Overview
When should the government intervene? Public economics answers this. It studies taxes (who pays?), spending (who benefits?), and market failures (when the free market messes up).
Core Idea
Market Failure: When the invisible hand drops the ball. Common causes:
- Externalities: Pollution (negative), Education (positive).
- Public Goods: National defense, clean air.
- Information Asymmetry: Used car markets, insurance.
Formal Definition (if applicable)
Public Good: A good that is non-excludable (you can’t stop people from using it) and non-rivalrous (my use doesn’t hurt your use). Example: A lighthouse.
Intuition
- Taxation: Plucking the goose with the least amount of hissing.
- Tragedy of the Commons: If a pasture is open to all, everyone will overgraze it until it’s destroyed. Solution: Property rights or regulation.
Examples
- Carbon Tax: Making polluters pay for the damage they cause.
- Social Security: A government pension system.
- Public Education: Subsidized because it benefits society as a whole.
Common Misconceptions
- “Taxes are theft.” (Taxes are the price we pay for a civilized society—roads, police, courts.)
- “Free markets always work.” (They fail often, requiring government correction.)
Related Concepts
- Deadweight Loss: The economic inefficiency caused by taxes.
- Progressive Tax: Rich pay a higher percentage.
- Regressive Tax: Poor pay a higher percentage (e.g., sales tax).
Applications
- Budgeting: Balancing the deficit.
- Healthcare Reform: Designing insurance markets.
- Environmental Protection: Cap-and-trade systems.
Criticism / Limitations
Government failure is also real. Politicians may act in their own self-interest (Public Choice Theory) rather than for the public good.
Further Reading
- Gruber, Public Finance and Public Policy
- Stiglitz, Economics of the Public Sector