M.A. FINAL ECONOMICS
PAPER IV (A)
PUBLIC ECONOMICS
WRITTEN BY
SEHBA HUSSAIN
EDITED BY
PROF.SHAKOOR KHAN
M.A. FINAL ECONOMICS
PAPER IV (A)
PUBLIC ECONOMICS
BLOCK 1
INTRODUCTION TO PUBLIC ECONOMICS
PAPER IV (A)
PUBLIC ECONOMICS
BLOCK 1
INTRODUCTION TO PUBLIC ECONOMICS
CONTENTS
Page number
Unit 1Basic concepts of public economics5
Unit 2Economic planning and development22
BLOCK 1 INTRODUCTION TO PUBLIC ECONOMICS
The block opens with introduction to public economics and related concepts. In first unit, the role of government in organized society has been discussed with the concept of mixed economy. Public sector and private sector are discussed with public private partnership. Finally the unit ended with the description on public vs. private sectors especially in context of Indian economy.
The second unit covers the aspects related to economic planning and development.
Government as an agent of economic planning will be the first area of discussion followed by public choice theory; rationale for public policy; public policy and provision of public and local goods; provision of infrastructure facilities; public policy and allocation of resources and inequalities; problems of regional imbalances and disparities and policy initiatives for balanced regional growth.
UNIT 1
BASIC CONCEPTS OF PUBLIC ECONOMICS
Objectives
After studying this unit, you should be able to understand and appreciate:
- The concept public economics
- The role of government in the society
- The approach of mixed economy
- Public sector, private sector and their linkages
- Public private partnership
Structure
1.1 Introduction
1.2 Role of government in organized society
1.3 Mixed economy
1.4 Public sector
1.5 Private sector
1.6 Public private partnership
1.7 Public vs. private sectors
1.8 Summary
1.9 Further readings
1.1 INTRODUCTION
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
- public-finance theory and its application
- distributional effects of taxation and government expenditures
- Analysis of market failure and government failure.
Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from ideology. Examples of topics covered are tax incidence, optimal taxation, and the theory of public goods.
1.1.1 Markets and governments efficiency and failure
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.
1.1.2 Public expenditure
Public goods
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
Public choice and the political process
- Arrow's impossibility theorem
- Public choice theory
- Right-financing
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.
1.1.3 Particular sectors
- Health care
- Defence and technology
- Social security
- Welfare and employment
- Education
- Regulated markets
- Emergency and local services
1.1.4 Public finance and tax
Public finance is a field of economics concerned with paying for collective or governmental activities, and with the administration and design of those activities. The field is often divided into questions of what the government or collective organizations should do or are doing, and questions of how to pay for those activities. The broader term, public economics, and the narrower term, government finance, are also often used.
1.2 ROLE OF GOVERNMENT IN THE ORGANIZED SOCIETY
Anthropologists tend to identify different types of societies differentiating them on the basis how they tend to be organized. Civilizations fall within what we would call states - a society defined by a centralized political structure and a central bureaucracy. The first literate states developed in the Near East by about 3000 BC, having evolved out of village communities within a millennium, a tiny segment of time by prehistoric standards. In the millennia that followed, state-organized societies emerged elsewhere in the Old World, in India, Greece, China, and Southeast Asia. They also developed out of village societies in Mexico and the Andes after about 1500 BC.
Food production led to major changes in human life, vastly enhancing people's ability to exploit and manipulate the natural environment. But human societies everywhere were closely adapted to their environments, living in fundamental ecological balance with their surroundings. With the emergence of state-organized societies, the pre-industrial civilizations with their dense urban populations and new social orders, human societies became more interdependent and in more constant competition for land and resources. Slowly, the world order changed until, with the emergence of regional, then global, empires, the myriad societies of the globe were linked through ties significant and insignificant in an intricate web of economic, cultural, and political interdependence.
What is a state-organized society, a "civilization?" Definitions abound in the academic literature and surround three institutions-the notion of civilization itself, and what is called a state-organized society. It's now time to look more closely at pre state and state-organized societies.
Pre-State societies are small scale societies based on the community, the band, or the village. They vary greatly in their degree of political integration. In many, the community is the largest political unit, with no centralized authority whatsoever. In others, several communities may join together for some cooperative political or social activity, but there is no permanent political authority over all of them. Still other pre-state societies are much more elaborately organized, with many communities under the overall authority of a centralized or supreme political authority, which can sometimes be a hereditary leader. However, these societies lack the highly stratified class structure and other characteristics of the state.
State-organized societies are on a large scale. All state-organized societies are autonomous political units, with many communities within their boundaries. They share a number of common features:
(1) There is a centralized political structure and a central bureaucracy that runs the state. Kin-based relationships are less important and specialization in economic and socio-political organization essentially replaces earlier forms of kin-organization. The emergence of non-kin-based relationships is a primary element of a state.
(2) There is a rigid social stratification that concentrates power in the hands of privileged elite at the head of the social pyramid. Other classes include artisans, priests, and other specialists. Most people were commoners, farmers, fisher folk, and other food producers. Slaves were the lowest of the low and below commoners.
(4) States are supported by intensified food production capable of supporting large numbers of non-food producers. Such intensification took many forms, but often involved state-organized water control and distribution systems. For example, irrigation canals were vital in Egypt and Mesopotamia, while the Aztecs of Mexico developed a huge system of swamp gardens to support more than 600,000 people.
(5) Elaborate public buildings, which served as temples, administrative centers, and dwellings for the elite are hallmarks of states (and civilizations.) Writing, or some equivalent form of record keeping, also was a essential element of dealing with the complexity of states.
