Nichole Patricia B.

Pedriña
2013-63832
BS Economics II

1.) What is Public Economics?

Public economics is a field of economics that is concerned with the study of various
economic policies and the aspects of government economic intervention which includes a particular
emphasis upon taxation. (Myles, 2001) The scope of public economic also aims to analyze a
particular economy’s response to externalities which can lead to market failures. Also, it
determines what policies are the most effective to secure a society’ economic welfare.

It seeks to address how government policies directly affect the economy and how policies
should be designed according to the particular setting of an economy. Practical relevance, academic
interest, and methodology are the three main reasons why these questions are studied and
addressed. (Chetty and Burich, 2012)

2.) Who are the people who primarily contributed to the development of the economics of the
public sector?

The history of the development of the economics of the public sector can be traced back to
the early 16th century with the emergence of the Mercantilists in Europe. They were the ones who
actively promoted the significant role of the government in intervening with and controlling the
economy. (Ho, 2010) They championed for the belief that the economy should have a hand in trade
and industry. Since it was a period of the emergence of nation-states, Mercantilism continued to
dominate the major economies of the world up to the early 18th century.

In 1776, Scottish economist Adam Smith who is now known as the Father of Modern
Economics published his work entitled An Inquiry Into the Nature and Causes of the Wealth of
Nations or commonly known as The Wealth of Nations wherein he argued for the limited role that
the government should have when it comes to handling the economy. He stated in his work that
absolute government intervention will only disrupt the coordinating mechanism of the market
known as the “Invisible Hand”. He wrote that this dictates the level of supply and demand and
guides each one’s interest and individualism towards the greater societal economic welfare. This
notion of the guiding principle that is present within the market eventually led to the doctrine
known as the laissez faire.(Diokno-Sicat, 2010) It simply means that opposing of governmental
interference in economic affairs beyond what is necessary for maintaining an amicable economic
environment. In 1817, the economist David Ricardo discussed the complications and gains from
public debt.

Other notable people included Charles Dickens, who was a 19th writer. (Stiglitz, 2000) He
attempted to convey the message of the plight of the working class in his novels. As the world
entered a new era, social theorists such as Karl Marx eventually saw an opportunity to address the
grave inequalities that he believed were brought upon by “capitalist” economics. He later became
the most influential proponent of Marxian Socialism which became the basis for Communism. (Ho,
2010) They argued for totalitarian government system wherein a single party would have the
upper hand in managing state-owned means of production to ensure greater equity for everyone.

Another notable figure is the Cambridge educated economist, John Maynard Keynes. (Ibid)
During the Great Depression, he proposed that the government should take necessary action to
combat the problems brought by the event such as high unemployment and inflation rates, bank
failures and the stock market crash. He argued that the best way to combat these is for the
government to intervene in a manner that is not absolute but rather in a manner that would
stabilize the economy once again. He meant for the government to spend in order for employment
levels to rise once again and to increase aggregate demand. His ideas later went on to become the
Keynesian economic school of thought.

3.) What is your stand regarding government intervention?

For an undergraduate student coming from a state-sponsored university in a developing

country such as myself, I think that economies should have limited government intervention. Since
there is currently no country anywhere in the world that functions without even a hint of
government intervention in their economy, I can say that an economy wouldn’t reach its full
potential if there was a total detachment from the government.

Limited government intervention simply means that the government should only take on
minimalist roles that would ensure market efficiency and attempt to address market equity. Such
roles include the provision of universal goods such as national defense, peace and security, the
provision for a judicial system to promote peace and stability, and the provision of public works
and institutions.

Although some would argue that the government can be unreliable due to the fact that it can
easily be manipulated by political parties in order to gain from inefficient proposals, I still believe
that the government should commit to its roles of taxation, regulation and subsidizing projects.
(Boundless, 2014) It is through these three roles that the market would be efficient for the different
parties concerned such as the consumers and producers.

The government should only have limited power in imposing taxes. It should not burden the
people and it should be proportionate to their respective incomes. With that said a government’s
only source of income in a free market economy should only come from taxes. These taxes should
later on aid the government in subsidizing firms and the like in order to boost employment rates
and national incomes. It is also important to note the government’s role in regulation. Regulating
the market does not mean that the government dictates what the exact prices of goods should be
but rather handing out suggested prices which takes into consideration the factors that occur
during the stage of production. Regulation protects both consumers and producers not only by
keeping price levels at par but by granting them intellectual property rights which includes
patenting so that no ideas would be exploited without the owner’s consent.

With all the justifications that I have presented, I would say that I still haven’t given up on
the belief that the government can aid a nation’s economy. Take it from Adam Smith who stated in
his work, The Wealth of Nations that a man is naturally self-interested and individualistic. It is
logical and probable that an economy would still continue to exist without government intervention
but the question that would emerge is that who gains from the market? (Pettinger, 2012) Would the
level of goods and services be enough to suffice a population without regulation? With that said, I
on the other hand do not approve of absolute government on intervention. If we look at the pages of
history when it comes to the government having absolute power, I think that we should’ve learned
our lesson by now. If not, then it simply means that we are ignorant and are willing to repeat the
mistakes of those who have come before us.
References:

Boundless. “Why Governments Intervene in Markets.” Boundless Economics. Boundless, 03 July,

2014. Retrieved 31 Jan. 2015 from
https://www.boundless.co/economics/textbook/boundless-economics-textbook/introducing -
supply-and-demand-3/government-intervention-and-disequilibrium-49/whhy-governments-
intervene-in-markets-182-12280/.

Chetty, Raj and Bruich, Gregory A. (2012). Public Economics Lectures Part 1: Introduction
(PowerPoint slides). Retrieved from
obs.rc.fas.harvard.edu/chetty/public_economics_lectures.pdf

Diokno-Sicat, Justine. (2010). Public Sector Economics (PowerPoint slides). Retrieved from
http://www.upecosoc.org/p/notes-and-samplexes.html

Ho, M. (2010). Economics of the Public Sector (PowerPoint Slides). Retrieved from
http://www.upecosoc.org/p/notes-and-samplexes.html

Myles, Gareth D. Public Economics (PDF document). Retrieved from

http://people.exeter.ac.uk/gdmyles/papers/pdfs/pubec.pdf

Pettinger, Tejvan. “Should the government intervene with the economy?”. Economics Help, 24
September, 2012. Retrieved from
http://www.economicshelp.org/blog/5735/economics/should-the-government-intervene-in-
the-economy/

Stiglitz, Joseph. Economics of the Public Sector (PDF document). Retrieved from
http://www.scribd.com.