Public financial economics
The science of public finance arose as a part of economics to specialize in the study of the financial activity of the state, and as a result of the mutual and close relationship between them, interest in studying the economic aspects of public finance has increased.
The science of public finance studies the financial activity of the state, and this activity relates to identifying each of the following:
Government expenditures necessary to satisfy the general needs of society
How to provide the government revenues needed to cover these expenses.
The scope of the science of public finance differed according to the development of the state in economic activity, especially between the traditional school and the modern school.
Traditional economic school
The role of the state is limited to providing the necessary public services such as defense, security, justice (the custodian state), and some works that the private sector does not accept to carry out, especially those whose provision does not entail a change in prices for goods and services if the works that do not cause damage to economic activity. As the forces of supply and demand, if left without the intervention of the state, will lead the economy to an automatic equilibrium at the level of full employment that meets the needs of society.
Characteristics of the traditional economic school
The financial activity of the government is neutral and does not affect prices.
The financial activity of the government is at the lowest possible cost and therefore the tax burden on society must be reduced.
The necessity of achieving balance in the general budget, as the surplus leads to waste and the deficit leads to borrowing.
Public loans, from the point of view of this school, are a waste of national savings as they are withdrawn from investment.
The emergence of the modern economic school
The lack of conditions for perfect competition in order for the market system to function efficiently and restore balance and stability automatically in the economies of the capitalist countries that followed this approach. The Great Depression that swept the world in the thirties of the twentieth century was a turning point in economic thought, especially with regard to the role of the state. Modern theory has tended to support state intervention to influence and direct economic activity.
Characteristics of the modern economic school:
The goal of the modern school has become to achieve economic and social balance rather than balance the general budget, and thus the deficit can be deliberate.
The nature of public spending is no longer only consumerist, but its nature can be productive as well.
There is no longer a need for the neutrality of financial activity, so it called for the non-neutrality of public finances.
The relationship of the science of public finance to the science of economics
The relationship of public finance science with the economy is the relationship of the part to the whole that affects and is affected by each other, by using revenues and expenditures as important tools to influence the economy. Many economic crises such as inflation and deflation can have revenues or expenditures that have a clear and influential role in mitigating the effects of these crises. In addition, there is no contradiction between fiscal policy and economic policy, but rather a unity of purpose in achieving stability and getting rid of economic crises.
Kinds of needs
Individual needs: the individual undertakes the matter of satisfying himself and leaves him the freedom to dispose of them as a general rule in every society, and these needs are derived from the requirements of the natural, cultural and spiritual life of man.
Collective needs: defined as the collective need that the general activity satisfies, and it is divided into:
A department that is saturated by special activity, which is known as special needs.
A department that satisfies public activity, which is known as public needs such as the need for justice, security, and defense...
1- General, indivisible needs:
They are the needs that cannot be satisfied and the benefits generated by them for individuals or groups cannot be divided, such as internal security, external defense, and justice...
The amount of satisfaction of the needs of these services is not equal for all individuals.
It is impossible to exclude any individual or group from enjoying these general needs.
2- Eligible needs:
Needs that can be divided, and can be separated from each other, and depend mainly on the economic, social, and political nature of the state in society, and they are needs that can be carried out by private activity as well as by public activity if there is a collective benefit greater than the individual benefit such as education, health, transportation, transportation, and water Electricity and gas…
Criteria for distinguishing between public needs and special needs
Economic criterion: Individuals satisfy their own needs, as they seek to satisfy the largest possible amount of their needs at the lowest possible economic cost. An individual does not satisfy certain needs if satisfying them requires an expenditure greater than the benefit they achieve for him. Whereas, the state must satisfy these needs, regardless of the process of balancing the expenditure it incurs and the benefit it accrues.
Historical criterion: This criterion is adopted in distinguishing between needs by referring to the traditional state function. The needs are general, i.e. within the scope of the traditional functions known to the state such as defense, security, justice, and foreign affairs.
Goods and services in public finance:
Public goods occupy special importance in the study of public finance, as they represent the basic activities of the state, and consequently, its identification entails knowing the necessary aspects of spending that the state must undertake.
