For B.Sc(Economics Honours) Third year

1. PUBLIC FINANCE
MOOCS
BY
DR. SUBIR MAITRA
ASSOCIATE PROFESSOR OF ECONOMICS
For B.Sc Economics(Honours) Third Year
University of Calcutta

2. Aim of the course
 To discuss the role of the public sector in
modern economies,
 To examine the economic rationale for
government intervention,
 To discuss the effects of government’s actions
in terms of efficiency and equity

3. Course outline (as per CU Syllabi)
Introduction to public economics :
The nature, scope and significance of
public economics
Forms and Functions of Government :
Different forms of government – unitary
and federal. Tiers of government in the
federal form- Central, State, Local
(Introductory discussion with examples).

4. Course outline (as per CU Syllabi)
 Functions of Government:
Economic functions -allocation, distribution
and stabilization.
Regulatory functions of the Government and
its economic significance
 Federal Finance
Federal Finance: Different layers of the
government, Inter governmental transfer—
horizontal vs. vertical equity.
Grants—merits and demerits of various types
of grants — unconditional vs. conditional
grants, tied grants, matching grants.

5. Course outline (as per CU Syllabi)
 Public Goods and Public Sector
Concept of public goods—characteristics of public goods,
national vs. local public goods, determination of provision of
public good
Externality, concept of social versus private costs and benefits,
merit goods, club goods.
Provision versus production of public goods. Market failure and
public provision.
Pricing of public goods—vertical summation
 Government Budget and Policy
Government budget and its structure – Receipts and
expenditure – concepts of current and capital account,
balanced, surplus, and deficit budgets, concept of budget
deficit vs. fiscal deficit, functional classification of budget.
Concept of Revenue Deficit.
Budget, government policy and its impact. Budget multipliers.

6. Course outline (as per CU Syllabi)
 Revenue Resources
Concept of tax, types of tax – direct tax and indirect
tax, canons of taxation, subsidy, transfer policy.
Principles of taxation -Ability to Pay principle (brief
discussion), Benefit Approach (Actual Examples)
Tax Design - introduction – truth seeking mechanism.
 Tax Structure
Effects of income tax on work effort, saving and risk
bearing (just brief ideas).
Excess burden of indirect taxes
VAT, Goods and Services Tax (pros and cons).
Non-tax revenue resources-earnings from public
undertakings, interest on loans.

7. Course outline (as per CU Syllabi)
 Distribution and Stabilization
Instruments for stabilization
Public Debt---internal and external.
Public Finance and Public Choice: The Role of State.
 Readings
1. Musgrave and Musgrave: Public Finance in Theory and
Practice (Fifth Edition).
2. H.L. Bhatia. Public Finance. (Fifteenth Revised Edition).
3. Amaresh Bagchi (ed.). Readings in Public Finance. Oxford
University Press.
4. Misra and Puri. Indian Economy.

8. Introduction to Public Economics
Government or Public intervention: Circular Flow of
Income
 Government as the provider of goods and services:
Health, education, defence, environment,
infrastructures, etc.
 Government as the framer of the rules and
regulation:
Legal structure and property rights, environmental
regulation and protection of natural resources,
safety regulations, employment regulations, etc.

9. Introduction to Public Economics
 Government ensuring a stable economic
environment: Budget/Fiscal Deficit, Deficit Financing
 Government financing its activities with taxation:
and this affects the agents’ decisions on labour
demand and supply and on consumption.

10. Nature and scope of public economics
Role of the government in market
economies, the rationale of its
intervention and the economic and
social effects in terms of the efficiency
and equity trade offs.
 When should the government intervene
in the economy?
 How should the government intervene?
 What are the effects of public
intervention?
 How social choices are made?

11. When should the government intervene
in the economy?
The public sector has different roles
in market economies:
Allocation of resources (efficiency
goal)
Income (re)Distribution (equity
goal)
Stabilisation for the economic
cycle

12. Allocation role (efficiency)
 The ALLOCATION ROLE is to provide efficiently
goods and services when the market is not able to
produce them efficiently (market failures) through:
 The production of public goods or the public
financing of private provision: i.e. all those goods
and services which are not produced (or would be
produced inefficiently) by the market, due to
market failures;
 The regulation of market activities to support
market competition (property rights, legal system,
restrictions )
 Taxes and subsidies which change the market
price of goods/services

13. Redistributive role
 The aim is to foster equity correcting the
distribution of resources resulting from market
mechanisms by shifting resources from some
groups in society to others and/or by changing
initial endowments through:
 Monetary transfers (such as welfare benefits to
support the income of the poor or the
unemployed)
 Transfers in kind (provisions of public services
such as education, health services, social
services)
 Taxes/subsidies (for example with progressive
taxation or exemptions)

14. Stabilisation role
Smoothing over the business cycle and
external shocks, supporting full
employment and controlling inflation
through:
 Fiscal policy (transfers and taxation,
automatic stabilizers, public
expenditures)
 Support to productive activities

15. The analysis of government failures
Government failures occur due to:
Limited information
Limited control on private markets
responses to public intervention
Limited control over the public
bureaucracy
Limitations imposed by the political
process

16. What are the effects of public
intervention
 Need to consider direct and indirect effects of
public intervention on individuals and markets:
 Direct effects are those expected assuming that the
behaviour of economic agents do not change as a
consequence of government intervention
 Indirect effects are those that arise because agents
change their behaviour in response of the
intervention (for example increasing taxation may
reduce labour supply)
 Difficult to measure impacts and especially to
establish causation (see Gruber ch.3 if interested)

17. How decisions are taken?The
analysis of social choices
 Political economy studies how the political
decision making process produces decisions that
affect individuals and the economy
 This part of public economics analyses how socially
desiderable goals are chosen
 Socially desiderable goals relate to:
- the capacity to support socio-economic growth
- the capacity to guarantee adequate living
conditions to citizens
- the capacity to guarantee equality in
opportunities for all

18. Key economic questions
in public economics Efficiency:
 What is produced, how it is produced and how much it is
produced (public vs private goods/services): given
available resources make the pie as large as possible
 Equity
 For whom it should be produced and who should pay for it:
distribute the pie in the most equitable way
 How are decisions taken?
 Trade offs:
 an efficient outcome could be not equitable
 an equitable outcome could be inefficient