FUNDAMENTAL PRINCIPLES OF PUBLIC FINANCE

1
INTRODUCTION

• FUNDAMENTAL PRINCIPLES OF PUBLIC FINANCE
• Market Failure
• Political Failure

2
How are Governments Different From other Entities?

• Geographic Jurisdiction
• Authority to Coerce (police power)

3
How Is Public Finance Different from Corporate
Finance?

• Different general purpose financial statements?
• Different tools/analytic concepts?
• Different purposes?
• Different scorecards?
• Different activities?

4
2/3 of Governments Financial Activities Are the
Same!

• SPENDING
• BORROWING (and managing cash)

• But not
• TAXING

5
Taxes Are the Reason Public Finance is NOT the
Same as Corporate Finance

• Taxes are not the same as purchases.
• They are COMPULSARY not voluntary
• They reflect a LEGAL requirement for payment
  backed, if necessary, by FORCE or threat of FORCE
• Coercion is nasty -- something we dislike and
  distrust

6
IF TAXES ARE SO BAD, WHY HAVE A PUBLIC SECTOR IN
AN OPEN AND FREE SOCIETY?
7
IN SOME CASES THE BENEFITS OF COLLECTIVE ACTION
(requiring spending) OFFSET THE HARM DONE BY
TAXES
8
Markets and the Functions of Government

• MARKET PRECONDITIONS
• System of law
• Protection of life and property
• Enforcement of contracts
• Sound medium of exchange

• MARKET STABILIZATION
• Macroeconomic
• Income redistribution
• Microeconomic
• Definition of property
• Disclosure requirements
• Regulation of competition natural monopolies

9
Market Failure

• Markets equilibrate
• DEMAND (measured in terms of willingness and
  ability to PAY)
• and
• SUPPLY (measured in terms of willingness and
  ability to SELL)

10
Public Good I