Public goods are goods that satisfy the needs of society as a whole, such as homeland defense services, internal security, justice, and foreign affairs. They are the first determinant of the size of the state's public expenditures.
The primary purpose of public goods and services is to achieve a public benefit and satisfy public needs.
Characteristics of public goods and services
Non-competitive consumption: A commodity can be consumed by unlimited societies at the same time without decreasing what is available for consumption by others. This characteristic means that the marginal cost resulting from adding one person to the consumers of the good or service is equal to zero. An example of building a lighthouse guided by its light.
Inability to exclude: the inability to prevent anyone from consuming a good or service, so no one can be excluded from
To benefit from the defense service, for example, because he did not pay the taxes due on him. When there is no logical justification for excluding an individual from consuming a good, that good is public.
The problem of free use of public goods:
The free beneficiary is the consumer who does not disclose his preferences towards public goods and is used without paying for them. The problem of free access is one of the main reasons for the difficulty of relying on the private sector and market forces to produce public goods. For example, some residents may be reluctant to participate in the financing of a park in the hope that they will benefit from it when it is implemented. That is why the government undertakes the production and financing of such goods and services.
Domestic public goods
Domestic public goods can be produced by local entities that have a low level of competitiveness in consumption but with the ability to exclude non-paying individuals such as using tickets to enter the park, provided that this does not lead to a significant increase in costs. The object of charging, in this case, is to link the payment to the benefit to cover the cost, such as for parking in a city center. But when the demand for it is low, it is better to allow free use of it rather than incurring the costs of regulating the use.
Goods that have external effects
Consumption or production externalities occur when an individual is affected by the consumption of a good or service either positively or negatively even though it was not in the transaction that led to the direct consumption or production.
Goods that have positive external effects: such as the education of the child, not only benefits the child, but society as a whole.
Goods that have negative externalities: such as factory smoke costs borne by society such as the cost of frequent laundry and the cost of chest diseases caused by smoke.
Reasons for public finance interference in economic activity
The state’s intervention in economic activity determines the volume of public expenditures due to the failure of the interaction of supply with demand to achieve the best results for society, and in other cases, the conditions for full competition for the functioning of the market system are not available.
Public goods are goods or services that satisfy the general needs of society as a whole, such as defense, security, and justice. The private sector does not seek to produce it, and therefore the market system fails to provide it because:
Its consumption is not competitive, which means that the marginal cost of any additional use of it = zero.
Its efficiency requires resource allocation to be priced at marginal cost = price, which is what makes the private sector reluctant to provide it, as well as when it is not possible to exclude those who do not pay for the service.
Objectives of public finance intervention in economic activity
Employment level: by raising the level of public demand by increasing government spending (an expansionary fiscal policy) or raising the level of private demand by reducing taxes (deficit financing policy).
Price stability: If price increases prevail, the economy will be in a state of "economic inflation", as it reduces the real incomes of people with fixed incomes, and leads to money losing purchasing power and increasing production costs, so facing inflation is usually what is meant by price stability. The state can work to reduce the volume of aggregate demand by reducing its components of consumption and investment through a policy of surplus financing (taxation) and reducing government spending by reducing the volume of aggregate consumption with a contractionary fiscal policy.
Balance of payments balance: It is an arithmetic record that organizes the relations between the domestic economy and the outside world during a certain period of time through the trade balance. The state can increase exports by facilitating export subsidies. The government can also reduce imports by raising the tax on imports and encouraging alternative industries to import.
Economic development: production is increased by creating the factors of production in society. Economic development is characterized as long-term and does not have a quick financial return, which makes the state’s intervention necessary to achieve it by raising spending on human capital, better use of natural resources, direct investments, and justice in the distribution of income and wealth.
Anti-monopoly: Imposing legislation and laws that prevent a monopoly from occurring and supervising the policy of monopolistic activities to ensure that they work in accordance with the interests of society and by adopting decreasing costs (natural monopoly), meaning that the marginal cost decreases with the increase in the volume of production.