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PUBLIC FINANCE - Intro1
PUBLIC FINANCE - Intro1
FINANCE
Urvashi Gill Dhingra
Books recommended
1. Rosen & Gayer, Public Finance, 8 th edition, McGraw Hill
2. Stiglitz, J.E. Economics of the Public Sector, 3 rd edition
3. Musgrave R. A. and Musgrave P. A. Public Finance in
Theory and Practice, McGraw Hill
4. Singh S. K. Public Finance in Theory and Practice, S.
Chand and Company Ltd., 2008.
5. Tyagi, B. P. Public Finance, Jai Prakash Nath & Co.,
6. H. L Bhatia, Public Finance, Vikas Publishing House
Pvt. Ltd., 2008
Introduction
Public Finance: Field of economics which studies
government activities and the alternative means
of financing government expenditure
Public Sector over the years
Mercantilist View
Adam Smiths invisible hand
Karl Marx socialist ideology
Keynes View
Mixed economy of today
Pareto Optimality.A
recap
Properties of Pareto criteria
MARKET FAILURE
When markets do not lead to efficient outcomes i.e.
are not Pareto efficient
Reasons:
1. Failure of Competition
2. Public goods
3. Externalities
4. Incomplete markets
5. Imperfect information
6. Unemployment and other macro economic
distributes
Failure of Competition or
Imperfect Competition
Reasons:
1. Declining average costs
2. Natural monopoly
3. High transportation costs
4. Imperfect information
5. Strategic behaviour to discourage competition
6. Government action- e.g. granting of patents
Public Goods
Two characteristics of a Pure Public good:
1. Non rival
2. Non excludable
Markets will either not supply such goods or supply in
insufficient amounts
Classic examples: A Lighthouse, National Defence
Externalities
When actions of one individual or firm affects other
individuals or firms, generating either a cost on them,
but does not compensate them; or alternatively
generates a benefit for other individual or firms, but
does not reap a reward for providing those benefits.
Externalities are of two types:
1. Positive externalities
2. Negative externalities
Incomplete Markets
Goods which markets fail to provide even though their cost of
provision is less than what individuals are willing to pay
Asymmetries of information
Adverse selection
.Complementary markets
Information failures
Information in many respects is a public good and
efficiency requires that information be freely
disseminated
Private market will supply inadequate amount of
information
Unemployment, Inflation
and Disequilibrium
High rate of unemployment and inflation are some of the
most convincing evidences of market failure