{{Short description|Study of government economic and fiscal policy}} {{Economics sidebar}} '''Public economics''' ''(or economics of the public sector)'' is the study of government policy through the lens of economic efficiency and equity. Public economics builds on the theory of welfare economics and is ultimately used as a tool to improve social welfare. Welfare can be defined in terms of well-being, prosperity, and overall state of being.
Public economics provides a framework for thinking about whether or not the government should participate in economic markets and if so to what extent it should do so. Microeconomic theory is utilized to assess whether the private market is likely to provide efficient outcomes in the absence of governmental interference; this study involves the analysis of government taxation and expenditures.
This subject encompasses a host of topics notably market failures such as, public goods, externalities and Imperfect Competition, and the creation and implementation of government policy.<ref>Serge-Christophe Kolm, 1987. "public economics," ''The New Palgrave: A Dictionary of Economics'', v. 3, pp. 1047–55. [http://www.dictionaryofeconomics.com/article?id=pde1987_X001794&edition=all&field=content&q= Table of Contents.]</ref>
Broad methods and topics include: * the theory and application of public finance<ref>• Richard A. Musgrave, 2008. "public finance," ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_P000244&edition=current&q= Abstract.]<br /> • _____, 1959. ''The Theory of Public Finance: A Study in Public Economy''. J. M. Buchanan review, [https://www.jstor.org/pss/1054956 1st page.]</ref> * Analysis and design of public policy<ref>• Dani Rodrik, 1996. "Understanding Economic Policy Reform," ''Journal of Economic Literature'', 34(1), pp. [http://relooney.fatcow.com/rodrik.pdf 9–41.] {{webarchive |url=https://web.archive.org/web/20130606053456/http://relooney.fatcow.com/rodrik.pdf |date=June 6, 2013 }}<br />From ''The New Palgrave Dictionary of Economics Online'', 2008. Abstract links for:<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_B000331&edition=current&field=content&q= behavioural public economics"] by B. Douglas Bernheim and Antonio Rangel<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_F000118&edition=all&field=content&q= "fiscal federalism"] by David E. Wildasin<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_E000262&edition=all&field=content&q=analysis "hazardous waste, the economics of"] by Hilary Sigman.<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_N000165&edition=all&field=content&q= "nutrition and public policy in advanced economies"] by Janet Currie.</ref> * distributional effects of taxation and government expenditures<ref>'' The New Palgrave Dictionary of Economics'', 2008, 2nd Edition. Abstract/contents links for:<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_P000244&edition= "public finance"] by Richard A. Musgrave<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_C000320&edition=current&q= "consumption taxation"] by James M. Poterba<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_D000261&edition=all&field=content&q= "distributive politics and targeted public spending"] by Brian G. Knight<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_G000203&edition=current&q= "generational accounting"] by Jagadeesh Gokhale<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_N000165&edition=all&field=content&q= "nutrition and public policy in advanced economies"] by Janet Currie<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_P000218&edition=all&field=content&q= "progressive and regressive taxation"] by William Vickrey and Efe A. Ok<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_R000067&edition=current&q= "redistribution of income and wealth"] by F.A. Cowell<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_T000240&edition= "tax expenditures"] by Daniel N. Shaviro<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_T000236&edition=current&q= "taxation and poverty"] by John Karl Scholz<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_W000053&edition=current&q= "welfare state"] by Assar Lindbeck.<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_S000525&edition=all&field=content&q= social insurance and public policy] by Jonathan Gruber.</ref> * analysis of market failure<ref>'' The New Palgrave Dictionary of Economics'', 2008, 2nd Edition. Abstract links for:<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_M000056&edition=current&q= "market failure"] by John O. Ledyard<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_B000237&edition=current&field=content&q= "bureaucracy"] by Mancur Olson<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_E000228&edition=current&field=content&q= "health insurance, the economics of"] by Joseph P. Newhouse<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_P000360&edition=all&field=content&q= "mandated employer provision of employee benefits"] by Jonathan Gruber<br /> • [http://www.dictionaryofeconomics.com/article?id=pde2008_P000245&edition=current&field=content&q= "public goods"] by Agnar Sandmo</ref> and government failure.