1. CHAPTER 1: Why Study Public Finance?

2. Public Finance VS Public Financial Management
Public finance: The study of the role of the government in the economy. This includes what kind of services should the government provide? Should we tax our citizens? What kind of activities should be taxed and which ones should be exempted?
Budgeting & Public financial management: is the science that study how the government administers its budget and resources. The field includes the different budgetary theories, the techniques of preparing the budget, the budgetary cycle, and the politics involved in the budgetary process.

3. The Four Questions of Public Finance
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?

4. When the Government Should Intervene in the Economy 1
Economics generally presumes that markets deliver efficient outcomes, so why should government do anything?
The primary motive for government intervention is therefore market failure.
Market failure: A problem that causes the market economy to deliver an outcome that does not maximize efficiency. Externalities and public goods are both examples of market failures.
Externalities are one example of a market failure.
Externality: arise whenever the actions of one party make another party worse or better off, yet the first party neither bears the costs nor receives the benefits of doing so.

5. When the Government Should Intervene in the Economy 2
A good example of market failure is when an individual chooses not to get a flu shot, which increases the risk of both himself and others getting the flu. The same example applies on whether should we require people to be vaccinated or not.
When deciding whether to get a flu shot, the individual considers the cost only to himself, not to others.
This is an example of a negative externality, whereby the man’s decision imposes on others costs that he does not bear.

6. APPLICATION 1: Modern Measles Epidemic
Measles vaccine was introduced in 1963, and measles cases had become relatively rare in the United States by the 1980s.
1989−1991: Huge resurgence in measles.
This outbreak resulted from very low immunization rates among disadvantaged inner-city youths.
Unimmunized children imposed a negative externality on other children.

7. APPLICATION 2: Modern Measles Epidemic
The federal government responded to this health crisis in the early 1990s:
Encouraged parents to immunize their children.
Paid for the vaccines for low-income families.
Impressive results:
Immunization rates never higher than 70% prior to outbreak.
Rose to 90% by 1995.
Government intervention clearly reduced this negative externality.

8. APPLICATION 3: Modern Measles Epidemic
In 2014, there were 644 cases.
The reason was the refusal of a large number of parents to immunize their children due to the now discredited “link” between vaccinations and autism.
The “anti-vaccine” movement has taken root, resulting in large pockets of nonimmunized children in some areas.
Does government policy need to go further and require children to be vaccinated?

9. When Should the Government Intervene in the Economy?
Even if the market is well functioning, an efficient outcome is not necessarily socially desirable.
Redistribution is a second reason for government intervention. Governments redistribute resources in order to achieve equity in the society.
Redistribution: The shifting of resources from some groups in society to others.
Redistribution usually entails efficiency loss because it will probably push some people to change their behavior.
This leads to the equity–efficiency trade-off.

10. How the Government Might Intervene 1
Tax or Subsidize Private Sale or Purchase
Use the price mechanism, changing the price of a good to encourage or discourage use.
Taxes raise the price for private sales or purchases of goods that are overproduced.
Subsidies lower the price for private sales or purchases of goods that are under produced. Subsidies can be thought of as negative taxes.

11. How the Government Might Intervene 2
Restrict or Mandate Private Sale or Purchase
Quotas restrict private sale of goods that are overproduced.
Mandates require private purchase of goods that are under produced. Example: requiring car insurance on all cars.
Public Provision
The government can provide the good directly.
Public Financing of Private Provision
Governments pay; private companies produce.

12. What Are the Effects of Interventions on Economic Outcomes?
Interventions have direct and indirect effects.
Direct effects: The effects of government interventions that would be predicted if individuals did not change their behavior in response to their interventions.
With 49 million uninsured, providing universal health insurance covers 49 million people.
Indirect effects: The effects of government intervention that arise only because individuals change their behavior in response to the interventions.
If people drop private coverage, many more people may end up covered by the public plan.

13. Why Do Governments Choose to Intervene in the Way That They Do?
As public administration and policy students, we must recognize that we do not live in a perfect world where governments are applying the things we learn from books 100%.
Governments do not always choose efficient or socially desirable outcomes.
Governments face big challenges in figuring out what the public wants and how to choose policies that match those wants.
So government might end up taking actions that satisfy their citizens, which might not be the most efficient or optimal option.

14. Facts on Government in the United States and Around the World
The government is a huge part of the economy.
Government spending represents a large sector of the economy in the United States and around the world.
This spending is financed with taxes, natural resource revenues (like oil and natural gas), or with debt, and these affect every aspect of the economy.
Many sectors of the economy are also directly affected by government’s regulation.

15. Spending, Taxes, Deficits, and Debts
Government have a budget just like households do. However, governmental budgets are more complicated.
If revenues exceed spending, there is a budget surplus.
If revenues fall short of spending, there is a budget deficit.
A balanced budget is one that has revenues that equal its spending
Each dollar of government deficit adds to the stock of government debt. That is, the deficit measures the year-to-year shortfall of revenues relative to spending.
The debt measures the accumulation of past deficits over time. It is amount that a government owes to those who have loaned it money.
This government debt must be financed by borrowing from either citizens/banks of one’s own local or national area or citizens/banks of other areas or other nations.

16. Distribution of Spending
Public goods: Goods for which the investment of any one individual benefits everyone in a larger group. Public goods are another example of a market failure. Public goods are non- excludable and non-rivalrous.
Non-excludable: means that you cannot exclude nonpaying customers from using the good.
Non-rivalrous: means that your consumption of the good does not affect the consumption of others to the same good.
Examples of public goods: Defense spending, lighthouses, street lighting.
Social insurance programs: Government provision of insurance against adverse events to address failures in the private insurance market.
Example: Health insurance and social security.

17. Regulatory Role of the Government
The governments around the world regulates a wide range of economic and social activities.
The industries of food, cosmetics, drugs, and medical devices.
Regulations of workplace safety.
Regulations on radio and television.
Government regulations on pollution of air, water, and food supplies.

18. Conclusion
Government plays a central role in the lives of all citizens.
There is ongoing disagreement about whether that role should expand, stay the same, or contract.
The existence of the government is very important for the economy.