INTRODUCTION FUNDAMENTAL PRINCIPLES OF PUBLIC FINANCE Market Failure Political Failure

How are Governments Different From other Entities? Geographic Jurisdiction Authority to Coerce (police power)

How Is Public Finance Different from Corporate Finance? Different general purpose financial statements? Different tools/analytic concepts? Different purposes? Different scorecards? Different activities?

2/3 of Government’s Financial Activities Are the Same! SPENDING BORROWING (and managing cash) But not TAXING

Taxes Are the Reason Public Finance is NOT the Same as Corporate Finance Taxes are not the same as purchases. They are COMPULSARY not voluntary They reflect a LEGAL requirement for payment backed, if necessary, by FORCE or threat of FORCE Coercion is nasty -- something we dislike and distrust

IF TAXES ARE SO BAD, WHY HAVE A PUBLIC SECTOR IN AN OPEN AND FREE SOCIETY?

IN SOME CASES THE BENEFITS OF COLLECTIVE ACTION (requiring spending) OFFSET THE HARM DONE BY TAXES

Markets and the Functions of Government MARKET PRECONDITIONS System of law –Protection of life and property –Enforcement of contracts Sound medium of exchange MARKET STABILIZATION Macroeconomic Income redistribution Microeconomic –Definition of property –Disclosure requirements –Regulation of competition & natural monopolies

Market Failure Markets equilibrate DEMAND (measured in terms of willingness and ability to PAY) and SUPPLY (measured in terms of willingness and ability to SELL)

Public Good I