Why study public finance

Why study public finance

Public finance is the study of the role of the gvernment in the economy (Gruber,2010). This is a very broad defnition. This study involves answering the four questions of public finance ;

1.      when should the government intervene in the economy?

Market failure, the first motivation for government involvement in the economy is the existence of market failures. Problems that cause a market economy to deliver an outcome that does not maximize efficiency

Retribution, the second reason for government intervention is redistribution. The shifting of resources from some groups in society to others.

2.      How might the government intervene?

Tax or subsidize private sale or purchase one way that the government can try to address failures in the private market is to use the price mechanism, whereby government policy is used to change the price of a good in one of two ways.

Taxes. Through taxes, which raise the price for private sales or purchases of goods that are overproduced.

Subsidies. Through subsidies, which lower the price for private sales or urchase of goods that are underproduced.

3.      How might the government intervene?

·         Restrict or mandate private sale or purchase

Alternatively, the government can directly restrict private sale or purchase of goods that are overproduced, or mandate private purchase of goods that are underproduced and force individuals to buy that good.

·         Public provision

Another alternative is to have the government provide the good directly, in order to potentially attain the level of consumption that maximizes social welfare.

·         Public financing of private provision

Finally, governments may want to influence the level of consumption but may not want to directly involve themselves in the privision of a good. In such cases, the government can finance private entities to provide the desired level of provision.

4.      What is the effect of those interventions on economic outcomes?

In assessing the effects of government interventions, policy makers must keep in mind that any policy has 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 the interventions.

·         Indirect effects, the effects of government interventions that arise only because individuals change their behavior in response to the interventions.

5.      Why do governments choose to intervene in the way that they do?

Political economy, the theory of how the political process produces decisions that effect individuals and the economy.