Part I:

NATURE OF
GOVERNMEN
T
EELEC 03- PUBLIC
ECONOMICS
Chapter 1: Foundations
of Public Economics
Chapter 1: Foundations of Public
Economics
At the end of the lesson, the students should be able to:

1. Demonstrate knowledge on the basic principles and foundations of public

economics.

2. Determine the significant economic functions of the government.

3. Identify some of the major principles of economics that we will draw on throughout the
analysis of government policies and actions.
 Public Economics studies the
government and how its policies
What is Public affect the economy. It considers
Economics? how the choices of the
government are made and how
they can improve or hinder
economic efficiency. ( Myles
2004).
 THE ROLE OF
GOVERNMENT IN
THE ECONOMY
THE GOVERNMENT POLICIES IN
THE LENS OF ECONOMIC
EFFICIENCY AND EQUITY

Society making
Concerned with how optimal used of scarce
resources are distributed resources to help
throughout society. satisfy the changing
needs and wants.
 The discipline of public economics,
explains the thorough government
interventions through economic theory.
What is Public
Economics?
 It encompasses topics as diverse as
possible as responses to market failures due
to existence of externalities, the motives of
tax evasion and the explanation of
bureaucratic decision making.
 James Buchanan- was an American
economist known for his work on
Public Choice Theory.
His work initiated research on how
James politicians' and bureaucrats' self-
Buchanan interest, utility maximization, and
other non-wealth-maximizing
• Public considerations affect their decision-
Choice making.
Theory
 Richard Musgrave- was a
strong believer in the role of
Richard the state as a provider of
Musgrave community wellbeing.
• Father of Public His work on public finance
Economics
has been described as his
• Public Finance
"attempt to marry the theory
and practice of good
government."
 The view of public finance is
considered to be threefold,
consisting of governmental
effects on:
Richard Musgrave
1. The efficient allocation of
available resources.
• Public Finance
Theory
2.The distribution of income
among citizens;

3. The stability of the

economy.
 Economic and social well-being
require good government.

A good government provides the institutions

and rules that allow markets to flourish, effort to
be rewarded and people to lead prosperous and
healthy lives.
It supplies essential public services,
including law and order, economic
infrastructure,
 In order to reach out to these areas, PUBLIC
ECONOMICS was developed from its narrow emphasis
upon the collection and spending of government revenues
to its present concern with every aspect of government
interaction with the economy.

.
PUBLIC
SECTOR
Economic
Functions of
Government
 1 Government can intervene in the

Establishing economic process in various ways.

Institutions and
Establish the institutions and rules that allow
Ground Rules markets to work.

Property Rights- establish market structures

and to establish rules for entry into and exit
out of markets

Effective regulation on major financial

institutions.

Markets operates under a functioning political

and legal system.
The common approach in
economic analysis is to assess
which goods are supplied
inefficiently by markets and
might therefore be provided by
government.
 What
2 economic services should government
provide?

Establishing
Institutions and
Ground Rules The common approach in economic analysis
is to assess which goods are supplied
inefficiently by markets and might therefore be
provided by government.

The government
Competitive
should accomplish
things by collective markets are very
action that good at
individuals find producing the
difficult or goods that
impossible to people want.
accomplish
separately.
 Markets have three main sets of
Three weaknesses weaknesses:
of Markets
(1) Market failures:
Under certain conditions markets allocate
resources inefficiently and fail to supply goods
that consumers want;
◦ There are four main forms of market failures:
a.Public goods
b.Externalities
c.Imperfect competition and
d. Information failures.
 (2) Income inequality:
Markets often result in inequitable distribution of
Three weaknesses income;
of markets In competitive markets workers receive approximately
the value of their marginal product. However, because of
differences in abilities or opportunities, or simply from
accident of birth, the value of the marginal products and
therefore the income of individuals vary greatly.

All markets, competitive or otherwise, tend to produce an

unequal distribution of income. Indeed, there is no
guarantee that markets will provide everyone with an
adequate living to avoid destitution.
 3) Macroeconomic instability:
Three Markets may not produce full employment and
Weaknesses of price stability.
Markets If wages were to fall in flexible labour markets,
lower wages will not produce full employment in
the short run if the aggregate demand for goods
is deficient. Less dramatically, markets may
produce inefficient fluctuations in economic
activity over business cycles.
 These three forms of market weakness provide three

potential economic functions for government

Three potential allocation, redistribution and stabilization functions.
government The allocation function requires government to respond to
functions market inefficiencies, to provide public goods, regulate
externalities, promote competitive markets or regulate
market power and protect individuals from information
failures.

The redistribution function requires government to

alleviate poverty and reduce income inequality.

The stabilization function involves management of

aggregate demand to achieve price stability and high levels
of employment and to reduce fluctuations in output over the
business cycle.
 How economic analysis can contribute to public
Public Policy and policy making.?
Principles of
Economic
Analysis The issues are complex and diverse. They
may involve, among other things, how
much to spend on hospitals and roads,
whether and how to regulate markets,
what assistance to provide to different
groups in society or how to raise revenue.
1. What are the policy
objectives?
2. What are the options for
achieving these objectives?
3. What are the implications of
each option?
4. Which is the preferred
option?
Normative Economics
Economic analysis that requires ethical
judgements is known as normative economics.

The analysis that requires judgements about

what is desirable: judgements that society would be
better off with one objective or outcome than with
another. Judgements of desirability, of good and
bad, are ethical or moral judgements. Such
judgements are not true or false, they are matters of
personal values or views.
Positive Economics
Economic analysis that deals with facts is
described as positive economics.
Economic analysis is nearly always required to
identify the means available to achieve desired
social objectives and the implications of these
measures. Economic analysis is needed even
when government plans to redistribute income, for
example to the unemployed or the elderly. In such
cases, estimates of the costs and consequences of
the options are generally required.
Some
Applications of
Economic
Principles to the Scarcity &
Value of
Opportunit
Public Sector y Cost
Trade

The Role
The Role
of
of Prices
Incentives
Some
Applications of The
Economic principles
Principles to the Working
of
with
Public Sector efficient
Markets
productio
n

Rational
Social
Decision
Welfare
Making
 Schedule of Quiz No. 1
Public Economics
Sept 13- 17, 2021
(Take the quiz on the schedule day of
virtual meet up. )
 Case Study Presentation
Search for case study that depicts the role of economic functions of the government. It may be in
field of education, health, agriculture, business, investment and others. You are give 15 mins to present.
Prepare your power point presentation, maximum of 5 slides, discuss the case using the outline below.

I. Present the Salient Points of Case Study in bulleted form.

II. Identify the problem & resolution made

III. Discuss how the government came into light to carry out its functions.

Sept 20- 30. Date of presentation

***** Guidelines for case study preparation and presentation will be uploaded at gclassroom.