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Documente Profesional
Documente Cultură
ECONOMIC POLICIES
Structure
1.0 Objectives
1.1 Introduction
1.2 Public Economics
1.3 Public Choice and Social Choice
1.3.1 Two Basic Systems
1.3.2 Forms of Democracy
1.3.3 Voting
1.3.4 Majority Rule
1.3.5 Individual Preferences
1.3.6 Multiple Voting
1.3.7 Plural Voting
1.3.8 Rank Voting
1.3.9 Point Voting
1.3.10 Strategy
1.3.11 Political Parties
1.3.12 Bureaucracy
1.3.13 Positive Theory
1.0 OBJECTIVES
After going through this unit you should be able to:
• Sketch out the domain of Public Economics;
• Appreciate the welfare foundations of economic policies;
• Understand the idea of public choice and its basic approaches;
• Delineate the role of government;
• Capture the characteristic features of public interventions; and
• Appreciate the changing perspective of governance in a mixed economy. 1
Public Economics : The
Basic Concepts 1.1 INTRODUCTION
The term Public Economics came into existence only in 1960s though a few titles
with nomenclature like Public Finance had already started covering much ground,
which is today covered within the realm of Public Economics.
Public Economics is often called as applied welfare economics. It underlines the fact
that some notion of social welfare or economic welfare of the society lies underneath
this branch of economics. Even though a social welfare function may not always be
explicitly specified, the notions of efficiency and ethics/equity and the
complementarities and tradeoffs between the two generally remain at the back of
mind while formulating and evaluating public policies dealing with economic aspects.
More deeply, it concerns the kind of relationship that exists between individual
preferences for own-selves or social states (social alternatives) and societal preference
under different criteria of choice. For example, which criterion one would apply
while undertaking a project, which may displace some people from their homesteads
and livelihoods: (i) post-project sum total of individual utilities is higher or not; (ii)
nobody is displaced if displacement means loss of utility to those who are displaced,
whatever the gains for others, or (iii) the people displaced are adequately compensated
for their perceived loss. Likewise, whenever there is a discussion of reservation of
jobs in employment, seats in educational courses or items for production in small
scale sector there is involved one or the other criterion of ethics which gets juxtaposed
with efficiency.
In last fifty years there has been a further development that economic approach
came to be applied in the arena of public decision-making process, which broadly
covers many political and bureaucratic processes and the interface between the
two. This has come to be included in the name of public choice in the area of Public
Economics. Outcomes may a great deal depend on the process adopted and therefore
the underlying behavioural assumptions of actors and implications of the processes
in practice came to be studied.
Why should and how should the State intervene through the government apparatus
in the economic sphere of the country, has been an important discourse in economics
for long. According to one theory, the institutions of State and private property
(following which, market) came into being simultaneously. Even if this theory is not
accepted it appears very plausible that the State undertook to protect private property
(along with life of its citizens) and charged fees for service in terms of a proportion of
produce, which was largely agricultural corn so that it could support its protective
force. But later on, as the economy of a society developed in terms of commodification
of goods, its State assumed the charge to regulate some of its economic activities or
some aspects of many activities, like standardization of weights and measures and
coinage. Still later, the State intervened in commodity market by taxing and/or
subsidizing different commodities with a view to impacting on (reducing or augmenting)
their demands and supplies if they were not, in its perception, in congruence with
societal interest. Later, one finds that many community-oriented welfare activities
were also assumed by the State directly or through its subsidiaries.
For a very large part of the twentieth century, we may recall, there existed capitalist
market-oriented economies and socialist planning-oriented economies. Twenty first
century is however witnessing that all modern economies are of a more mixed sort.
But there exists full spectrum of mixed economies in the world. For example, one
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may find that the government expenditure as a proportion of the gross domestic
product may vary from 20 per cent to 70 per cent in different countries and yet the Welfare Foundations of
Economic Policies
division between the national and regional/local governments may differ greatly. One
size and one shape will hardly fit all, one may tend to argue, as different countries are
at different stages of development. As all fully developed men are not of same stature
and not of same complexion, different countries will continue to differ from each
other at any point of time. Yet there is some tendency of convergence in economies,
which is true about role of the government intervention in the economy.
