introduction to public finance - aseen)li_c2.pdffour questions of public finance when should...
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Lecture 2Introduction to Public Finance
ANDREEA STOIAN, PHD
PROFESSOR OF FINANCE
DEPARTMENT OF FINANCE AND CEFIMO
BUCHAREST UNIVERSITY OF ECONOMIC STUDIES
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Why Study Public Finance?
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Role of the government in economy
CANDIDATE 1
The role of the government is notto create wealth. The role of thegovernment is to create anenvironment in which theentrepreneur is willing to takerisk and to be able to get a returnon the risk taken.
CANDIDATE 2
oSet in motion programs thathelp people go to college, buy anew house, and build theirwealth
oPlans invest in people
oInvesting more in public schoolsand expecting more in return
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The goal of Public Finance
The study of the role of thegovernment in the economy inorder to proper understand it.
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Four questions of Public Finance
WHEN should government intervene
in the economy?
HOW might the government intervene?
WHAT is the effect of those interventions in
the economy?
WHY do governments choose to intervene in the way what they do?
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WHEN?
MARKET FAILURE
Problem that causesthe market economy todeliver an outcomethat does not maximizeefficiency
REDISTRIBUTION
The shifting of resourcesfrom some groups insociety to others
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Market failure
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Market failure (I)
Peoples’ needs
Individual needs
Private goods
Market
Social needs
Public goods
Government
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Market failure (II)C
om
pet
itiv
e m
arke
t eq
uili
bri
um
Should be the most efficient outcome for society when all individuals would make ‘collective decisions’
Mar
ket
fails
in d
eliv
erin
g th
e m
ost
ef
fici
ent
ou
tco
me
to s
oci
ety
Due to choices based on ‘individual rationality’
Go
vern
men
t in
terv
ene
in a
chie
vin
g th
e m
ost
eff
icie
nt
ou
tco
me
for
the
soci
ety
By making collective decisions aiming at the ‘social welfare’
Supplementary reading: http://www.econlib.org/library/Buchanan/buchCv3c4.html#Ch. 4, Individual Rationality in Social Choice
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Redistribution
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Redistribution (I)
Distribution
Equity-Efficiency trade
off
Size
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Thomas Piketty – Capital in the Twenty-First Century
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The Regulatory Role of the GovernmentAnother critical role that government plays in all nations is that of regulating economic and social activities.
Example of the regulatory role of the government in economic activities
• Give an example!
Example of the regulatory role of the government in social activities
• Give an example!
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The Stabilization Role of the Government
Intervene in the economy in order to stimulate/reduce the activity
• Give an example!
Smoothing the business cycle
• Give an example!
Prevent large disequilibrium
• Give an example!
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HOW?
Government
Restricting or
mandating
Public provision
Public financing
and private provision
Taxes and subsidies
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WHAT?
Empirical public finance
Direct Effects: that would be predicted if individuals did not change behaviour in response
to the intervention
Indirect Effects: that arise only because individuals change
their behaviour in response to the interventions
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WHY?
Normative
• How should government intervene?
• Question concerned with how things should be done
Positive
• Why do governments do what they do?
• Question concerned with the things are the way they are
Political economy
• The theory of how the political process produces decisions that affect individuals and the economy
• Government failures
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