Public economics
Microeconomic theory is utilized to assess whether the private market is likely to provide efficient outcomes in the absence of governmental interference; this study involves the analysis of government taxation and expenditures.
This subject encompasses a host of topics notably market failures such as, public goods, externalities and Imperfect Competition, and the creation and implementation of government policy.
[19] Some examples of government intervention are providing pure public goods such as defense, regulating negative externalities such as pollution and addressing imperfect market conditions such as asymmetric information.
Due to the two unique properties that public goods exhibit, being non-rivalrous & non-excludable, it is unlikely that without intervention markets will produce the efficient amount.
[23] Pigou describes as positive externalities, examples such as resources invested in private parks that improve the surrounding air, and scientific research from which discoveries of high practical utility often grow.
[24] Some notable imperfections include: In its essence, the role of government is to address the issues that arise from these market failures and decide the optimal degree of intervention necessary.
[19] In 1971, Peter A. Diamond and James A. Mirrlees published a seminal paper that showed that even when lump-sum taxation is not available, production efficiency is still desirable.
Joseph E. Stiglitz and Partha Dasgupta (1971) have criticized this theorem as not being robust on the grounds that production efficiency will not necessarily be desirable if certain tax instruments cannot be used.
In his book, The Economics of Welfare (1932), Pigou describes how these divergences come about: ...one person A, in the course of rendering some service, for which payment is made, to a second person B, incidentally also renders services or disservices to other persons (not producers of like services), of such a sort that payment cannot be extracted from the benefited parties or compensation enforced on behalf of the injured parties (Pigou p. 183).In particular, Pigou is known for his advocacy of what are known as corrective taxes, or Pigouvian taxes: It is plain that divergences between private and social net product of the kinds we have so far been considering cannot, like divergences due to tenancy laws, be mitigated by a modification of the contractual relation between any two contracting parties, because the divergence arises out of a service or disservice to persons other than the contracting parties.
In subsequent years, several other important works appeared: Jack Hirshleifer, James DeHaven, and Jerome W. Milliman published a volume entitled Water Supply: Economics, Technology, and Policy (1960); and a group of Harvard scholars including Robert Dorfman, Stephen Marglin, and others published Design of Water-Resource Systems: New Techniques for Relating Economic Objectives, Engineering Analysis, and Governmental Planning (1962).
An important part of collective decision making in a democracy, and thus public economics, is aggregating preferences of all individuals in society.
This process can be perverted in a number of ways including lobbying, media biases, political advertising, and special interest groups.
One of the central components of social choice theory is that government actions result from individuals acting out of rational self-interest within the confines of the “rules of the game”.
[31] One of the pioneers in this field was the American economist James Buchanan, who emphasized the role of the constitution in setting out the rules of the game.
