Goal of Public Finance vs. Private Economy.
Public:
are in the interest of the entirety (of the state); politically determined; as far as possible realization of the economic principle.
Private:
are in the interest of the individual; subjective; profit maximizing as much as possible
Means of PF vs. Private Economy
Public:
Compulsory revenues, fees, contributions, public credits
Private:
Equity, debts loans from the public and
private sector
Risk of PF vs. Private Economy
Public:
Entirety of taxpayers and entirety of citizens, limitedrecourse liability of administration.
Private:
for the individual economic agent (individual/organization/business)
What is the definition of the Free Rider Problem
The free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods, or services of a communal nature do not pay for them or under-pay.
Examples of Socially Prefered Behaviour
If participants in the traffic do not oblige to certain rules, the police will penalize certain behavior.
This can include direct costs such as penalty fees or withdrawal of driving permits. Both intervention cause a decrease in utilities for the individuals.
Another example is shoplifting. The thrill of stealing and the reward caused by the adrenalin and the item for free increase the individual utility but the risk of being caught and the
penalty decrease the expected utility.
Problem with Pure Public Goods
- Everyone maximizes their extraction
- Everyone minimizes their input
The public resource is overused and
disappears.
Problem in the case of Common Goods
- Everyone maximizes their extraction
- Everyone minimizes their input
The public resource is overused and
disappears.
Solutions to the problem of Public and Common goods
- Coase Theorem
The distribution of property rights
eliminates the danger of free riders (Attention now no longer a common good).
- Extraction
- Investment (Maintenance)
Disadvantage: The individual areas are
too small to recover. Fewer grazing
animals need to be kept than in the case
of collective use.
->Loss of efficiency
Different Types of goods
- Private (excludable and Rivalry)
- Club Goods (excludable but no rivalry)
- Impure Goods (not excludable but Rivalry)
- Pure Public (not excludable & no rivalry )
Market failure occurs, when the market does not provide an optimal allocation. How does this happen?
- If the individuals optimize for themselves, but the overall optimum consequently decreases.
- The opportunity of free riding
- External effects
Alternative reasons for market failure are:
* Incomplete Information
* Monopoly/Oligopoly
* Lack of market participants
* Lack of property rights and law enforcement
* Adverse selection
How might the Government Intervene?
- Tax or subsidies
-Restrict or Mandate sale or Purchase
Explain how Tax and Subsidies Work
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 underproduced
Explain how Quotas and Mandates Work
- Quotas restrict private sale of goods that are overproduced.
- Mandates require private purchase of goods that are underproduced.
Explain what Public Provision and Public Financing of private Provision is.
Public Provision
* The government can provide the good directly.
Public Financing of Private Provision
* Governments pay; private companies produce
4 Questions of Public Finance
0.Why do we need efficient markets?
1.When should the government intervene in the economy?
2.How might the government intervene?
3.What is the effect of those interventions on economic outcomes?
4.Why do governments choose to intervene in the way that they do?
Effects of Interventions on Economic
Outcomes
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. - Indirect effects: The effects of government intervention that arise only because individuals change their
behavior in response to the interventions.
Why do governments choose to intervene the
way that they do?
Governments do not always choose efficient or socially desirable outcomes.
- Governments face enormous challenges in figuring out what the public wants and how to choose policies
that match those wants. - Political economy: The theory of how the political process produces decisions that affect individuals and
the economy
