Public economics is often defined as the economic study of the public sector. Contemporary public economics draws from two traditions, public finance and public choice. The older public finance tradition of economists such as Arthur Pigou and Richard Musgrave views government as essentially benevolent. The roles of government are, first, to raise funds and provide basic public goods, such as national defense; second, to correct market failure, namely the failure of markets to achieve efficiency in the presence of externalities, public goods, and imperfect information; and third, to improve equity. Equity is viewed primarily in terms of income distribution, and so more equity is generally associated with less inequality in the distribution of income.
Unlike many other areas of mainstream economics, much of the public finance literature is explicitly normative. For example, optimal tax theory prescribes how governments should raise revenue so as to achieve both equity and efficiency. The American Economic Association’s Journal of Economic Literature classification system reflects the public finance tradition, categorizing the subfields of public economics as “structure and scope of government; taxation, subsidies and revenues; fiscal policies and behaviour of economic agents; publicly provided goods; national government expenditures and related policies; national budget, deficit and debt; state and local government; intergovernmental relations” (American Economics Association 2006, pp. 1157-1158).
The public choice tradition, associated with the economist James Buchanan, sees government as a collection of rational, self-interested agents. These agents trade and exchange in the public sector, just as firms and consumers do in private markets. Central concerns of public choice include the behavior of bureaucracies and the design of political institutions, including constitutional rules. Although public choice is an avowedly positive research program, it has normative implications. For example, a positive statement that bureaucrats attempt to maximize the size of their budgets thereby extracting all benefits from government activity has implications for how large governments should be. Public choice has had a major influence on current political science research, and this intersection between economics and politics is frequently referred to as political economy.
In the twenty-first century the borders between public economics and other areas of economics have blurred, as has the division between the public finance and public choice traditions. Since government impacts all aspects of the economy, economists in other fields also study the public sector. For example, labor economists study the effects of taxation and income support programs on labor supply, environmental economists study the problem of externalities, and so on. In the later part of the twentieth century the size of government in industrialized countries stabilized or shrank, while economists became aware that governments, like markets, could fail. Public economists began to study nongovernmental forms of collective action, for example, the private provision of public goods. The central insight of public choice, that politicians and bureaucrats are rational—and not necessarily benevolent—agents, became widely accepted. The Journal of Public Economic Theory describes the scope of contemporary public economic research in its mission statement: “public goods, local public goods, club economies, externalities, taxation, growth, public choice, social and public decision making, voting, market failure, regulation, project evaluation, equity, and political systems” (“Aims and Scope”). Public economics is no longer simply the economics of the public sector.
SEE ALSO Decision-making; Externality; Government; Political System; Public Choice Theory; Public Goods; Public Sector; Public Utilities; Regulation; State Enterprise; Taxation; Voting
American Economics Association. 2006. Journal of Economic Literature Classification System. Journal of Economic Literature 44 (4): 1157–1158. http://www.aeaweb.org/journal/jel_class_system.html#h.
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Journal of Public Economic Theory. 2006. Aims and Scope. http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/wooders/apet/mission/.
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