Government as an Economic Unit

1. Government as an Economic Unit Week 2

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

3. Government as a Unit Analogous to person • Analyzing economic activity of an individual: • First Stage: • 1- How an individual earn an income and how much it is? • 2-How income is spent? • Second 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?

4. The 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.

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

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

7. 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.

8. What is Government • In a dictatorship, we may reduce public finance to a study of private finance. However, people will impose constraints on the freedom of the dictator. • Government 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.

9. What is Government • Public 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

10. What should government maximize? • Early 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!

11. 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. • The additions to total utility caused by the addition of incremental units of income diminish as more income is added. (diminishing marginal utility of income). • On the basis of such assumption, certain principles of public finance be driven. Such as progressive tax.

12. What should government maximize? • A second approach : Public interest • Exist a part from the interests of individual citizens. • 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.

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

14. The Government As Mean of Individual Action • We 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. • 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