. should leave the private sector alone, it should not attempt to regulate or control enterprises. - Govt. is limited on 3 duties; a. Ensure peace and order, b. Protecting people from injustice & oppression, c. Erecting & maintaining public works. 3. Socialist View Karl Marx, Sismondi and Robert Owen - They suggested the reorganization of the society to address grave inequalities in income and condition of the working class. - They advocate the government to take greater role for the state in controlling the means in production. 5. Market System 20th century - Govt. complements market and private enterprises. F. Importance of Public Finance 1. According to A.C Pigou In every developed society there is some form of government organization, which may or may not represent the members of the society collectively, but certainly has coercive authority over them individually. It identifies the coercive nature of government compulsion power, govt. force people to do things that they value probably not otherwise do, However there is no guarantee that the govt. will act in the best interest of the people. 2. Public finance will ensure efficiency and equity in the program and activity of the govt. 3. It provide information and knowledge on how the government spends the taxes they are collecting. G. Why do we need a Public Sector? Market Failures- These are market inadequacies or areas that the market or private sector of the economy fails to address and fail to satisfy all the needs of the society. 1. Market failure in providing the societys desired set of goods and services. 2. Market failures in the distribution of income and poverty.

Lecture Notes I: Introduction to Public Economics Jai Leonard I. Carinan

3. Market failure in achieving stability in employment and prices. Reduces fluctuation in economic activities (business cycles, boom, peak, recession, and depression). Government Failures- its the limitation of government in achieving its goals. 1. Limited information- the consequences of many actions are complicated and difficult to foresee. Govt. does not have the information requires to do what it would like to do. 2. Limited control over private market responses- Govt. has only limited control over the consequences of its action. 3. Limited control over bureaucracy- system failure from legislation to implementation of govt. project. 4. Limitation imposed by political processes- political process through which decisions about actions are made would raise additional difficulties. H. Achieving Balance between Public and Private Sector Market often fails, but government often does not succeed in correcting the failures of the market. With the recognition of the limitation of government implies that govt. should direct its energies only at those areas in which market failures are most significant and where there is evidence that government intervention can make a significant difference. I. Fiscal Function: Allocation, Distribution and Stabilization Allocation Government increase efficiency by promoting competition, curving externalities like pollution and providing basic public goods. *Efficiency- denotes the most effective use of society resources in satisfying peoples wants and needs Distribution Government promotes equity by using tax and expenditure programs to redistribute income towards particular groups. Stabilization Government fosters macroeconomics stability Reducing unemployment and inflation while encourages growth. and growth.

Lecture Notes I: Introduction to Public Economics Jai Leonard I. Carinan

References: Aronson, Richard J. Public Finance, USA, New York: Mc Graw Hill Book Co.,1985 Rosen, Harvey S., Public Finance, 5th edition, USA, New York: Mc Graw Hill Book Co., 1999. Stiglitz, Joseph E., Economics of Norton & Co., New York, 2000 the Public Sector, 3rd edition, W.W.