CHAPTER 1 INTRODUCTION

PUBLIC ECONOMICS

LÝ Hoàng Phú – MSC, CERDI - France
Faculty of International Economics, Foreign Trade University


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Course outline
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1. Introduction
2. Market Failures
3. Income Redistribution
4. Public Choice and Political Economy
5. Implication of taxation and
redistribution policies

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Public Economics
3 credits = 15 sessions
 3 credit tests
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(1) Class attendance: 10% of grade
(2) Mi term exam: 30% of grade (2 small tests)
(3) Final Exam: 60% of grade

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CHAPTER I
INTRODUCTION TO PUBLIC
ECONOMICS

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Structure of the chapter
I.
II.
III.
IV.

Object and methods to study
Four major problems of Pub Eco
Reference documents
Generality about the Government

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I. Object

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and methods to study

1, Object to study
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What is Pub Eco?

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The economic science which deal with the
government intervention in the market
economy

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It studies how decisions are made

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It analyses what decisions should be made

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2. Methods to study
a, The method of positive analysis
Positive analysis is about explaining
why there is a public sector, how
government policies are chosen and
how these policies affect the economy.
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Example: analysing effect of the corporate
tax on inward investment are examples of
positive analysis.
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2. Methods to study
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b, The method of subjective/normative analysis
Normative analysis investigates what the best
policies are, and aims to provide a guide to good
government.
Example: should the level of pensions be indexed to
average wages.

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Example: When we consider the construction of a bridge,
with the method of subjective analysis, we will find
whether there is other better solutions: ex buy barge,
ships instead of bridge…

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Q&A: True or False?
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2.

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Normative statements describe how the world is, while
positive statements prescribe how the world should be.
Positive statements are descriptive, while normative
statements are prescriptive.
Positive statements can be evaluated using data alone,
but normative statements cannot.
"Society would be better off if the welfare system were
abolished" is a normative statement, not a positive
statement.
"Other things equal, an increase in supply causes a
decrease in price" is a normative statement, not a
positive statement.

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II. THE FOUR QUESTIONS
OF PUBLIC ECONOMICS
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When should the government intervene in
the economy?

 How might the government intervene?
 What is the effect of those interventions on

economic outcomes?
 Why do governments choose to intervene in the

way that they do?
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1. When Should the Government
Intervene in the Economy?

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Normally, competitive private markets provide
“efficient” outcomes for the economy.
Generally hard to justify government intervention
in markets. But two main justifications are:
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Market failures: Problems that cause a market economy
to deliver an outcome that does not maximize efficiency.
Redistribution: The shifting of resources from some
groups in society to others.

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1. When Should the Government Intervene?

a, Efficiency
b, Equity

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Market failure: efficiency unachievable
Market failure arises when efficiency is not
achieved.
Sources of market failure:

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monopoly
public goods
externalities
asymmetric information

Market failure may justify additional government
intervention

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it must be tested whether intervention is beneficial
government cannot always improve upon the unregulated
economy

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When there is no equity:
=>Redistribution
Government intervention also motivated by

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inequality of income
inequality of opportunity
inequality of wealth.

Redistribution of resources

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alleviates these inequalities
may raise welfare

Two conflicting aims

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efficiency
equity

Optimal policy

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the correct trade-off between equity and efficiency

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2. How Might the Government Intervene?
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If the government wants to intervene in a market, there
are a number of options:
 Using the price mechanism with taxes or subsidies.
 The government can directly restrict the private
sale or purchase of goods that are overproduced.
 Mandate that either individuals or firms provide the
good.
 The government can mandate the private purchase
of goods that are under produced and force
individuals to buy that good.

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Public Provision
 The government can provide the good directly, in order to
potentially attain the level of consumption that maximizes
social welfare. Ex: the Medicare program for elderly
citizens.

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Public Financing of Private Provision
 Governments may want to influence the level of
consumption but may not want to directly involve
themselves in the provision of a good.

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Medicare prescription drug cards, where private companies
administer the drug insurance.

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3. What Are the Effects
of Alternative Interventions?
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Much of the focus of empirical public economics is
assessing the “direct” and “indirect” effects of

government actions.
Direct effects of government actions assume “no
behavioral responses” and examine the intended
consequences of those actions.
Indirect effects arise because some people change
their behavior in response to an intervention. This
is sometimes called the “law of unintended
consequences.”

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4. Why Do Governments Do What
They Do?
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Governments do not simply behave as benign actors who
intervene only because of market failure and redistribution.
Political economy: the theory of how the political
process produces decisions that affect individuals and the
economy
Tools of political economy helps us understand how
governments make public policy decisions.

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Just as market failures can lead to market inefficiency, there are a
host of government failures that lead to inappropriate government
intervention.

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Why Do Governments Do What They
Do?
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For example, substantial variation across developed
countries in health care delivery suggests efficiency
and redistribution are not the only considerations.
U.S.: Private health insurance
Canada: National public health insurance
Germany: Mandates private health coverage
U.K.: Free national health care
Thailand?

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II. Reference documents
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2.

3.

4.

5.

PGS,TS.Phạm Văn Vận, ThS. Vũ Cương, Kinh tế
công cộng, Nxb Thống kê, 2006
Joseph Stiglitz, Economics of the public sector ,
Third Edition, 2000
Jean-Jacques Laffont, Fundamentals of Public
Economics, MIT Press, 1998
Donijo Robbins, Handbook of Public Sector
Economics, Marcel Dekker/CRC Press 2004
David Schultz, Encyclopedia of Public

Administration and Public Policy, Facts On File
Inc.; 2004

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III. Generality about the Government
1.

2.

3.

The Government and major roles in
the market economy
Government’s failures when
intervention in the market economy
Generality of Government role in the
history of economic theories

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1. The Government and major roles in
the market economy
a, Definition of Government
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An organization that is the governing
authority of a political unit.

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Elected by the society, the government
regulated individual behavior in this
society (= regulator), and its activities
are for a better society.

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b, Functions of the Government
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Maintaining legal and social framework

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Stabilizing the economy

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Providing public goods and services

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Maintaining competition

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Correcting for externalities

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Redistribution income

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2, Government failure when
intervention in the market economy
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Government failure refers to situations
where allocative efficiency may have been

reduced following government intervention in
markets designed to correct market failure.

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Government failure if Asymmetric
information
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Imperfect information:
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Lack of knowledge of:

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Prices
Value
Costs
Benefits
Long term effects
Behavioural changes
External costs and benefits

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Value of producer and consumer surplus

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– all mean less than efficient allocation may result from
government intervention.

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Government failure if there is own interest
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Public Choice Theory:
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Politicians, bureaucrats and others acting on
behalf of the ‘public’ may act in their own self
interest as ‘utility maximisers’.
The ‘invisible hand’ may not work in the provision
of public goods.
“Rent seeking” and “Log rolling” - two important
concepts.

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3. Generality of Government role in

the history of economic theories
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Since XVth to XVIIth century
Since XVIIth to XXth century

Since the late of 30s to 70s of the XXth
century: J.M.Keynes
The years of 1980 of the XXth century:
the neoliberalism
Since the decade of 1990: the mixed
economy

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