<ref>• Sharun W. Mukand, 2008. "policy reform, political economy of," ''The New Palgrave Dictionary of Economics'' 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_P000363&edition=current&q= Abstract.]<br /> • James M. Buchanan, 2008. "public debt," ''The New Palgrave Dictionary of Economics'' 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_P000241&edition=current&q= Abstract.]<br /> • Mrinal Datta-Chaudhuri, 1990. "Market Failure and Government Failure," ''Journal of Economic Perspectives'', 4(3), pp. [http://archive.wikiwix.com/cache/20110730002039/http://netdrive.montclair.edu/%7Elebelp/DattaChaudMktFailJEP1990.pdf 25-39.].<br /> • Kenneth J. Arrow, 1969. "The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Non-market Allocations," in ''Analysis and Evaluation of Public Expenditures: The PPP System''. Washington, D.C., Joint Economic Committee of Congress. PDF reprint as pp. [http://www.econ.ucsb.edu/~tedb/Courses/UCSBpf/readings/ArrowNonMktActivity1969.pdf 1-16] (press '''+''').<br /> • Joseph E. Stiglitz, 2009. "Regulation and Failure," in David Moss and John Cisternino (eds.), ''New Perspectives on Regulation'', ch. 1, pp. [http://www.tobinproject.org/twobooks/pdf/New_Perspectives_Ch1_Stiglitz.pdf 11-23.] {{webarchive |url=https://web.archive.org/web/20100214200105/http://www.tobinproject.org/twobooks/pdf/New_Perspectives_Ch1_Stiglitz.pdf |date=February 14, 2010 }} Cambridge: The Tobin Project.</ref>
Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from ideology. Examples of topics covered are tax incidence,<ref>Gilbert E. Metcalf, 2008. "tax incidence," ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_T000019&edition=current&q= Abstract.]</ref> optimal taxation,<ref>Louis Kaplow, 2008. "optimal taxation," ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_O000034&edition=current&q= Abstract.]</ref> and the theory of public goods.<ref name="PublicGood" >• Agnar Sandmo, 2008."public goods," ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_P000245&edition= Abstract.]<br /> • Serge-Christophe Kolm, 1987. "public economics," ''The New Palgrave: A Dictionary of Economics'', v. 3, pp. 1047-48.<br /> • Anthony B. Atkinson and Joseph E. Stiglitz, 1980. ''Lectures in Public Economics'', McGraw-Hill, pp. vii-xi.<br /> • Mancur Olson, 1971, 2nd ed.''The Logic of Collective Action: Public Goods and the Theory of Groups'', Harvard University Press, [https://archive.org/details/logicofcollectiv00olso_0 <!-- quote=frontcover. --> Description] and chapter-previews links, pp. [https://archive.org/details/logicofcollectiv00olso_0 <!-- quote=frontcover. --> ix]-[https://archive.org/details/logicofcollectiv00olso_0 <!-- quote=frontcover. --> x.]</ref>
==Subject range== The Journal of Economic Literature (JEL) classification codes are one way categorizing the range of economics subjects. There, Public Economics, one of 19 primary classifications, has 8 categories. They are listed below with JEL-code links to corresponding available article-preview links of The New Palgrave Dictionary of Economics Online (2008) and with similar footnote links for each respective ''sub''category if available:<ref>Of which a complete list with Wikipedia links is at JEL classification codes#Public economics JEL: H Subcategories</ref> :[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H JEL: H (all)] – Public Economics :[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H0 JEL: H0] – General :[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H1 JEL: H1] – Structure and Scope of Government<ref>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H11 JEL: H11] – Structure, Scope, and Performance of Government<br/>[https://archive.today/20131130220203/http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H12 JEL: H12] - Crisis management</ref> :[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H2 JEL: H2] – Taxation, Subsidies, and Revenue<ref>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H21 JEL: H21] – Efficiency; Optimal taxation<br/>JEL: H22 – Incidence<br/>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H23 JEL: H23] – Externalities; Redistributive Effects; Environmental taxes and Subsidies<br/>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H24 JEL: H24] – Personal Income and Other Nonbusiness Taxes and Subsidies<br/>JEL: H25 – Business Taxes and Subsidies<br/>JEL: H26 – Tax evasion</ref> :[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H3 JEL: H3] – Fiscal Policies and Behavior of Economic Agents<ref>JEL: H31 – Household<br/>JEL: H32 – Firm</ref> :[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H4 JEL: H4] – Publicly Provided Goods<ref>JEL: H40 – General<br/>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H41 JEL: H41] – Public goods<br/>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H42 