We propose to broadly hint at the scope of Public Economics, the rationale of
public intervention in market, and the methods of decision-making for intervention
by the State in the economy. We also propose to discuss and delineate the role of
government in an organized society and the changing perspective in a mixed economy.
We shall also cover the relationship between public sector and private sector in a
mixed economy.
However, we will like to remind that the treatment in this unit shall be more at an
introductory level. They will be more adequately treated in subsequent units.
However, there are two enriching appendices to the unit, which you may like to go
through.
Check Your Progress 1
1) Why Public Economics is often called applied welfare economics ?
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2) What could be a quantitative measure of public intervention in an economy?
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3) Try to sequence public intervention in economic sphere in terms of stages?
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4) Why would public intervention differ from economy to economy?
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Public Economics : The
Basic Concepts 1.2 PUBLIC ECONOMICS
Public Economics can broadly be understood as that Economics which deals with
public intervention in the economy. Its domain is supposed to encompass rationale
for public intervention as well as the manner, approaches, forms, mechanisms,
processes and instruments whereof. The term ‘public’ has a restricted meaning: it
generally connotes government, as such, at all levels as well as public bodies, that is,
the bodies floated by the government at any level. The term ‘public’ may also refer,
in certain cases like public choice, to the people in general, which are supposed to
participate in a democratic process of electing political representatives as well as
options related to social/political/economic spheres. It does not however connote
any collectivity of people, which is not mandated by the government, irrespective of
its size.
The State attempts to oversee, as exemplified by Art. 39 (b) and (c) of our Constitution,
that private activities may not cause harm to the common good and in case they do
so corrective actions are taken by the State. The government does therefore intervene
in a variety of matters, economic and non-economic. But concern of Public Economics
is largely intervention into economic sphere much beyond fiscal politics as the sphere
of economics is enlarging by day because, for instance, many environmental problems
are being discovered to have economic implications. Yet Public Economics may
also concern with the problems and pitfalls of public intervention as such or its
particular forms.
Government should intervene in the economy is today a foregone conclusion but the
manner in which and the extent to which it should continues to be an issue. It is
needless to say that exact complexion of intervention will a great deal depend on the
complexion of the economy as well as on people’s choice (and perhaps the manner
in which people choose to make the choice or are made to make the choice). Yet, it
is broadly agreed that the government intervenes in the economy for influencing the
allocation of resources between activities, keeping in view the present and the future,
the distribution of resources between individuals and their collectivities, keeping in
view again the present generation and the future generations. This is in the long run
interest of the society. However, intervention may be needed for stabilizing certain
parameters like growth, unemployment, prices, foreign exchange, etc. so that the
economy does not get drifted away from its desired course. This became duly
recognized in literature after Keynes though various States did come to rescue
whenever people were in distress.
Should the intervention be direct by undertaking— owning, controlling and
managing— a particular activity or somewhat direct through regulating it or indirect
through tax-subsidy mechanism or even how much direct? The answer varies from
society to society and changes in any society with changes in internal and external
environment and mutation in technological innovations and institutional complexion.
Overtly, the purpose is to serve public interest!
Public Finance was always dealing with intervention through fiscal instruments,
including federal relationships between different tiers of governments and later on it
subsumed Public Finances dealing with public sector enterprises when many private
enterprises were nationalized and/or new enterprises were established in the public
sector. Although public works were very much in the public sector domain even if
many of them were erected through outsourcing to contractors. Public Finance
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generally did not cover the regulatory aspects of intervention, except in the context
of public utilities or natural monopolies. This becomes part of Public Economics. Welfare Foundations of
Economic Policies
The process of democratic decision-making and problems associated therewith is
now discussed under the rubric of public choice, which has been included by most
economists in the scope of Public Economics.
Certain textbooks are more concerned with appraisal and evaluation techniques of
large projects while others dwell on the theory of second best as in real economies
conditions of perfect competition hardly exist and distortions in one part of the
economy may have to be balanced by causing distortions elsewhere if the former
cannot be done away with.
