Public economics

From Wikipedia, the free encyclopedia

Public economics studies the government and how its policies affect the economy and society. It considers how the choices of the government are made and how they can improve or hinder economic efficiency. Public economics also investigates the extent to which it is possible for the government to influence the distribution of income and wealth and whether this is desirable. To undertake these tasks public economics draws on influences from many areas of economics. This is reflected in the diversity of its subject matter which ranges from the traditional study of the effects of taxation to public-choice explanations of the functioning of government.

The study of public economics has a long tradition. It developed out of the original political economy of Mill and Ricardo, through the public finance tradition of Musgrave into the optimal policy analysis of Diamond and Mirrlees, and has now returned to its roots with the development of the new political economy. From the inception of economics as a scientific discipline, public economics has always been one of its core branches. The explanation for why it has always been so central is the foundation that it provides for practical policy analysis. This has always been the motivation of public economists, even if the issues studied and the analytical methods employed have evolved over time.

In the broadest interpretation, public economics is the study of economic efficiency, distribution, and government economic policy. The subject encompasses topics as diverse as responses to market failure due to the existence of externalities, the motives for tax evasion, and the explanation of bureaucratic decision-making. In order to reach into all of these areas, public economics has developed from its initial narrow focus upon the collection and spending of government revenues, to its present concern with every aspect of government interaction with the economy. Public economics attempts to understand both how the government makes decisions and what decisions it should make.

To understand how the government makes decisions it is necessary to investigate the motives of the decision-makers within government, how the decision-makers are chosen and how they are influenced by outside parties. Determining what decisions should be made involves studying the effects of the alternative policies that are available and evaluating the outcomes to which they lead. These aspects are interwoven throughout public economics.