Public finance

Public finance is the study of the role of the government in the economy.[1] It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.[2] The purview of public finance is considered to be threefold, consisting of governmental effects on:[3]

  1. The efficient allocation of available resources;
  2. The distribution of income among citizens; and
  3. The stability of the economy.

Economist Jonathan Gruber has put forth a framework to assess the broad field of public finance.[4] Gruber suggests public finance should be thought of in terms of four central questions:

  1. When should the government intervene in the economy? To which there are two central motivations for government intervention, Market failure and redistribution of income and wealth.[5]
  2. How might the government intervene? Once the decision is made to intervene the government must choose the specific tool or policy choice to carry out the intervention (for example public provision, taxation, or subsidization).[6]
  3. What is the effect of those interventions on economic outcomes? A question to assess the empirical direct and indirect effects of specific government intervention.[7]
  4. And finally, why do governments choose to intervene in the way that they do? This question is centrally concerned with the study of political economy, theorizing how governments make public policy.[8]

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