Public Finance

2835 Words Dec 13th, 2007 12 Pages
public finance is the study of the financial activities of governments and public authorities. divided into three categories: a - Knowing what activities the public sector engages in and how these are organized (that is, revenue gathering and expenditures) b - Understanding and foreseeing the full consequences of these governmental activities c - Evaluating alternative policies.
The positive side describes the activities of the public sector, explains the reasons of the programs in existence and also analyses the consequences of government policies
The normative side, on the other hand, is concerned with designing new policies that meet certain objectives.
*two approaches are complementary, because, in order to make judgements about what
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example education externalities keep the market from reaching allocative efficiency because the gains or losses generated are external to the pricing system; they are unpriceable. The transaction costs of externalities misallocation of resources or a failure of the market economy to generate a Pareto optimum. positive externalities 3 types of interventions the government may engage in:
(i) Subsidies: Subsidies are monetary payments government budget to lower their prices Long-term, low-interest loans and tax reductions are examples of subsidies.
(ii) Government production at lower priceswe have a direct governmental influence on allocation because the government itself undertakes the responsibility of the production of the positive external good. supplies it at a lower price, in some cases free of charge iii)compulsion:it regulate the consumption of certain goods and services.example in most country basic education is compulsory and parents have to send their children to school. negative externalities arise from harmful production and consumption, 3 instruments the government may use. These are:
(i)Tax penalties or legal punishments to limit the production or consumption of a good. e.g. outlawing pollution
(ii) The government may impose excise taxes on goods so as to discourage their consumption or production. known as sumptuary taxes, e.g. taxes on the consumption of alcoholic drinks