In short, study of Public Finance (including Public Revenue, Public Expenditure and
Public Debt), Public Enterprises/Firms, Public Projects, Public Utilities, Public
Services and Public Choice would broadly form the realm of Public Economics.
They may be concerned with any level of government— national, sub-national or
local.
Over last fifty years there has been a curious development in the matter of local
governance. It has been argued that people may vote with feet instead of by show of
hands. It means that individuals may quietly mere across local jurisdictions for the
preferred package of local public goods like sanitation, road conditions, aesthetic
view. The conditions of such occurrence/phenomena as this have been a matter of
research.
However, we may note, public intervention through money supply, interest rate,
foreign exchange rate, etc. by monetary authorities is still not covered by most
textbooks in its domain though it logically belongs to Public Economics. Part of the
reason for non-inclusion of this kind of public intervention is the fact that most of
Public Economics grew out of microeconomic theory as applied to public intervention
in the market while most of monetary and exchange rate intervention comes from
macroeconomic domain. In this unit we shall occasionally refer to these interventions
as well. Yet, there are books (such as one by Leif Johansen), which deal with
macroeconomic interventions. In fact, the area is still not well settled.
Check Your Progress 2
1) Attempt to define Public Economics?
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2) Delineate the scope of Public Economics?
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Public Economics : The 3) Explain how public intervention tries to influence allocation and distribution of
Basic Concepts
societal resources.
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4) What do you mean by stabilization of the economy?
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5) Which kind of public intervention is not still considered a part of Public
Economics and why?
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1.3.3 Voting
Voting does not concern only election of representatives but also options on war, on
prohibition, on budget, on a particular item of budget, on pricing services of a utility;
and options may be more than two. Let us consider for the present the one-person-
one-vote system. If there are two options, rules could be unanimity, consensus,
simple majority and qualified majority. If unanimity is the rule, then a single dissent is
as good as the veto; everyone has veto power here. Consensus is usually a sort of
unanimity arrived at after some deliberation. Logrolling through vote trading across
issues among voters is often seen in the legislatures in the West; it may improve
majority voting but is often detested on moral grounds.
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Public Economics : The 1.3.7 Plural Voting
Basic Concepts
Suppose there are 20 candidates and 100 voters, the candidate getting 6 votes can
also win by this rule. In some countries, this is not considered a majority rule. Each
voter is allowed to rank the candidates in order of preference. If nobody secures at
least number of 50 per cent votes just exceeding from the first choice, then the
second choice is counted. In case nobody again secures 50 per cent +1 votes, then
the third choice is counted. The process is stopped when someone secures at least
that number of votes which just exceeds 50 per cent of the total. Thus, simple
majority defined by 50 per cent marks is adhered. Note that the party with highest
number of members of parliament is not allowed to form the government if this
number is less than 50 per cent. A candidate who has support of no less than 50 per
cent members is supposed to be invited to form the government.
1.3.10 Strategy
Real world is not so simple. We are witness to and participants in the politics of
voting. If I know or guess that my most preferred option in any case is not going to
win, I may vote for my second preferred option lest still less preferred option (or
negatively preferred option) wins in the election. In that case, voters may distort
their real preference when it comes to revealing them. Since many voters may choose
to do so, the outcome will depend on political skills of voters, and candidates, and
supporters. Therefore, in many cases, rules are less crude than simple majority system.
Some options or candidates may not be real. They may be put as dummies as a
strategy. Then, public choice becomes a more complicated exercise. A bureaucrat
may do the same by posing irrelevant options in the menu.
1.3.12 Bureaucracy
Who set the agenda in the parliament, who create the options on an issue, and who
frame many rules, which govern even the filing of nominations? Who propose the
demands for various departments in the budget and who put up the file for projects/
programmes? Bureaucrats do all this, may be with the advice of the political executives.
Much in the same way as managers may have their own interests pitted against the
shareholders’, bureaucrats have their own axe to grind in the whole political drama.
