EC302 Microeconomic Analysis - Week 3, Lecture 1

EC302 Microeconomic Analysis - Week 3, Lecture 1

• Public economics focuses on maximizing public welfare, also known as welfare economics.
• The government plays a critical role in decisions to achieve public welfare goals.
• Views on government functions depend on how people view the relationship between the individual and the state, and the effectiveness of markets versus government.
• Two main views exist regarding the state:
  • Organic view: society's goals are set by the government, giving the state inherent value.
  • Mechanistic view: society sets goals, the state is a tool to achieve those goals.
• The mechanistic view further divides into four perspectives:
  • Libertarians: strong support for private property, advocate limited government intervention in private exchanges, viewing markets as efficient.
  • Socialists: advocate for a command and control economy, believing market systems distribute rewards unequally; therefore, full equity necessitates government intervention.
  • Conservatives: question government's role, favor market distribution but believe the government can perform some tasks better than the private sector.
  • Social Democrats: recognize market productivity's limitations in efficiently allocating resources with unequal distributions; thus, government intervention is crucial for redistribution.
• Government's fundamental economic role is to establish institutions and rules enabling market functionality.
• Government intervention is necessary when markets fail (public goods, externalities, imperfect competition, information failures), exhibit uneven income redistribution, or display macroeconomic instability.
• Potential government functions include allocative function, redistributive function, and stabilization function.
• Allocative function: providing public goods, regulating externalities, promoting competitive markets, and protecting individuals from information failures.
• Redistributive function: alleviating poverty and reducing income inequality.
• Stabilization function: managing aggregate demand to achieve price stability, high employment, and reduce output fluctuations.
• The extent of government's economic role depends on market weaknesses and the government's ability to achieve desirable outcomes—and globalization has potentially weakened governmental control.
• Crucial public policy questions include:
  • What are the objectives?
  • What are the options?
  • What are the implications of each option?
  • Which is the preferred option?
• Seven fundamental economic principles apply to the public sector:
  • Scarcity, choice, and opportunity costs apply to economies, including the public sector.
  • Trade is essential for gaining benefits in markets.
  • Incentives influence behavior in the public sector, as in the private sector.
  • Demand and supply concepts apply even in the absence of price signals.
  • Efficient production (cost, division of labor) applies to the public sector.
  • Markets are crucial demand and supply forces; often, government actions support market function.
  • Social welfare maximization is constrained and implies social marginal benefit equaling social marginal cost.
• Principles of economics applicable to government actions mirror those in the private sector.
• Positive economics estimates how government policy affects individual behavior; normative economics guides decisions regarding which policies are preferred.
• The government's key attribute is power; it encompasses all budget-funded services (including public and private sectors).