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Public Finance

by The Saylor Foundation

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Course Description

Purpose of Course

Public Finance rests at the intersection of two disciplines: Public Economics and Public Choice.  Public Economics deals with issues of social optimality: how much of a good (or ill) does a society desire (or tolerate), and how do we incentivize producers and consumers to attain that amount?  Public economics concerns itself with externalities, which are costs that are borne by persons not involved in a market transaction.  There are both positive and negative externalities; public economists want to know how we get more of the good and less of the bad.  Public choice is the field of economics that looks into the behavior of voters, politicians, and bureaucrats and studies how they choose given different policy institutions.

The field of Public Finance studies the interaction between these two disciplines, asking questions like: How do the incentives of the political actors shape the policies they craft?  How does that in turn affect the outcomes in the marketplace?  Alternately, students of Public Finance might ask: How do outcomes in the marketplace affect the incentives of political actors?

After a review of economic cost-benefit analysis tools, we will consider the justification for government fiscal intervention.  We will learn how to distinguish between public and private goods and how to determine whether the market and the government are succeeding in providing the optimal amount of these goods.

After this introduction, we will use these tools to work through the effects that different kinds of taxes have, including on the behavior of individuals.  We will use these same tools to analyze subsidies (put simply, subsidies are taxes in reverse).  As we learn about taxes and subsidies, we will consider real world policies and how we might improve them by using the lessons learned from our economic logic.

In the second part of the course, we will consider the activities of taxation and subsidy within the context of political processes.  The final part of this course will provide you with an overview of general trends within the United States government’s tax and spending activities, along with current controversies regarding taxation and government spending in the US.

By studying public finance, you should get a sense of the natural tension between the desire for policies that optimize society’s welfare and the motivations that lead to actual tax and expenditure policy outcomes.  In this course, we will consider the question of how well the political system can be expected to do in terms of keeping the country financially sound.
Public Finance
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