1. Field of Public Finance Anderson Chapter 1

2. Copyright © by Houghton Mifflin Company. All rights reserved. 2 Definition Public finance is field of study in economics that is concerned with the financial activities of the public sector—that part of the economy controlled by governments. Richard Musgrave definition: “The complex of problems that center around the revenue-expenditure process of government is referred to traditionally as public finance.”

3. Copyright © by Houghton Mifflin Company. All rights reserved. 3 Questions We want to know: What activities are sensible for governments to carry on, The right quantities of public goods and services that should be provided, And the best method of paying for those services.

4. Copyright © by Houghton Mifflin Company. All rights reserved. 4 Levels of Government We care about public sector activity at all levels: Federal State Local

5. Copyright © by Houghton Mifflin Company. All rights reserved. 5 Explanation of Public Economics From the Handbook of Public Economics We attempt to explain why government behaves as it does, how its behavior influences the behavior of private firms and households, and what the welfare effects of such changes in behavior are. Notice the why, how, and what aspects of this statement.

6. Copyright © by Houghton Mifflin Company. All rights reserved. 6 J. M. Keynes on the Problems to be Solved “The political problem of mankind is to combine three things: economic efficiency, social justice, individual liberty.” Tradeoffs between efficiency and distribution

7. Copyright © by Houghton Mifflin Company. All rights reserved. 7 Musgrave’s Economic Roles of Government Allocation Distribution Stabilization

8. Copyright © by Houghton Mifflin Company. All rights reserved. 8 Allocation Role of Government Allocate resources in public sector. Involves making decisions on public expenditure programs to provide the public goods and services citizens desire at tax/fee rates they are willing to pay.

9. Copyright © by Houghton Mifflin Company. All rights reserved. 9 Distribution Role of Government Given output of economy (measured in GDP or other terms), the question is who receives the benefit of that production? If the distribution provided by the market mechanism is unacceptable, there is a role for government to redistribute income or wealth.

10. Copyright © by Houghton Mifflin Company. All rights reserved. 10 Stabilization Role of Government Stabilize output, employment, and prices. Purview of macroeconomics course, hence we will not put emphasis on this role in this course.