SUBIR MAITRAAssociate Professor

DEPARTMENT OF ECONOMICS HERAMBA CHANDRA COLLEGE

(UNIVERSITY OF CALCUTTA) HCC/ECON/SM/VB/2016-17/LECTURE:1

Aim of the course To discuss the role of the public sector in

modern economies,

To examine the economic rationale for government intervention,

To discuss the effects of government’s actions in terms of efficiency and equity

Course outline (as per CU Syllabi)

Introduction to public economics : The nature, scope and significance of public economics.

Forms and Functions of Government : Different forms of government – unitary and federal. Tiers of government in the federal form- Central, State, Local (Introductory discussion with examples).

Course outline (as per CU Syllabi) Functions of Government:

Economic functions -allocation, distribution and stabilization.

Regulatory functions of the Government and its economic significance

Federal Finance Federal Finance: Different layers of the government, Inter governmental transfer—horizontal vs. vertical equity.Grants—merits and demerits of various types of grants — unconditional vs. conditional grants, tied grants, matching grants.

Course outline (as per CU Syllabi) Public Goods and Public Sector

Concept of public goods—characteristics of public goods, national vs. local public goods, determination of provision of public goodExternality, concept of social versus private costs and benefits, merit goods, club goods.Provision versus production of public goods. Market failure and public provision. Pricing of public goods—vertical summation

Government Budget and PolicyGovernment budget and its structure – Receipts and expenditure – concepts of current and capital account, balanced, surplus, and deficit budgets, concept of budget deficit vs. fiscal deficit, functional classification of budget. Concept of Revenue Deficit.Budget, government policy and its impact. Budget multipliers.

Course outline (as per CU Syllabi) Revenue Resources

Concept of tax, types of tax – direct tax and indirect tax, canons of taxation, subsidy, transfer policy.Principles of taxation -Ability to Pay principle (brief discussion), Benefit Approach (Actual Examples)Tax Design - introduction – truth seeking mechanism.

Tax StructureEffects of income tax on work effort, saving and risk bearing (just brief ideas).Excess burden of indirect taxesVAT, Goods and Services Tax (pros and cons).Non-tax revenue resources-earnings from public undertakings, interest on loans.

Course outline (as per CU Syllabi) Distribution and Stabilization

Instruments for stabilizationPublic Debt---internal and external.Public Finance and Public Choice: The Role of State.

Readings1. Musgrave and Musgrave: Public Finance in Theory and Practice (Fifth Edition).2. H.L. Bhatia. Public Finance. (Fifteenth Revised Edition).3. Amaresh Bagchi (ed.). Readings in Public Finance. Oxford University Press.4. Misra and Puri. Indian Economy.

Introduction to Public EconomicsGovernment or Public intervention: Circular

Flow of Income

Government as the provider of goods and services: Health, education, defence, environment, infrastructures, etc.

Government as the framer of the rules and regulation: Legal structure and property rights, environmental regulation and protection of natural resources, safety regulations, employment regulations, etc.

Introduction to Public Economics

Government ensuring a stable economic environment: Budget/Fiscal Deficit, Deficit Financing

Government financing its activities with taxation: and this affects the agents’ decisions on labour demand and supply and on consumption.

Nature and scope of public economicsRole of the government in market

economies, the rationale of its intervention and the economic and social effects in terms of the efficiency and equity trade offs.

When should the government intervene in the economy?

How should the government intervene?What are the effects of public intervention? How social choices are made?

When should the government intervene in the economy?

The public sector has different roles in market economies:

Allocation of resources (efficiency goal)

Income (re)Distribution (equity goal)Stabilisation for the economic cycle

Allocation role (efficiency)

The ALLOCATION ROLE is to provide efficiently goods and services when the market is not able to produce them efficiently (market failures) through:

The production of public goods or the public financing of private provision: i.e. all those goods and services which are not produced (or would be produced inefficiently) by the market, due to market failures;

The regulation of market activities to support market competition (property rights, legal system, restrictions )

Taxes and subsidies which change the market price of goods/services

Redistributive roleThe aim is to foster equity correcting the

distribution of resources resulting from market mechanisms by shifting resources from some groups in society to others and/or by changing initial endowments through:

Monetary transfers (such as welfare benefits to support the income of the poor or the unemployed)

Transfers in kind (provisions of public services such as education, health services, social services)

Taxes/subsidies (for example with progressive taxation or exemptions)

Stabilisation roleSmoothing over the business cycle and external shocks, supporting full employment and controlling inflation through:

Fiscal policy (transfers and taxation, automatic stabilizers, public expenditures)

Support to productive activities

The analysis of government failures

Government failures occur due to:Limited informationLimited control on private markets

responses to public interventionLimited control over the public

bureaucracyLimitations imposed by the political

process

What are the effects of public interventionNeed to consider direct and indirect effects of

public intervention on individuals and markets:

Direct effects are those expected assuming that the behaviour of economic agents do not change as a consequence of government intervention

Indirect effects are those that arise because agents change their behaviour in response of the intervention (for example increasing taxation may reduce labour supply)

Difficult to measure impacts and especially to establish causation (see Gruber ch.3 if interested)

How decisions are taken? The analysis of social choices

Political economy studies how the political decision making process produces decisions that affect individuals and the economy

This part of public economics analyses how socially desirable goals are chosen.

Socially desirable goals relate to: - the capacity to support socio-economic growth - the capacity to guarantee adequate living

conditions to citizens - the capacity to guarantee equality in opportunities

for all

Key economic questions in public economics

Efficiency: What is produced, how it is produced and how much it is

produced (public vs private goods/services): given available resources make the pie as large as possible

Equity For whom it should be produced and who should pay for

it: distribute the pie in the most equitable way How are decisions taken?

Trade offs: an efficient outcome could be not equitable an equitable outcome could be inefficient