They may, for example, favour large projects, which increase their prestige and may
prefer those, which have large expenditure in the present rather than in future if they
think their stay in office is going to be short. It does not mean that they do not serve
any public purpose. Further, there may be competition among bureaucrats as there
could be collaboration.
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Median : The middle-most value in a sequenced order
of values.
Microeconomics : Analysis dealing with the behaviour of single/ Welfare Foundations of
Economic Policies
individual elements such as a product or a
business firm.
Monetary Policy : Operations of the central bank for exercising
control¯through discount rate, reserve
requirements, liquidity ratio and adequacy
ratio-over money, interest rate and credit
conditions.
Moral hazard : An incentive for somebody to behave in a
non-judicious manner. For example, increase
in likelihood of non-locking of car because of
insurance against the risk of theft.
Natural monopoly : A technological situation in which one single
firm is capable of supplying service for the
entire demand while its average cost curve
continue to decrease.
Patent : An exclusive right granted by the State to an
inventor for a limited period to exercise
control over its use. The right can be sold/
purchased and inherited like any other
property.
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Public Economics : The
Basic Concepts 1.8 SOME USEFUL BOOKS
Bailey, Stephen J., Public Sector Economics, Macmillan, 1995.
David A. Starrett, Foundations of Public Economics, Cambridge University Press,
1988
Donijo Robbins (ed.), Handbook of Public Sector Economics, Taylor & Francis,
2005
Danis C. Mueller, Public Choice, Cambridge University Press, 1979
Richard A. Musgrave and Peggy B. Musgrave, Public Finance in Theory and
Practice, 1990
William F. Shughart II and Laura Razzolini (ed.), The Elgar Companion to Public
Choice, Edward Elgar, 2001
Kurien, C.T., The Economy: An Interpretative Introduction, Sage, 1992.
Halm, G.N., Economic Systems, Vakils, Feffer and Simons, 1971.
Ebenstein, William, Today’s Isms, Prentice-Hall,
22 2) Both are collective choices. There is some difference of opinion. Yet the chief
difference between the two is about actors and forums. Use fifth paragraph.
3) Unanimity, consensus, majority votes, pre-rogation. Welfare Foundations of
Economic Policies
4) Candidates/options are ranked in plurality voting. In case, nobody gets votes
more than 50 per cent, in counting of first preference, second preference is
counted. The process continues until some one scores just more than 50 per
cent. In the point voting, cardinal numbers out of a total (say 100) are assigned.
The points are counted for deciding the winner.
5) It is the preference of median voter in an ordered sequence of options that wins
in the simple majority rule. However, it will work only when individual
preferences are single-peaked.
6) Trading of votes across issues between voters is known as logrolling. Strategic
voting involved not voting for most preferred option for strategic reasons.
7) It is assumed that they have short-term horizon.
Check Your Progress 4
1) Write a few instrument of your choice ranging from tax on cigarette to minimum
Wage Act and use paragraph 1.
2) Participation of Public and Private sector.
3) Coal, steel; LIC, GICs, RBI, SBI, PNB etc.
4) IDBI, SIDBI, NABARD.
5) Huge capital and huge risk.
6) Regulation of entry, exit, output, prices. Take a case of road transport (bus and
auto) to see how government tries to protect consumers.
7) Left to market forces, distribution of income and wealth may create a great
chasm between different sectors, which may not good for the health of the
economy.
8) Merit good is one which is primarily a private good but may have extensive
positive externalities. Government encourages its consumption by making it
freely available or by making it freely available or by subsidizing its purchase.
Check Your Progress 5
1) Inefficient operation and dependence on government for survival.
2) Use your own knowledge gathered from local newspaper.
3) Banking, SEBI, IRDA, etc.
4) Direct and Indirect taxes, disinvestments in public enterprises, MOV.
5) Use the last paragraph of the section.
1.10 EXERCISES
1) Why would public intervention differ from economy to economy?
2) Which kind of public intervention is not still considered a part of Public
Economics and Why?
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Public Economics : The 3) Why are bureaucrats interested in projects that have large expenditure in the
Basic Concepts
present?
4) What is a merit good and what is the role of government in its provisioning?
5) What are the new trends about the role of state?
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