Government as an Economic Unit Week 2

The Subject of Public Finance It is concern with Economic of public sectorsEconomic of public sectors Or The public economyThe public economy studies the economic activity of government as unitPublic Finance: studies the economic activity of government as unit.

Government as a Unit Analogous to person Analyzing economic activity of an individual: First StageFirst Stage: 1- How an individual earn an income and how much it is? 2-How income is spent? Second StageSecond Stage: How an individual makes decisions or choices among the possible alternative? For Example: 1-Why work at one job instead of another? 2- What criteria determine purchases?

The pervious analogy can be both helpful and misleadingThe pervious analogy can be both helpful and misleading. The first stage is very similar. We need to gather the “fact” about the public finance. How government secure its revenue and how these revenues are spent. As for the second stage some important differences appear. We need to examine the way in which governmental decisions are made. Here the analogy breaks down. Governmental decision are reached as a result of many individual participating in political process, Not only one as in the case of individual person.

Government Finance A third StageA third Stage: The government decision has an impact on the whole economy. As compared to individual who has little affect. A final StageA final Stage: evaluation of the impact. Not like individual government activities affect all of the individual in society

What is Government The conception of government is related to the examination of the decision process. Two ways of looking at governmentTwo ways of looking at government: First : as unitaryFirst : as unitary being (similar to private person) Second as democratic stateSecond as democratic state

What is Government private persons direct their activity toward maximizing their “utility”. This assumption help predict the individual behavior. The difficult to apply to governmental action. How can “social utility” be defined? Does a projected outlay of 30 Million SR on urban reconstruction, financed by central government represent an increase in “social utility”? Or a decrease? There is no “fiscal brain” when we consider government decision.

What is Government dictatorshipIn a dictatorship, we may reduce public finance to a study of private finance. However, people will impose constraints on the freedom of the dictator. ruling groupGovernment as ruling group. Still it must reckon with reaction of those outside it. The government remains as an entity that is divorced from the people.

What is Government democraticPublic finance of democratic governments. Here the unitary conception of state doesn’t apply, However, Many approaches to the evaluation of government action on unitary conception of government. Attempts to evaluate government activities in this framework are hampered by the arbitrariness of any definition of social welfare

What should government maximize? social utilityEarly scholars in public finance assumed that the utility of separate persons could be added up to produce “social utility”. It is impossible to compare the utilities of among different individuals or to measure externally the utility of each. If this is possible the goal of taxation would be to reduce social utility as little as possible!

What should government maximize? Lets assume: It may be possible to drive certain guidelines for tax and expenditure decision which are widely accepted by individual in society. That all individual in society identical in their preferences. diminishing marginal utility of incomeThe additions to total utility caused by the addition of incremental units of income diminish as more income is added. (diminishing marginal utility of income). progressive tax.On the basis of such assumption, certain principles of public finance be driven. Such as progressive tax.

What should government maximize? Public interestA second approach : Public interest Exist a part from the interests of individual citizens.Exist a part from the interests of individual citizens. This approach is observed in discussion of budgetary decisions.This approach is observed in discussion of budgetary decisions. It is often argued that “national interest” demand a particular outlay on defense and a given level of expenditure on domestic program.It is often argued that “national interest” demand a particular outlay on defense and a given level of expenditure on domestic program.

What should government maximize? social interestA third approach: social interest Scholar introduce their own explicitly stated preference scheme. Such evaluation are inherently personal, not scientifically objective.

The Government As Mean of Individual Action not as unitaryWe approach government differently when we begin to consider it not as unitary being which act independently from its citizen. But as a mean through which private citizen make decisions collectively. Here we must discard all attempts at defining ‘social utility” or “social interest” independently of individual’s own preferences. individuals will choose to sacrifice privately enjoyed goods and services in return for publicly provided goods and services.We try to examine the condition under which individuals will choose to sacrifice privately enjoyed goods and services in return for publicly provided goods and services. Representative government become the ideal type