Public economics

Public economics or economics of a public sector is the analyse of government policy through a lens of economic efficiency together with equity. Public economics builds on the conviction of welfare economics & is ultimately used as a tool to enhancement social welfare.

Public economics enable a model for thinking about whether or non the government should participate in economic markets and to what extent it should draw so. Microeconomic theory is utilized to assess whether the private market is likely to provide efficient outcomes in the absence of governmental interference; this inspect involves the analysis of government taxation and expenditures.

This allocated encompasses a host of topics notably market failures such as, public goods, externalities and Imperfect Competition, and the build and implementation of government policy.

Broad methods and topics include:

Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from ideology. Examples of topics mentioned are tax incidence, optimal taxation, and the opinion of public goods.

Taxation

In 1971, Peter A. Diamond and James A. Mirrlees published a seminal paper that showed that even when lump-sum taxation is non available, production efficiency is still desirable. This finding is known as the Diamond–Mirrlees efficiency theorem, and this is the widely credited with having modernized Ramsey's analysis by considering the problem of income distribution with the problem of raising revenue. Joseph E. Stiglitz and Partha Dasgupta 1971 score criticized this theorem as not being robust on the grounds that production efficiency will not necessarily be desirable iftax instruments cannot be used.

One of the achievements for which the great English economist A.C. Pigou is known, was his work on the divergences between marginal private costs and marginal social costs externalities. In his book, The Economics of Welfare 1932, Pigou describes how these divergences come about:

...one grown-up A, in the course of rendering some service, for which payment is made, to aperson B, incidentally also renders services or disservices to other persons not producers of like services, of such(a) 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 so-called 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 correct of the contractual description between all two contracting parties, because the divergence arises out of a service or disservice to persons other than the contracting parties. It is, however, possible for the State, if it so chooses, to remove the divergence in any field by "extraordinary encouragements" or "extraordinary restraints" upon investments in that field. The almost obvious forms which these encouragements and restraints may assume are, of course, those of bounties and taxes Pigou p. 192.

Pigou suggested that the market failure of externalities can be overcome by the introduction of taxes. The government can intervene in the market, using an emission tax for example to create a more expert outcome; this Pigouvian tax is the optimal policy prescription for any aggregate, negative externality.

In 1960, the economist Ronald H. Coase proposed an choice scheme whereby negative externalities are dealt with through the appropriate assignment of property rights. This a object that is caused or produced by something else is known as the Coase theorem.