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Public Sector Economics
Externalities: Problem and Solutions
Public Sector Economics 1
, Understanding the fundamentals
Understanding the fundamentals
Why is government such a important:
What is government a budget surplus
What is budget deficit
“The debt measures the accumulation of past deficits over time” meaning
These deficits must be financed by borrowing from either
citizens of
the local/ national area, or by borrowing from citizens of
other areas /
nations
Public Sector Economics 2
, Unpacking the basic questions of the public economy
What are the 4 fundamental questions of public economics:
1. When should the government intervene in the economy?
2. How might the government intervene?
3. What is the effect of those interventions on economic outcomes?
4. Why do governments choose to intervene in the way that they do?
When should government Intervene: Understood through
fundamental theorems of Welfare in economics.
1st Fundamental Theorem of Welfare Economics
2nd Fundamental Theorem of Economics:
Society can attain any efficient outcome by suitably
redistributing resources among individuals and then
allowing them to freely trade
How does one define Social welfare
What is Redistribution
What is the Equity - efficiency trade off
Public Sector Economics 3
, 💡 the choice society must make between the total size of the economic
pie and its distribution among individuals
How might government intervene
Tax/Subsidise Private Sale or Purchase
Restrict/Mandate Private Sale or Purchase:
Quotas restrict private sale of goods that are overproduced. Mandates require
private purchase of goods that are underproduced
Public provision
Public Financing of Private Provision
The effect of alternative interventions
inventions have a direct and indirect effect
Direct Effect
the effects of government interventions that would be predicted if
individuals did not change their behaviour in response to their interventions.
E.g. Cost of providing health insurance to 84% uninsured in SA
Indirect Effect
The effects of government intervention that arise only because
individuals change their behaviour in response to the interventions
E.g. If the 16% with private health insurance drop their private coverage, how
does that affect the cost?
Why do governments do what they do
Governments do not always choose efficient or socially desirable outcomes •
Governments face enormous challenges in figuring out what the public wants
and
how to choose policies that match those wants • Political economy: The
theory of how the political process produces decisions that
affect individuals and the economy
Public Sector Economics 4
Public Sector Economics
Externalities: Problem and Solutions
Public Sector Economics 1
, Understanding the fundamentals
Understanding the fundamentals
Why is government such a important:
What is government a budget surplus
What is budget deficit
“The debt measures the accumulation of past deficits over time” meaning
These deficits must be financed by borrowing from either
citizens of
the local/ national area, or by borrowing from citizens of
other areas /
nations
Public Sector Economics 2
, Unpacking the basic questions of the public economy
What are the 4 fundamental questions of public economics:
1. When should the government intervene in the economy?
2. How might the government intervene?
3. What is the effect of those interventions on economic outcomes?
4. Why do governments choose to intervene in the way that they do?
When should government Intervene: Understood through
fundamental theorems of Welfare in economics.
1st Fundamental Theorem of Welfare Economics
2nd Fundamental Theorem of Economics:
Society can attain any efficient outcome by suitably
redistributing resources among individuals and then
allowing them to freely trade
How does one define Social welfare
What is Redistribution
What is the Equity - efficiency trade off
Public Sector Economics 3
, 💡 the choice society must make between the total size of the economic
pie and its distribution among individuals
How might government intervene
Tax/Subsidise Private Sale or Purchase
Restrict/Mandate Private Sale or Purchase:
Quotas restrict private sale of goods that are overproduced. Mandates require
private purchase of goods that are underproduced
Public provision
Public Financing of Private Provision
The effect of alternative interventions
inventions have a direct and indirect effect
Direct Effect
the effects of government interventions that would be predicted if
individuals did not change their behaviour in response to their interventions.
E.g. Cost of providing health insurance to 84% uninsured in SA
Indirect Effect
The effects of government intervention that arise only because
individuals change their behaviour in response to the interventions
E.g. If the 16% with private health insurance drop their private coverage, how
does that affect the cost?
Why do governments do what they do
Governments do not always choose efficient or socially desirable outcomes •
Governments face enormous challenges in figuring out what the public wants
and
how to choose policies that match those wants • Political economy: The
theory of how the political process produces decisions that
affect individuals and the economy
Public Sector Economics 4