States were not necessarily advantageous to everyone. Early states were societies where inequality was a reality, and where government was coercive. Government was usually controlled by a very small number of people. The elite maintained a monopoly on the use of force, and on the justice system. It was no coincidence that the rulers of many of these civilizations were perceived as having a special relationship to the gods. For example, Ancient Egyptian pharaohs were considered to be gods on earth. It was they who presided over the lavish public ceremonies that paid homage to the gods, recited the familiar chants that validated both the authority of the deities and their state. The Pharaoh was the owner of everything in Egypt in a literal sense.
Very often, social inequality was justified through elaborate fictions. For instance, the Shang rulers, who governed much of northern China 3,500 years ago, were considered intermediaries between the gods, the revered ancestors, the cosmos, and the living. They lived in isolated compounds, surrounded by a landscape of humble farming villages that has been called the "Green Circle." Shang lords and their successors maintained an elaborate fiction of their direct kin ties not only with the gods, but with the common people, who lived apart from them. In reality their authority was based on their monopoly of force to back their draconian decisions.
One of the most complex of all state-organized societies was ancient Rome, which for centuries presided over a vast empire centered on the Mediterranean Basin and extending at times far into Asia and as far as the Rhine and Danube Rivers. This was a highly centralized state, in the hands of patrician elite that controlled not only political and social life, but most of the empire's wealth as well. The elite presided over a highly ranked society of merchants, artisans, and commoners. The lowest of the low were slaves, criminals and prisoners of war, who worked war galleys, labored in state mines, and on other public works. The empire was based on a highly efficient and very productive agricultural system, supported by a complex infrastructure of merchant ships and roads that allowed the authorities to move both food and armies from one end of the empire to the other with great dispatch. This infrastructure was essential, for Rome's grain was grown not in Italy, but in outlying provinces like North Africa, Spain, and Egypt.
One of the most important things that we, as thinking beings, can ask ourselves is "What is the role of government in society?" But to answer it, we must first define government in a manner that satisfies all of us.
The thing that separates a government (or law, or the state, depending on the writer -- I am known to use all three) from any other civic or social organization is that governments may legally initiate the use of force. Nothing and nobody else may do this. Not you, not me, not the Elks, not GM, not the Southern Baptist Convention, not Greenpeace, not Trek Bicycles, not Public Citizen, not the United Auto Workers, not your neighborhood block club, not ANYBODY -- except government. Only government has this power, which is called the police power. And politics is nothing more than deciding how this power should be used. That's why, when Chairman Mao Zedong said, "All political power comes from the barrel of a gun," he was not philosophizing or speaking in abstract. He was stating a basic axiom.
Bear that in mind. Any time you elect a legislator, mayor, or other government official, you are hiring them to hold and use a gun on the people, including yourself. They may not do so directly, but anyone with the power to pass laws or write regulations has the power to decide when the police should come after you. And "you are disobeying a law" is ALWAYS reason enough.
Everything that a law demands that you do, or forbids you to do, is at gunpoint, if necessary -- at the threat of death. Perhaps not for the offense itself, but if you are stubborn enough about not accepting the penalties that government places on you for breaking its laws, you can easily find yourself under the barrel of a policeman's gun.
The defining characteristic of government IS the legal use of force. And if the use of force is legal, then it also should be just. Now, just who is the government? In unjust societies, it is whoever has the power to force the others to his will. But in democratic societies, the government is either us or our representatives acting on our behalf.
In fact, the reason that mankind ever formed governments in the first place was to protect ourselves from others using force to kill us (violating our right to life), or to make us do their will (violating our right to liberty), or to take what was ours (violating our right to property). Everybody agrees that when somebody comes to hurt or kill you, or to enslave you, or to rob you, you can defend yourself. Government is the same thing, only in groups. The point of having a government is to organize force for the defense of a group or community (be it a neighborhood, a town, a city, a state, or a nation). And the government IS us. So at what point does it become justice for the government to do by force that which it is unjust for US to do by force?
The answer is, "Never." The role of government is to defend our lives, our liberty, and our property, from those who would violate them, and to punish those who do so by making them pay us restitution. When a government limits itself to this, people are pleased with it, to the very limited extent that they have to think about it at all. And they do not care whether it is an autocracy, an oligarchy, a democracy, a despot, or a republic -- except for those who want to use the police power to compel others to do their will.
We don't care what it is that you want the government to do for you -- if you can't see yourself doing it, gun in hand, then don't ask that the government hold the gun and do it for you. It is neither our job nor that of the government to use force to stop us from being stupid, or hateful, or immoral, or discriminatory, or to help the poor, or provide medical care, or schooling, or art, or homes. It is not for you, or me, or the government, to stop people from making informed voluntary exchanges, in business, employment, housing, friendships, churches, civic organizations, or love, no matter what the circumstances.
I might be able to tolerate government intervention in those few cases where it supports a public good (and there are very few real public goods), or in the case of regulating natural monopolies (and there are few natural monopolies, and innovation often creates competition, eliminating them).
All of us look out for ourselves at all times. And almost all of us would love to be able to draw upon the resources of others without paying everything that they might demand. Throughout history, whoever has held the police power, be they few or many, has used it to benefit themselves at the expense of everyone else. When it was just a few, it was obvious and unjust. But as more and more people participate in the political process, nearly every single group has used government to benefit itself at the expense of everyone else.
And it's hardly surprising that they do so. After all, everyone else has done it. The group getting the benefit gains enormously, so it is worth it to them to lobby hard for it. Everyone else loses only a little, so it's worth little to fight it. And so we lose a little here to Steel, a little there to Medicine, a little elsewhere for the children, and on and on and on until it adds up to half of what we make. And all the while, using the government to steal gains more and more legitimacy, and people wind up having either to lose their moral outrage at violation of rights, or else lose their respect for all laws, including those that protect rights.