JEL: H42] – Publicly Provided Private Goods<br/>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H43 JEL: H43] – Project Evaluation; Social Discount Rate<br/>JEL: H44 - Publicly Provided Goods: Mixed Markets</ref> :[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H5 JEL: H5] – National Government Expenditures and Related Policies<ref>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H51 JEL: H51] – Government Expenditures and Health<br/>JEL: H52 – Government Expenditures and Education<br/>JEL: H53 – Government Expenditures and Welfare Programs<br/>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H54 JEL: H54] – Infrastructures; Other Public Investment and Capital Stock<br/>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H55 JEL: H55] – Social security and Public Pensions<br/>JEL: H56 – National Security and War<br/>JEL: H57 – Procurement</ref> :[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H6 JEL: H6] – National Budget, Deficit, and Debt<ref>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H60 JEL: H60] – General<br/>JEL: H61 – Budget; Budget Systems <br/>JEL: H62 – Deficit; Surplus<br/>JEL: H63 - Debt; Debt Management; Sovereign Debt<br/>JEL: H68 – Forecasts of Budgets, Deficits, and Debt<br/>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H69 JEL: H69] – Other</ref> :[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H7 JEL: H7] – State and Local Government; Intergovernmental Relations<ref>JEL: H71 – State and Local Taxation, Subsidies, and Revenue<br/>JEL: H72 – State and Local Budget and Expenditures<br/>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H73 JEL: H73] – Interjurisdictional Differentials and Their Effects<br/>[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H74 JEL: H74] – State and Local Borrowing<br/>JEL: H75 - State and Local Government: Health; Education; Welfare; Public Pensions<br/>JEL: H76 - State and Local Government: Other Expenditure Categories<br/>JEL: H77 - Intergovernmental Relations; Federalism; Secession</ref> :[http://www.dictionaryofeconomics.com/search_results?q=&field=content&edition=all&topicid=H8 JEL: H8] – Miscellaneous Issues.<ref>JEL: H80 – General<br/>JEL: H81 – Governmental Loans, Loan guarantee, Credits, and Grants; Bailouts<br/>JEL: H82 – Governmental Property<br/>JEL: H83 – Public administration; Public Sector Accounting and Audits<br/>JEL: H84 - Disaster Aid<br/>JEL: H87 – International Fiscal Issues; International Public Goods</ref>
== Market failures == {{main|Market failure}}
The role of government in providing efficient and equitable markets is largely underpinned by addressing market failures that may arise. Public Economics focuses on when and to what degree the government should intervene in the economy to address market failures.<ref name=":0">{{Cite book|last=Abelson|first=Peter|title=Public Economics: Principles and Practise|publisher=McGraw-Hill|year=2012|location=North Ryde, N.S.W.|pages=67/68}}</ref> Some examples of government intervention are providing pure public goods such as defense, regulating negative externalities such as pollution and addressing imperfect market conditions such as asymmetric information.
===Public goods=== Pure public goods, or collective consumption goods, exhibit two properties; non-rivalry and non-excludability. Something is non-rivaled if one person's consumption of it does not deprive another person, (to a point) a firework display is non-rivaled - since one person watching a firework display does not prevent another person from doing so. Something is non-excludable if its use cannot be limited to a certain group of people. Again, since one cannot prevent people from viewing a firework display it is non-excludable.<ref name="PublicGood" /> Due to these constraints, one of few examples of a "pure public good" is national defense - it is both non-rivalry and non-excludable. Another example, of a pure public good is knowledge. Consider a book. The book itself can be destroyed and thus is excludable. However, the knowledge obtained from the book is far more difficult to destroy and is non-rivalrous and non-excludable.<ref>{{Cite web|title=Peter Suber, SPARC Open Access Newsletter, 11/2/09|url=http://legacy.earlham.edu/~peters/fos/newsletter/11-02-09.htm|access-date=2020-10-30|website=legacy.earlham.edu}}</ref> In reality, not all public goods can be classed as 'pure' and most display some degree of excludability and rivalrous. These are known as Impure public goods.<ref name=":1">{{Cite book|last=Myles|first=Gareth|title=Public Economics|publisher=Cambridge University Press|year=2001|location=Cambridge|pages=255–256}}</ref> To visualize the public good's characteristic of non-excludability, it would be the inability to build a fence, barrier or wall that would block the good from consumption. In the modern era, digital replication allows several goods to be non-rivalry; since, people from all over the world can access it if you have access to the internet and a device.
