Lecture by Subir Maitra, Associate Professor, Department of Economics Heramba Chandra College (University of Calcutta)

1. SUBIR MAITRA
Associate Professor
DEPARTMENT OF ECONOMICS
HERAMBA CHANDRA COLLEGE
(UNIVERSITY OF CALCUTTA)
HCC/ECON/SM/VB/2016-17/LECTURE:1

2. Aim of the course
 To discuss the role of the public sector in modern
economies,
 To examine the economic rationale for government
intervention,
 To discuss the effects of government’s actions in
terms of efficiency and equity

3. Course outline (as per CU Syllabi)
 Introduction to public economics :
The nature, scope and significance of public
economics.
 Forms and Functions of Government :
Different forms of government – unitary and
federal. Tiers of government in the federal
form- Central, State, Local (Introductory
discussion with examples).

4. Course outline (as per CU Syllabi)
 Functions of Government:
Economic functions -allocation, distribution and
stabilization.
Regulatory functions of the Government and
its economic significance
 Federal Finance
Federal Finance: Different layers of the government, Inter
governmental transfer— horizontal vs. vertical equity.
Grants—merits and demerits of various types of grants
— unconditional vs. conditional grants, tied grants,
matching grants.

5. Course outline (as per CU Syllabi)
 Public Goods and Public Sector
Concept of public goods—characteristics of public goods,
national vs. local public goods, determination of provision of
public good
Externality, concept of social versus private costs and benefits,
merit goods, club goods.
Provision versus production of public goods. Market failure and
public provision.
Pricing of public goods—vertical summation
 Government Budget and Policy
Government budget and its structure – Receipts and expenditure
– concepts of current and capital account, balanced, surplus,
and deficit budgets, concept of budget deficit vs. fiscal deficit,
functional classification of budget. Concept of Revenue
Deficit.
Budget, government policy and its impact. Budget multipliers.

6. Course outline (as per CU Syllabi)
 Revenue Resources
Concept of tax, types of tax – direct tax and indirect tax, canons of
taxation, subsidy, transfer policy.
Principles of taxation -Ability to Pay principle (brief discussion),
Benefit Approach (Actual Examples)
Tax Design - introduction – truth seeking mechanism.
 Tax Structure
Effects of income tax on work effort, saving and risk bearing (just brief
ideas).
Excess burden of indirect taxes
VAT, Goods and Services Tax (pros and cons).
Non-tax revenue resources-earnings from public undertakings, interest
on loans.

7. Course outline (as per CU Syllabi)
 Distribution and Stabilization
Instruments for stabilization
Public Debt---internal and external.
Public Finance and Public Choice: The Role of State.
 Readings
1. Musgrave and Musgrave: Public Finance in Theory and
Practice (Fifth Edition).
2. H.L. Bhatia. Public Finance. (Fifteenth Revised Edition).
3. Amaresh Bagchi (ed.). Readings in Public Finance.
Oxford University Press.
4. Misra and Puri. Indian Economy.

8. Introduction to Public Economics
Government or Public intervention: Circular Flow of
Income
Government as the provider of goods and services:
Health, education, defence, environment, infrastructures,
etc.
Government as the framer of the rules and regulation:
Legal structure and property rights, environmental
regulation and protection of natural resources, safety
regulations, employment regulations, etc.

9. Introduction to Public Economics
Government ensuring a stable economic environment:
Budget/Fiscal Deficit, Deficit Financing
Government financing its activities with taxation: and
this affects the agents’ decisions on labour demand and
supply and on consumption.

10. Nature and scope of public economics
Role of the government in market
economies, the rationale of its intervention
and the economic and social effects in terms
of the efficiency and equity trade offs.
When should the government intervene in
the economy?
How should the government intervene?
What are the effects of public intervention?
How social choices are made?

11. When should the government intervene in the
economy?
The public sector has different roles in
market economies:
Allocation of resources (efficiency goal)
Income (re)Distribution (equity goal)
Stabilisation for the economic cycle

12. Allocation role (efficiency)
 The ALLOCATION ROLE is to provide efficiently goods
and services when the market is not able to produce
them efficiently (market failures) through:
 The production of public goods or the public
financing of private provision: i.e. all those goods and
services which are not produced (or would be produced
inefficiently) by the market, due to market failures;
 The regulation of market activities to support market
competition (property rights, legal system, restrictions )
 Taxes and subsidies which change the market price of
goods/services

13. Redistributive role
 The aim is to foster equity correcting the
distribution of resources resulting from market
mechanisms by shifting resources from some groups
in society to others and/or by changing initial
endowments through:
 Monetary transfers (such as welfare benefits to
support the income of the poor or the unemployed)
 Transfers in kind (provisions of public services
such as education, health services, social services)
 Taxes/subsidies (for example with progressive
taxation or exemptions)

14. Stabilisation role
Smoothing over the business cycle and
external shocks, supporting full
employment and controlling inflation
through:
Fiscal policy (transfers and taxation,
automatic stabilizers, public expenditures)
Support to productive activities

15. The analysis of government failures
Government failures occur due to:
Limited information
Limited control on private markets
responses to public intervention
Limited control over the public
bureaucracy
Limitations imposed by the political
process

16. What are the effects of public intervention
 Need to consider direct and indirect effects of public
intervention on individuals and markets:
 Direct effects are those expected assuming that the
behaviour of economic agents do not change as a
consequence of government intervention
 Indirect effects are those that arise because agents
change their behaviour in response of the intervention
(for example increasing taxation may reduce labour
supply)
 Difficult to measure impacts and especially to
establish causation (see Gruber ch.3 if interested)

17. How decisions are taken? The analysis of social
choices
 Political economy studies how the political decision
making process produces decisions that affect individuals
and the economy
 This part of public economics analyses how socially
desirable goals are chosen.
 Socially desirable goals relate to:
- the capacity to support socio-economic growth
- the capacity to guarantee adequate living conditions to
citizens
- the capacity to guarantee equality in opportunities for all

18. Key economic questions in public
economics
 Efficiency:
 What is produced, how it is produced and how much it is produced
(public vs private goods/services): given available resources make
the pie as large as possible
 Equity
 For whom it should be produced and who should pay for it:
distribute the pie in the most equitable way
 How are decisions taken?
 Trade offs:
 an efficient outcome could be not equitable
 an equitable outcome could be inefficient