Economics 342 -- Public Finance

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Generally speaking, there are three major economic objectives of government:

(1) achieve an efficient allocation of resources (2) achieve an "equitable" distribution of income and (3) achieve the stabilization goals of full employment, price stability, "adequate" economic growth and balance of payments equilibrium. Government stabilization of the economy is a macroeconomic objective and requires the tools of macroeconomics (developed in Economics 105) to study why this is a goal and how it can be achieved. The first two objectives of government are the subjects of investigation in this course. The objectives are microeconomic objectives requiring microeconomic tools (developed in Economics 105) to study why and how government attempts to achieve these objectives.

In this course we begin our study of government involvement in the marketplace by investigating the concept of economic efficiency. There are many cases where, in fact, government has very little to contribute toward an improvement in market efficiency. In these cases, government involvement in the market harms rather than helps society. In other markets, governments can be very effective in improving the welfare of society though an improvement in resource allocation. Once we have investigated what conditions must be present for governments to justify becoming involved in a market, we begin to look at how governments can best interact in the markets. We will look at the economic basis for why governments spend money and how the economy is affected by the taxes levied by governments to pay for their expenditures. The basic questions we will be investigating are: how is the allocation of resources and the distribution of income affected by the spending and taxing activities of government? What is the economic rationale for governmental activities such as spending in defense, highways, welfare and so on? What are the economic rationales for taxes levied? We will then investigate some methods of analyzing government spending programs which help determine whether a program is efficient from an economic perspective. Investigating these questions requires positive and normative economic analysis using tools of microeconomics.

Course Objectives

Understand the concept of efficiency, as defined by economists.

Explain when government has a role in altering market forces.

Formulation of government policies based upon efficiency criterion.

Understand the difference in government policy based on normative criterion vs. positive criterion