17/08/11 Public Economics 7a, The method of positive analysis Positive analysis is about explaining why there is a public sector, how government policies are chosen and how these policie
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PUBLIC ECONOMICS
LÝ Hoàng Phú – MSC, CERDI - France
Faculty of International Economics, Foreign Trade University
lyhoangphu@ftu.edu.vn
Course outline
1 Introduction
2 Market Failures
3 Income Redistribution
4 Public Choice and Political Economy
5 Implication of taxation and
redistribution policies
Public Economics
3 credits = 15 sessions
3 credit tests
(1) Class attendance: 10% of grade
(2) Mi term exam: 30% of grade (2 small tests)
(3) Final Exam: 60% of grade
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CHAPTER I
INTRODUCTION TO PUBLIC
ECONOMICS
Structure of the chapter
I. Object and methods to study
II. Four major problems of Pub Eco
III. Reference documents
IV. Generality about the Government
I. Object and methods to study
1, Object to study
What is Pub Eco?
The economic science which deal with the
government intervention in the market
economy
It studies how decisions are made
It analyses what decisions should be made
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a, The method of positive analysis
Positive analysis is about explaining
why there is a public sector, how
government policies are chosen and
how these policies affect the economy.
Example: analysing effect of the corporate
tax on inward investment are examples of
positive analysis
2 Methods to study
2 Methods to study
b, The method of subjective/normative analysis
Normative analysis investigates what the best
policies are, and aims to provide a guide to good
government
Example: should the level of pensions be indexed to
average wages
Example: When we consider the construction of a bridge,
with the method of subjective analysis, we will find
whether there is other better solutions: ex buy barge,
ships instead of bridge…
Q&A: True or False?
1. Normative statements describe how the world is, while
positive statements prescribe how the world should be
2. Positive statements are descriptive, while normative
statements are prescriptive
3. Positive statements can be evaluated using data alone,
but normative statements cannot
4. "Society would be better off if the welfare system were
abolished" is a normative statement, not a positive
statement
5. "Other things equal, an increase in supply causes a
decrease in price" is a normative statement, not a
positive statement
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II THE FOUR QUESTIONS
OF PUBLIC ECONOMICS
When should the government intervene in
the economy?
How might the government intervene?
What is the effect of those interventions on
economic outcomes?
Why do governments choose to intervene in the
way that they do?
1 When Should the Government
Intervene in the Economy?
Normally, competitive private markets provide
“efficient” outcomes for the economy.
Generally hard to justify government intervention
in markets But two main justifications are:
Market failures: Problems that cause a market economy
to deliver an outcome that does not maximize efficiency
Redistribution: The shifting of resources from some
groups in society to others
1 When Should the Government Intervene?
a, Efficiency
b, Equity
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Market failure: efficiency unachievable
Market failure arises when efficiency is not
achieved
Sources of market failure:
monopoly
public goods
externalities
asymmetric information
Market failure may justify additional government
intervention
it must be tested whether intervention is beneficial
government cannot always improve upon the unregulated
economy
When there is no equity:
=>Redistribution
Government intervention also motivated by
inequality of income
inequality of opportunity
inequality of wealth.
Redistribution of resources
alleviates these inequalities
may raise welfare
Two conflicting aims
efficiency
equity
Optimal policy
the correct trade-off between equity and efficiency
2 How Might the Government Intervene?
If the government wants to intervene in a market, there
are a number of options:
Using theprice mechanismwith taxes or subsidies
The government can directly restrict the private
sale or purchase of goods that are overproduced
Mandatethat either individuals or firms provide the
good
The government can mandate the private purchase
of goods that are under produced and force
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Public Provision
The government can provide the good directly, in order to
potentially attain the level of consumption that maximizes
social welfare Ex: the Medicare program for elderly
citizens
Public Financing of Private Provision
Governments may want to influence the level of
consumption but may not want to directly involve
themselves in the provision of a good
Medicare prescription drug cards, where private companies
administer the drug insurance
3 What Are the Effects
of Alternative Interventions?
Much of the focus of empirical public economics is
assessing the “direct” and “indirect” effects of
government actions.
Direct effects of government actions assume “no
behavioral responses” and examine the intended
consequences of those actions.
Indirect effects arise because some people change
their behavior in response to an intervention This
is sometimes called the “law of unintended
consequences.”
4 Why Do Governments Do What
They Do?
Governments do not simply behave as benign actors who
intervene only because of market failure and redistribution
Political economy: the theory of how the political
process produces decisions that affect individuals and the
economy
Tools ofpolitical economy helps us understand how
governments make public policy decisions
Just as market failures can lead to market inefficiency, there are a
host of government failures that lead to inappropriate government
intervention.
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Why Do Governments Do What They
Do?
For example, substantial variation across developed
countries in health care delivery suggests efficiency
and redistribution are not the only considerations.
U.S.: Private health insurance
Canada: National public health insurance
Germany: Mandates private health coverage
U.K.: Free national health care
Thailand?
II Reference documents
1. PGS,TS.Phạm Văn Vận, ThS Vũ Cương, Kinh tế
công cộng, Nxb Thống kê, 2006
2. Joseph Stiglitz, Economics of the public sector ,
Third Edition, 2000
3. Jean-Jacques Laffont, Fundamentals of Public
Economics, MIT Press, 1998
4. Donijo Robbins, Handbook of Public Sector
Economics, Marcel Dekker/CRC Press 2004
5. David Schultz, Encyclopedia of Public
Administration and Public Policy, Facts On File
Inc.; 2004
III Generality about the Government
1. The Government and major roles in
the market economy
2. Government’s failures when
intervention in the market economy
3. Generality of Government role in the
history of economic theories
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the market economy
a, Definition of Government
An organization that is the governing
authority of a political unit.
Elected by the society, the government
regulated individual behavior in this
society (= regulator), and its activities
are for a better society.
b, Functions of the Government
Maintaining legal and social framework
Providing public goods and services
Maintaining competition
Redistribution income
Correcting for externalities
Stabilizing the economy
2, Government failure when
intervention in the market economy
Government failure refers to situations
where allocative efficiency may have been
reduced following government intervention in
markets designed to correct market failure.
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Imperfect information:
Lack of knowledge of:
Prices
Value
Costs
Benefits
Long term effects
Behavioural changes
External costs and benefits
Value of producer and consumer surplus
– all mean less than efficient allocation may result from
government intervention.
Government failure if Asymmetric
information
Government failure if there is own interest
Public Choice Theory:
Politicians, bureaucrats and others acting on
behalf of the ‘public’ may act in their own self
interest as ‘utility maximisers’
The ‘invisible hand’ may not work in the provision
of public goods
“Rent seeking” and “Log rolling” - two important
concepts
the history of economic theories
Since XVthto XVIIthcentury
Since XVIIthto XXthcentury
Since the late of 30s to 70s of the XXth
century: J.M.Keynes
The years of 1980 of the XXthcentury:
the neoliberalism
Since the decade of 1990: the mixed