Due to the two unique properties that public goods exhibit, being non-rivalrous & non-excludable, it is unlikely that without intervention markets will produce the efficient amount. It therefore, the role of government to regulate the production of public goods so as to create an efficient market equilibrium.<ref name=":0" />
===Externalities=== Externalities arise when consumption by individuals or production by firms affect the utility or production function of other individuals or firms.<ref>{{Cite book|last=Tresch|first=Richard. W.|title=Public Sector Economics|publisher=PALGRAVE MACMILLAN|year=2008|isbn=978-0-230-52223-7|location=New York|pages=100}}</ref> Positive externalities are education, public health and others while examples of negative externalities are air pollution, noise pollution, non-vaccination and more.<ref>{{Cite book|last=Tresch|first=Richard W.|title=Public Sector Economics|publisher=PALGRAVE MACMILLAN|year=2008|isbn=978-0-230-52223-7|location=New York}}</ref>
Pigou describes as positive externalities, examples such as resources invested in private parks that improve the surrounding air, and scientific research from which discoveries of high practical utility often grow. Alternatively, he describes negative externalities, such as the factory that destroys a great part of the amenities of neighboring sites.
The role of government is to address the negative external effects and societal deadweight loss created from inefficient markets<ref name=":0" />
===Imperfect competition=== Imperfect competition within markets can take many forms and will often depend on the barriers to entry, firms profit and production objectives and the nature of the product and respective market.<ref name=":1" /> Imperfect competition will lead to a social cost and it is the role of government to minimize this cost.<ref>{{Cite journal|last=Matutes|first=Carmen|date=2000|title=Imperfect competition, risk taking, and regulation in banking|url=https://www.sciencedirect.com/science/article/abs/pii/S0014292198000579|journal=European Economic Review|volume=44|pages=1–34|doi=10.1016/S0014-2921(98)00057-9|via=ELSEVIER|url-access=subscription}}</ref> Some notable imperfections include:
# Companies sell differentiated products # There are barriers to exit and entry # Suboptimal output and pricing
In its essence, the role of government is to address the issues that arise from these market failures and decide the optimal degree of intervention necessary.<ref name=":0" />
==Taxation==
===Diamond–Mirrlees efficiency theorem=== In 1971, Peter A. Diamond and James A. Mirrlees published a seminal paper that showed that even when lump-sum taxation is not available, production efficiency is still desirable. This finding is known as the Diamond–Mirrlees efficiency theorem, and it is widely credited with having modernized Ramsey's analysis by considering the problem of income distribution with the problem of raising revenue. Joseph E. Stiglitz and Partha Dasgupta (1971) have criticized this theorem as not being robust on the grounds that production efficiency will not necessarily be desirable if certain tax instruments cannot be used.
===Pigouvian taxes=== {{main|Pigouvian tax}} [[File:A.C. Pigou.jpg|thumb|100px|A.C. Pigou (1877-1959).]]
One of the achievements for which the great English economist A.C. Pigou is known, was his work on the divergences between marginal private costs and marginal social costs (externalities). In his book, ''The Economics of Welfare'' (1932), Pigou describes how these divergences come about:
<blockquote>...one person A, in the course of rendering some service, for which payment is made, to a second person B, incidentally also renders services or disservices to other persons (not producers of like services), of such a sort that payment cannot be extracted from the benefited parties or compensation enforced on behalf of the injured parties (Pigou p. 183).</blockquote>
In particular, Pigou is known for his advocacy of what are known as corrective taxes, or Pigouvian taxes:
<blockquote>It is plain that divergences between private and social net product of the kinds we have so far been considering cannot, like divergences due to tenancy laws, be mitigated by a modification of the contractual relation between any two contracting parties, because the divergence arises out of a service or disservice to persons other than the contracting parties. It is, however, possible for the State, if it so chooses, to remove the divergence in any field by "extraordinary encouragements" or "extraordinary restraints" upon investments in that field. The most obvious forms which these encouragements and restraints may assume are, of course, those of bounties and taxes (Pigou p. 192).</blockquote>Pigou suggested that the market failure of externalities can be overcome by the introduction of taxes. The government can intervene in the market, using an emission tax for example to create a more efficient outcome; this Pigouvian tax is the optimal policy prescription for any aggregate, negative externality.<ref>{{Cite book|last=Tresch|first=Richard W.|title=Public Sector Economics|publisher=PALGRAVE MACMILLAN|year=2008|isbn=978-0-230-52223-7|location=New York|pages=108}}</ref>
In 1960, the economist Ronald H. Coase proposed an alternative scheme whereby negative externalities are dealt with through the appropriate assignment of property rights. This result is known as the Coase theorem.
