Public sector economics (or "public economics" for short) is the study of economic issues that concern the public sector in a mixed economy. While much of economics is based on how markets work, public sector economics focuses on why markets fail, and what issues arise around regulation and planning by government to ensure that goods and services meet people's needs and wants.

It covers public-finance theory and its application to public-policy issues. It includes economic issues beyond the household, firm, or market with emphasis on analytical and scientific methods and normative-ethical analysis (Kolm, 1987, p. 1047). Examples of topics covered are tax incidence, optimal taxation, the theory of public goods, and design of policy (Atkinson and Stiglitz, 1980).

Markets and governments efficiency and failure

Natural monopoly

• John Stuart Mill

Information asymmetry

• Joan Robinson

• Herbert Simon and bounded rationality

• "As Bruce Greenwald and I have shown, whenever information is imperfect - that is, always - markets are inefficient; hence the need for government action."^[1]

Public good

A public good has the feature that the marginal cost of an additional individual enjoying it is zero. Examples include an army, street lighting, radio signals or information. If there is an army defending one person in a country, a street lamp for one person, a radio signal for one person, then it is with no extra cost that two or more people use the service. For information, whose character as a public good was emphasised by Joseph Stiglitz, an old aphorism of philosopher Bertrand Russell holds true,

"If I have one apple and you have one apple and we exchange apples, we both have one apple. But if you have an idea and I have an idea and we exchange ideas, then we both have two."

The problem of the public good is that if people can use the good or service at the same time and cannot be excluded from its use (which with a cost they sometimes can, e.g. encoding a Wifi signal with a password) then people can "free-ride" on its use. Consumers will not be contributing to the costs of production. Because producers cannot recoup enough expenses, there will be systematic underproduction of public goods. There is therefore a role for state intervention. The government through taxation can get all people to contribute.

Externality

• Ronald Coase, 'The Problem of Social Cost' (1964) Journal of Law and Economics

Incomplete markets

• The Market for Lemons

Macroeconomic instability

Public expenditure

Public goods

• Characteristics

characteristics of public goods are non - excludability and transferable. Non excludabilty means the consumption of the goods is not limited on specific group of consumers, that is the satisfaction of the people watching fireworks display is not limited to the owners of the fireworks. The transferability feature of the public goods means that the consumption of an individual will not lead to deprive the other, that is, if a consumer is doing fishing on a pond, another person may do fishing as well on the same pond.

• The demand for pure public goods
• Efficient output of a pure public good
• The free rider problem

Public choice and the political process

• Arrow's impossibility theorem
• Public choice theory
• Right-financing

Externalities and government policy

• Internalization of externalities
• The Coase Theorem. The Coase theorem states that when trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.

Particular sectors

Health care

Defence and technology

Social security

Welfare and employment

Education

Regulated markets

• Agricultural industry
• Banking and financial services
• Broadcasting
• Electricity
• Gas
• Legal services
• Postal services
• Public transportation
• Telecommunications
• Water services

Emergency and local services

• Fire service
• Police service
• Social housing
• Town planning
• Waste management

Public finance and tax

See also

• Externalities
• Public choice
• Public finance
• Public goods
• Welfare economics
• Agnar Sandmo

Notes

References

Books

• Alan J. Auerbach and Martin Feldstein (2007), Handbook of Public Economics 4th Ed.
• Nicholas Barr (2004) Economics of the Welfare State, 4th ed., Oxford University Press
• Joseph E. Stiglitz (2000) Economics of the Public Sector, 3rd ed., Norton Press
• Serge-Christophe Kolm (1987). "public economics," The New Palgrave: A Dictionary of Economics, v. 3, pp. 1047-55.
• Anthony B. Atkinson and Joseph E. Stiglitz (1980). Lectures in Public Economics, McGraw-Hill Economics Handbook Series.
• Martin Feldstein (1976). The Economics of Public Services.
• James M. Buchanan (1968). The Demand and Supply of Public Goods.
• Robert Haveman (1976) The Economics of the Public Sector.
• Richard A. Musgrave (1959). The Theory of Public Finance: A Study in Political Economy.
• Jan Tinbergen (1958). On the Theory of Economic Policy.

Articles

• Joseph Stiglitz (2008) 'Government Failure vs. Market Failure: Principles of Regulation'
• B. Douglas Bernhem and Antonio Rangel (2008) 'Behavioural public economics', The New Palgrave Dictionary of Economics, 2nd Edition, Abstract
• Joseph Stiglitz (1994) 'Rethinking the Economic Role of the State: Publicly Provided Private Goods', pp. 19-47; Stiglitz focuses on the US systems of social security, health care and education

External links

• NBER papers in Public economics
• Journal of Public Economics

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