Public Finance: Theory and Policy
ECON F341
Vivekananda Mukherjee
Lecture 1
Introduction
• Public Finance: How to finance the activities of a government?
- Which activities?
……..what activities does a government perform in an economy?
……..what are the activities it should do and what is the best way to
perform an activity (policy)?
How to finance the activities of a government?
Alternative nomenclature
• Public Economics
• Economics of Government
• Economics of Public Sector
Importance of studying the government
• There is no economy in the World without government
• There is a positive correlation between the size of a government in an economy
and the level of development of the economy
Source: Besley and Persson (2011)
INDIA: TREND IN TOTAL EXPENDITURE (1985-2011)
35
30
TOTAL EXPENDITURE (Centre
& States combined) % of GDP
20
15
Линейная (TOTAL
EXPENDITURE (Centre & States
combined) % of GDP)
10
5
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
0
1985-86
% OF GDP
25
YEARS
SOURCE : Economic Survey (several years), and Indian Public Finance Statistics 2012-13
Theoretical foundation of a government
• Objectives of a government
- maintaining efficiency in an economy
- ensuring socially desired distribution of available resources
Tools: legal capacity and fiscal/extraction capacity
Do we need a government to achieve efficiency in an
economy?
Answer: No.
……..if the economy satisfies certain conditions.
What are these conditions?
• Perfectly competitive markets
• No externalities
• No asymmetry of information
…….a government is needed for the achievement of efficiency if any of
the above conditions are violated.