==Cost–benefit analysis== {{main|Cost–benefit analysis}} [[File:Julesdupuit.jpg|thumb|100px|Jules Dupuit (1804-1866).]]
While the origins of cost–benefit analysis can be traced back to Jules Dupuit's classic article "On the Measurement of the Utility of Public Works" (1844), much of the subsequent scholarly development occurred in the United States and arose from the challenges of water-resource development. In 1950, the U.S. Federal Interagency River Basin Committee's Subcommittee on Benefits and Costs published a report entitled, ''Proposed Practices for Economic Analysis of River Basin Projects'' (also known as the ''Green Book''), which became noteworthy for bringing in the language of welfare economics.<ref>A.R. Prest and R. Turvey, 1965. "Cost-Benefit Analysis: A Survey" ''The Economic Journal'', 75(300) pp. 683-735.</ref> In 1958, Otto Eckstein published ''Water-Resource Development: The Economics of Project Evaluation'', and Roland McKean published his ''Efficiency in Government Through Systems Analysis: With Emphasis on Water Resources Development''. The latter book is also considered a classic in the field of operations research. In subsequent years, several other important works appeared: Jack Hirshleifer, James DeHaven, and Jerome W. Milliman published a volume entitled ''Water Supply: Economics, Technology, and Policy'' (1960); and a group of Harvard scholars including Robert Dorfman, Stephen Marglin, and others published ''Design of Water-Resource Systems: New Techniques for Relating Economic Objectives, Engineering Analysis, and Governmental Planning'' (1962).<ref>[https://archive.today/20120805224548/http://yosemite.epa.gov/ee/epa/eed.nsf/2602a2edfc22e38a8525766200639df0/a92f904ea01bd78f85257662007490b8!OpenDocument Introduction to Benefit-Cost Analysis]</ref>
=== Individual Preferences for Public Goods === Public economics involves collective decision making, which can be difficult as individuals in society have different views, including on how much should be spent on public goods. Richer individuals prefer to spend more on both public and private goods than individuals with lower incomes.<ref name=":2">Stiglitz, Joseph E., Rosengard, Jay K.. (2015). ''Economics of the Public Sector'' (Ed. 4th). New York: W.W. Norton & Company, Inc..</ref> While both rich and poorer citizens pay the same price for private goods, individuals with higher incomes must pay a relatively higher cost when it comes to public goods.<ref name=":2" /> We can calculate this additional expenditure as the tax price; “the additional amount an individual must pay when government expenditures increase by one dollar”.<ref name=":2" /> With a higher tax price wealthier individuals will desire a lower expenditure on public goods.
=== Aggregating Preferences === An important part of collective decision making in a democracy, and thus public economics, is aggregating preferences of all individuals in society. To aggregate preferences, however, the decision-making body (i.e. the government) must first ascertain the preferences of the citizens. We can call this process preference revelation, and in terms of public economics, the objective is to determine the “desired level of public goods of each individual”.<ref name=":2" /> This can be a very difficult process in practice. In most democratic countries, citizens vote for representatives that best emulate their preferences. This process can be perverted in a number of ways including lobbying, media biases, political advertising, and special interest groups.<ref name=":2" />
Another aspect of this public choice paradigm was identified by Anthony Downs in 1957, when he wrote that “parties formulate policies to win elections, rather than win elections to formulate policies”.<ref name=":3">{{Cite journal |last=Rowley |first=Charles K. |date=1984 |title=The Relevance of the Median Voter Theorem |url=https://www.jstor.org/stable/40750679 |journal=Zeitschrift für die gesamte Staatswissenschaft / Journal of Institutional and Theoretical Economics |volume=140 |issue=1 |pages=104–126 |jstor=40750679 |issn=0044-2550}}</ref><ref name=":4">{{Cite journal |title=An Economic Theory of Political Action in a Democracy on JSTOR |url=https://www.jstor.org/stable/1827369 |access-date=2024-04-29 |journal=Journal of Political Economy |jstor=1827369 |language=en |last1=Downs |first1=Anthony |date=1957 |volume=65 |issue=2 |pages=135–150 |doi=10.1086/257897 |url-access=subscription }}</ref> The argument is that political parties and candidates are motivated primarily by self-interest, and “the income, prestige and power which come from being in office".<ref name=":3" /><ref name=":4" /> This can sometimes lead to difficult outcomes and can make it harder to properly aggregate the preferences of the population and can potentially lead to the favouring of the welfare of government officials as opposed to public welfare.
