Public economics is the study of economic policy, with particular emphasis upon taxation. The subject therefore encompasses topics as diverse as responses to market failure due to the existence of externalities and the determination of optimal social security policies. This characterization reflects an extension of the scope of public economics from its initial emphasis upon the collection and disbursement of government revenues to its present concern with all aspects of government economic intervention.
Public economics has a long history as a discipline within economics and many eminent economists have written on the subject. For example, Ricardo discussed the effects of public debt, the incidence of taxation in imperfectly competitive markets was analyzed by Cournot, Edgeworth considered the effects of taxation on multi-product firms and Pareto set out the foundations for making social decisions. The explanation for this interest in public economics is no doubt contained in the close connection of the analysis with policy and application, which are the ultimate inspiration of most economists.
The motivation for study of public economics follows naturally from the observation that unregulated economic activity does not lead to a socially optimal outcome. At a very basic level, an economy could not function effectively if there were no contract laws since this would inhibit satisfactory exchange. In addition, although the anarchic equilibrium that would occur without contracts may be in the core of the economy, it need not be particularly stable. It must therefore be accepted that no economy could operate without law enforcement and that in order for organized economic activity to take place, there must be a clearly defined and enforced set of contract laws.
In considering an economic policy the state will generally have two conflicting aims. On the one hand, it will aim to implement the policy with the minimum loss to the society. The use of policy will cause a loss due to the resources used in the implementation process and from the economic distortions that the policy will cause. Minimizing these losses is the efficiency aspect of policy design.
The role of information is central to public economics. The availability of information to private agents determines the nature of the equilibrium without policy intervention and the information set of the government determines feasible policy instruments. If the information deficiencies, particularly asymmetric information between agents in the economy, lead the market outcome to be inefficient, the state can only improve the outcome if it not subject to the same informational limitations.
Public sector plays an important role in mixed economies of the major industrialized countries. The public sector is significant in the economies of the industrialized countries and mixed economies of these countries are characterized by substantial government involvement. They are far from being free market with minimal government intervention. The size of the public sector alone is justification of the study of how it should best choose its means of revenue collection and its allocation of expenditure. It is also worth noting that data on expenditure typically understate the full influence of the public sector upon the economy.
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