EKN 310
Chapter 1– The Role of the Public Sector in the
economy
Introduction
Public economics studies…
• The impact of the public sector (government) on resource allocation and
distribution.
• The nature, principles and economic consequences of
1. Expenditure
2. Taxation
3. Financing
4. Regulatory actions undertaken by the non-profit making government
sector
• These four areas of decision-making are called Instruments of Fiscal
Policy.
• Public economics analyses the nature and impact of these instruments.
Positive vs Normative economics
Positive economics:
- It studies the nature and consequences of decisions taken.
- Example: If the government raised income tax, what will happen to the
supply of labour in the economy?
Normative economics:
- It focuses on studies of the question, ‘What should the situation be?’
- Example: If the government wants a more even distribution of income,
what type and level of taxation should be introduced?
, Instruments of Fiscal Policy
Expenditure, taxation and financing:
• These instruments entail the procurement by the state of private funds and
the spending of these funds.
• These three constitute the direct mobilisation and allocation of scarce
resources.
• Example: Spending of tax income on primary healthcare or borrowing
funds to build an irrigation dam or a highway.
• There are various forms of taxation and expenditure that all have diRerent
economic consequences.
• Taxes on income (income tax) , wealth (property tax) and goods (VAT)
• The choice of a particular tax depends on how govt. wants to change the
distribution of income or wealth in the economy.
NB: Economists have created important guidelines to help the government
decide how to tax and spend money. These guidelines are based on 2 main
ideas…
1. ERiciency (using resources in the best possible way)
2. Equity (being fair)
Regulation:
• Regulation however entails the government enacting a law or oRicial rule
that leads to a diRerent allocation of private resources.
• Aka the law changes how private people or businesses use their own
resources compared to what they would to done without government
intervention.
• The allocation of resources is now influenced indirectly.
• Example: Government forces the manufactures of motor vehicles to install
platinum catalysts in the exhaust pipes of vehicles to reduce the
emissions of carbon monoxide or smoking bans in public areas.
Chapter 1– The Role of the Public Sector in the
economy
Introduction
Public economics studies…
• The impact of the public sector (government) on resource allocation and
distribution.
• The nature, principles and economic consequences of
1. Expenditure
2. Taxation
3. Financing
4. Regulatory actions undertaken by the non-profit making government
sector
• These four areas of decision-making are called Instruments of Fiscal
Policy.
• Public economics analyses the nature and impact of these instruments.
Positive vs Normative economics
Positive economics:
- It studies the nature and consequences of decisions taken.
- Example: If the government raised income tax, what will happen to the
supply of labour in the economy?
Normative economics:
- It focuses on studies of the question, ‘What should the situation be?’
- Example: If the government wants a more even distribution of income,
what type and level of taxation should be introduced?
, Instruments of Fiscal Policy
Expenditure, taxation and financing:
• These instruments entail the procurement by the state of private funds and
the spending of these funds.
• These three constitute the direct mobilisation and allocation of scarce
resources.
• Example: Spending of tax income on primary healthcare or borrowing
funds to build an irrigation dam or a highway.
• There are various forms of taxation and expenditure that all have diRerent
economic consequences.
• Taxes on income (income tax) , wealth (property tax) and goods (VAT)
• The choice of a particular tax depends on how govt. wants to change the
distribution of income or wealth in the economy.
NB: Economists have created important guidelines to help the government
decide how to tax and spend money. These guidelines are based on 2 main
ideas…
1. ERiciency (using resources in the best possible way)
2. Equity (being fair)
Regulation:
• Regulation however entails the government enacting a law or oRicial rule
that leads to a diRerent allocation of private resources.
• Aka the law changes how private people or businesses use their own
resources compared to what they would to done without government
intervention.
• The allocation of resources is now influenced indirectly.
• Example: Government forces the manufactures of motor vehicles to install
platinum catalysts in the exhaust pipes of vehicles to reduce the
emissions of carbon monoxide or smoking bans in public areas.