'''Social Choice Theory'''
Social choice theory in economics studies how groups end up making decisions as opposed to individuals. One of the central components of social choice theory is that government actions result from individuals acting out of rational self-interest within the confines of the “rules of the game”.<ref name=":2" /> In this sense, the constitution of a given country is a significant factor in what actions a government can take (i.e. limits on deficit spending).<ref>{{Cite journal |last=Buchanan |first=James M |date=1987-08-01 |title=Tax Reform as Political Choice |url=http://dx.doi.org/10.1257/jep.1.1.29 |journal=Journal of Economic Perspectives |volume=1 |issue=1 |pages=29–35 |doi=10.1257/jep.1.1.29 |issn=0895-3309}}</ref> One of the pioneers in this field was the American economist James Buchanan, who emphasized the role of the constitution in setting out the rules of the game.<ref name=":2" /> The idea is that without restraints in place, there will be natural incentives for the majority to redistribute income in away from the minority in their favour. There is also the threat of special interest groups influencing elected representatives to act in their favour, at the expense of the public interest, and without appropriate rules in place these temptations will naturally be capitalized on.<ref name=":2" />
==See also== {{div col}} * Education economics * Health economics * Mixed economy * Public finance * Rawlsian social welfare function * Welfare economics {{div col end}}
==Notes== {{reflist|2}}
==References== * Atkinson, Anthony B., and Joseph E. Stiglitz, 1980. ''Lectures in Public Economics'', McGraw-Hill * Auerbach, Alan J., and Martin S. Feldstein, ed. ''Handbook of Public Economics''. Elsevier. : 1985, v. 1. [http://www.elsevier.com/wps/find/bookdescription.cws_home/601133/description#description Description] and [https://books.google.com/books?id=PlC8qO3HdRQC&dq=%22public+economics%22&pg=PR5 preview.] : 1987, v. 2. [http://econpapers.repec.org/bookchap/eeepubhes/2.htm Description.] : 2002. v. 3. [http://www.elsevier.com/wps/find/bookdescription.cws_home/601135/description#description Description.] : 2007. v. 4. [http://www.elsevier.com/wps/find/bookdescription.cws_home/601136/description#description Description.] * Barr, Nicholas, 2004. ''Economics of the Welfare State'', 4th ed., Oxford University Press. * Buchanan, James M., [1967] 1987. ''Public Finance in Democratic Process: Fiscal Institutions and Individual Choice'', UNC Press. [http://uncpress.unc.edu/books/T-1115.html Description], scrollable [https://books.google.com/books?id=TS2tK4equ0YC&pg=PA3 preview], and [https://books.google.com/books?id=TS2tK4equ0YC&pg=PA312 back cover.] * _____ and Musgrave, Richard A., 1999. ''Public Finance and Public Choice: Two Contrasting Visions of the State''. MIT Press. [http://mitpress.mit.edu/books/public-finance-and-public-choice Description] and scrollable preview [https://books.google.com/books?id=jEnjN7dKrzcC&pg=PR5 links.] * Coase, Ronald. "The Problem of Social Cost" ''Journal of Law and Economics'' Vol. 3 (Oct. 1960) 1-44 * Diamond, Peter A. and James A. Mirrlees. "Optimal Taxation and Public Production I: Production Efficiency" ''The American Economic Review'' Vol. 61 No. 1 (Mar. 1971) 8-27 * Diamond, Peter A. and James A. Mirrlees. "Optimal Taxation and Public Production II: Tax Rules" ''The American Economic Review'' Vol. 61 No. 3 (Jun. 1971) 261-278 * Drèze Jacques H., 1995. "Forty Years of Public Economics: A Personal Perspective," ''Journal of Economic Perspectives'', 9(2), pp. [http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.9.2.111 111-130.] * Dupuit, Jules. "On the Measurement of the Utility of Public Works" in ''Readings in Welfare Economics'', ed. Kenneth J. Arrow and Tibor Scitovsky (1969) * Haveman, Robert 1976. ''The Economics of the Public Sector''. * Kolm, Serge-Christophe, 1987. "public economics," ''The New Palgrave: A Dictionary of Economics'', v. 3, pp. 1047–55. * Feldstein, Martin S., and Robert P. Inman, ed., 1977. ''The Economics of Public Services''. Palgrave Macmillan. * Musgrave, Richard A., 1959. ''The Theory of Public Finance: A Study in Public Economy'', McGraw-Hill. 1st-page reviews of J.M. Buchanan[https://www.jstor.org/pss/1054956] & C.S. Shoup[https://www.jstor.org/discover/10.2307/1813080?uid=3739936&uid=2&uid=4&uid=3739256&sid=21101722883337]. * _____ and Alan T. Peacock, ed., [1958] 1994. ''Classics in the Theory of Public Finance'', Palgrave Macmillan. [https://books.google.com/books?id=pzUELgEACAAJ Description] and [https://archive.today/20130216151232/http://www.palgrave.com/products/TitlePrint.aspx?PID=256425 contents.] * Laffont, Jean-Jacques, 1988. ''Fundamentals of Public Economics'', MIT Press. [https://web.archive.org/web/20110629133734/http://mitpress.mit.edu/catalog/item/default.asp?ttype=2&tid=11822 Description.] * Myles, Gareth D., 1995. ''Public Economics'', Cambridge. [https://books.google.com/books?id=2jtvmYDrhoQC Description] and scroll to chapter-preview [https://books.google.com/books?id=2jtvmYDrhoQC links.] * Oates, Wallace E., 1972. ''Fiscal Federalism'', Harcourt Brace Jovanovich, Inc. * Pigou, A.C. "Divergences Between Marginal Social Net Product and Marginal Private Net Product" in ''The Economics of Welfare'', A.C. Pigou (1932) * Ramsey, Frank P. "A Contribution to the Theory of Taxation" in ''Classics in the Theory of Public Finance'', ed. R.A. Musgrave and A.T. Peacock (1958) * Stigler, George J. and Paul A. Samuelson, 1963. "A Dialogue on the Proper Economic Role of the State." ''Selected Papers'', No.7. Chicago: University of Chicago Graduate School of Business. * Starrett, David A., 1988. ''Foundations of Public Economics'', Cambridge. [https://books.google.com/books?id=R35yljdyyIkC&dq=onepage&pg=PR11 Description.] Scroll to chapter-preview [https://books.google.com/books?id=R35yljdyyIkC&q=gbs_navlinks_s links.] * Stiglitz, Joseph E., 1994. [https://web.archive.org/web/20110928085902/http://www2.gsb.columbia.edu/faculty/jstiglitz/download/papers/1994_Rethinking_the_Economic_Role_ofthe_State.pdf 'Rethinking the Economic Role of the State: Publicly Provided Private Goods'] Unpublished. * _____, 1998. "The Role of Government in the Contemporary World," in Vito Tanzi and Ke-Young Chu, ''Income Distribution and High-Quality Growth'', pp. [https://books.google.com/books?id=LQjyj7plILoC&dq=false&pg=PA21 211-54.] * _____, 2000. ''Economics of the Public Sector'', 3rd ed., Norton. * Tinbergen, Jan, 1958. ''On the Theory of Economic Policy''.
