Samenvatting Public economics
Normative point of view --> subjective and value based, is the economy fair?
Positive point of view --> objective and fact based, is the economy efficient?
Hoorcollege 1
There is often a role for the government in a market economy because the outcomes of unfettered markets are
not always desirable (marktfalen).
Milton Friedman (against government interference) ‘’spending someone else’s money on someone else’’
Role of the Example
government
0 Anarchy Somalia
1 Night-watchman state
2
3 Liberal market economy United Stated
4
5 Modern welfare state Netherlands
6 Nanny state Sweden
7
8 Socialism with market elements China
9 Centrally steered command economy North Korea
Government aim:
Maximisation of social welfare (and a number of subordinate goals)
1. Public interest model
Normative aspect: government serves the interest of the public, citizen-based.
Aim of the government: Functional government -> benevolent social planner
2. Public choice model
Positive aspect: political actors act strategically and pursue their own interest
Aim of the government: maximisation of social welfare is secondary to personal goals
Microeconomic theory suggests that perfect competition leads to very desirable outcomes: efficient allocations
that can’t be improved upon emerge as equilibria through anonymous market coordination by price-taking,
rational and selfish agents. This is the first-best allocative outcome.
However the model says nothing about fairness (equity) even though this is where much of policy
concern lies.
Also there are a lot of assumptions that make sure the market works efficiently. However in real markets
many market failures occur.
1st theorem
A general competitive equilibrium leads to a Pareto efficient allocation of resources. A person is not capable in
increasing their utility without decreasing some else’s. This means there is no incentive to trade anymore.
Normative point of view --> subjective and value based, is the economy fair?
Positive point of view --> objective and fact based, is the economy efficient?
Hoorcollege 1
There is often a role for the government in a market economy because the outcomes of unfettered markets are
not always desirable (marktfalen).
Milton Friedman (against government interference) ‘’spending someone else’s money on someone else’’
Role of the Example
government
0 Anarchy Somalia
1 Night-watchman state
2
3 Liberal market economy United Stated
4
5 Modern welfare state Netherlands
6 Nanny state Sweden
7
8 Socialism with market elements China
9 Centrally steered command economy North Korea
Government aim:
Maximisation of social welfare (and a number of subordinate goals)
1. Public interest model
Normative aspect: government serves the interest of the public, citizen-based.
Aim of the government: Functional government -> benevolent social planner
2. Public choice model
Positive aspect: political actors act strategically and pursue their own interest
Aim of the government: maximisation of social welfare is secondary to personal goals
Microeconomic theory suggests that perfect competition leads to very desirable outcomes: efficient allocations
that can’t be improved upon emerge as equilibria through anonymous market coordination by price-taking,
rational and selfish agents. This is the first-best allocative outcome.
However the model says nothing about fairness (equity) even though this is where much of policy
concern lies.
Also there are a lot of assumptions that make sure the market works efficiently. However in real markets
many market failures occur.
1st theorem
A general competitive equilibrium leads to a Pareto efficient allocation of resources. A person is not capable in
increasing their utility without decreasing some else’s. This means there is no incentive to trade anymore.
