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Public economics (or economics of the public sector) is the study of economic issues concerning the public sector (including government) and its interface with the private sector (including households, businesses, and markets) in a mixed economy. While much of economics is based on how markets work, public economics considers the functioning of government and its role and scope in promoting economic well-being.

Broad methods and topics include:

• analysis and design of public policy^[1][2]
• public-finance theory and its application
• distributional effects of taxation and government expenditures
• analysis of market failure and government failure.^[3]

Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from ideology. Examples of topics covered are tax incidence, optimal taxation, the theory of public goods.^[4][5]

Contents 1 Markets and governments efficiency and failure 1.1 Natural monopoly 1.2 Information asymmetry 1.3 Public good 1.4 Externality 1.5 Incomplete markets 1.6 Macroeconomic instability 2 Public expenditure 2.1 Public goods 2.2 Public choice and the political process 2.3 Externalities and government policy 3 Particular sectors 3.1 Health care 3.2 Defence and technology 3.3 Social security 3.4 Welfare and employment 3.5 Education 3.6 Regulated markets 3.7 Emergency and local services 4 Public finance and tax 5 See also 6 Notes 7 References 8 External links

[edit] Markets and governments efficiency and failure

[edit] Natural monopoly

• John Stuart Mill

[edit] Information asymmetry

• Joan Robinson

• Herbert Simon and bounded rationality

• "As Bruce Greenwald and I have shown, whenever information is imperfect - that is, always - markets are inefficient; hence the need for government action."^[6]

[edit] Public good

A public good has the feature that the marginal cost of an additional individual enjoying it is zero. Examples include an army, street lighting, radio signals or information. If there is an army defending one person in a country, a street lamp for one person, a radio signal for one person, then it is with no extra cost that two or more people use the service. For information, whose character as a public good was emphasised by Joseph Stiglitz, an old aphorism of philosopher Bertrand Russell holds true,

"If I have one apple and you have one apple and we exchange apples, we both have one apple. But if you have an idea and I have an idea and we exchange ideas, then we both have two."

The problem of the public good is that if people can use the good or service at the same time and cannot be excluded from its use (which with a cost they sometimes can, e.g. encoding a Wifi signal with a password) then people can "free-ride" on its use. Consumers will not be contributing to the costs of production. Because producers cannot recoup enough expenses, there will be an underproduction of public goods. There is therefore a role for state intervention. The government through taxation can get all people to contribute.^[7][8]

[edit] Externality

• Ronald Coase, "The Problem of Social Cost", 1960. Journal of Law and Economics

[edit] Incomplete markets

• George Akerlof, "The Market for Lemons", 1970.

[edit] Macroeconomic instability

[edit] Public expenditure

[edit] Public goods

• Characteristics

Public goods are [non-excludable] and [non-rivaled]. Something is non-excludable if its use is cannot be limited to a certain group of people. For example, since one cannot prevent people from viewing a firework display it is non-excludable. Something is non-rivaled if one person's consumption of it does not deprive another person, again (to a point) a firework display is non-rivaled - since one person watching a firework display does not prevent another person from doing so.

• The demand for pure public goods
• Efficient output of a pure public good
• The free rider problem

[edit] Public choice and the political process

• Arrow's impossibility theorem
• Public choice theory
• Right-financing

[edit] Externalities and government policy

• Internalization of externalities
• The Coase Theorem. The Coase theorem states that when trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.

[edit] Particular sectors

[edit] Health care

[edit] Defence and technology

[edit] Social security

[edit] Welfare and employment

[edit] Education

[edit] Regulated markets

[edit] Emergency and local services

[edit] Public finance and tax

[edit] See also

[edit] Notes

[edit] References

• Atkinson, Anthony B., and Joseph E. Stiglitz, 1980. Lectures in Public Economics, McGraw-Hill
• Auerbach, Alan J., and Martin S. Feldstein, ed. Handbook of Public Economics. Elsevier.

1985, v. 1. Description.

1987, v. 2. Description.

2002. v. 3. Description.

2007. v. 4. Description.

• Barr, Nicholas, 2004. Economics of the Welfare State, 4th ed., Oxford University Press
• Haveman, Robert 1976. The Economics of the Public Sector.
• Kolm, Serge-Christophe, 1987. "public economics," The New Palgrave: A Dictionary of Economics, v. 3, pp. 1047-55.
• Feldstein, Martin S., and Robert P. Inman, ed., 1977. The Economics of Public Services. Palgrave McMillan.
• Musgrave, Richard A., 1959. The Theory of Public Finance: A Study in Political Economy.
• Stigler, George J. and Paul A. Samuelson, 1963. "A Dialogue on the Proper Economic Role of the State." Selected Papers, No.7. Chicago: University of Chicago Graduate School of Business. Samuelson portion reprinted in The Collected Scientific Papers of Paul A. Samuelson, 1966, MIT Press. v. II, ch. 107, pp. 1419--1428.
• Stiglitz, Joseph E., 1994. 'Rethinking the Economic Role of the State: Publicly Provided Private Goods', pp. 19-47; Stiglitz focuses on the US systems of social security, health care and education
• _____, 2000. Economics of the Public Sector, 3rd ed., Norton Press
• _____, 2008. 'Government Failure vs. Market Failure: Principles of Regulation'
• Tinbergen, Jan, 1958. On the Theory of Economic Policy.

[edit] External links

• NBER papers in Public economics
• Journal of Public Economics

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