==Further reading== * Arrow, Kenneth J. ''Social Choice and Individual Values.'' (1970) * Atkinson, Anthony B. "On the Measurement of Inequality" ''Journal of Economic Theory'' 2 (1970) 244-263 [http://darp.lse.ac.uk/papersdb/Atkinson_%28JET70%29.pdf] * Auerbach, Alan J. and Laurence J. Kotlikoff. ''Dynamic Fiscal Policy.'' (1987) * Boiteux, Marcel. "On the Management of Public Monopolies Subject to Budgetary Constraints" ''Journal of Economic Theory'' 3 (1971) 219-240 * Corlett, W.J. and D.C. Hague. "Complementarity and the Excess Burden of Taxation" ''The Review of Economic Studies'' Vol. 21 No. 1 (1953–1954) 21-30 * Dalton, Hugh. "The Measurement of Inequality of Incomes" ''The Economics Journal'' Vol. 30, No. 119 (Sep. 1920) 348-361 * Edgeworth, F.Y. "The Pure Theory of Taxation" ''The Economic Journal'' Vol. 7 No. 25 (Mar. 1897) 46-70 [https://instruct1.cit.cornell.edu/Courses/econ335/out%2007/edgeworth%201897.pdf] * Feldstein, Martin. "Social Security, Induced Retirement, and Aggregate Capital Accumulation" ''The Journal of Political Economy'' Vol. 82 No. 5 (Sep.-Oct. 1974) 905-926 * Fisher, Irving. "Income in Theory and Income Taxation in Practice" ''Econometrica'' Vol. 5 No. 1 (Jan. 1937) 1-55 * Fisher, Irving. "The Double Taxation of Savings" ''The American Economic Review'' Vol. 29 No. 1 (Mar. 1939) 16-33 * Gini, Corrado. "Variability and Mutability" in ''Memorie di Metodologica Statistica'', ed. E. Pizetti and T. Salvemini (1955) * Harberger, Arnold. "The Incidence of the Corporation Income Tax" ''The Journal of Political Economy'' Vol. 70 No. 3 (Jun. 1962) 215-240 [http://www.uib.es/depart/deaweb/personal/profesores/personalpages/amedeospadaro/workingpapers/bibliosecpub/harberger.pdf] * Lihndahl, Erik. "Just Taxation: A Positive Solution" in ''Classics in the Theory of Public Finance'', ed. R.A. Musgrave and A.T. Peacock (1958) [http://www.econ.ucsb.edu/~tedb/Courses/UCSBpf/readings/lindahl.pdf] * Lorenz, M.O. "Methods of Measuring the Concentration of Wealth" ''American Statistical Association'' Vol. 9 No. 70 (Jun. 1905) 209-219 * Musgrave, Richard A. "A Multiple Theory of Budget Determination" (1957) [http://autoren.mohr.de/fa/musgrave_scan.pdf]{{dead link|date=January 2025|bot=medic}}{{cbignore|bot=medic}} * Niskanen, William A. "The Peculiar Economics of Bureaucracy" ''The American Economic Review'' Vol. 58, No. 2 (May 1968) 293-305 [http://www.uv.es/=atortosa/niskanen.pdf] * Niskanen, William A. ''Bureaucracy and Representative Government.'' (2007) * Orshansky, Mollie. "Children of the Poor" ''Social Security Bulletin'' Vol. 26 No. 7 (July 1963) * Orshansky, Mollie. "Counting the Poor: Another Look at the Poverty Profile" ''Social Security Bulletin'' Vol. 28 No. 1 (Jan. 1965) * Samuelson, Paul. "The Pure Theory of Public Expenditure" ''Review of Economics and Statistics'', XXXVI (1954), 387-89 [https://web.archive.org/web/20110826154152/http://samba.fsv.cuni.cz/~hava/VE%20LS%202011%20DISK%202/CITANKA%20textu/5%20Vererejne%20statky%20a%20externality/Samuelson%201954%20The%20pure%20theory%20of%20public%20expenditure.pdf] * Tiebout, Charles M. "A Pure Theory of Local Expenditure" ''The Journal of Political Economy'' Vol. 64, No. 5 (Oct. 1956), 416-424 [https://web.archive.org/web/20161009104042/http://www.bookshd.com/product/the-journal-of-political-economy-volume-15/] * Wicksell, Knut. "A New Principle of Just Taxation" in ''Classics in the Theory of Public Finance'', ed. R.A. Musgrave and A.T. Peacock (1958)
==External links== * [http://www.sciencedirect.com/science/journal/00472727 Journal of Public Economics] * [http://www.nber.org/papersbyprog/PE.html NBER papers in Public Economics] {{Public infrastructure topics}} {{Authority control}}
Category:Public economics