Public

Finance

Introduction
to Public
Finance

Harvey S. Rosen

Department of Economics
Princeton University

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Public Economics
Public Finance or Public Sector
Economics.
Focuses on the taxing and spending
activities of government and their
influence on the allocation of
resources and income distributions
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Organic View of Society

Individuals are valuable only in their
contribution to the realization of social
goals.
These Goals are determined by the
Government.

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Mechanistic View of Society

Government is an institution erected to further
individual goals.
Question:
How does the government should promote
sometimes conflicting individual goals?
How does government balance the objectives
of achieving efficiency and equity in the
society?

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Role of Government
Legal constraints on central and provincial
government economic activity are embodied
in the laws (example: UU No. 22 & 25 /1999).
Central government may effectively
undertake any expenditures it wishes and
may use debt and taxes to finance them.
Question:
Does central have to discriminate among
states when choosing tax rates or spending?
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Continued.

Does provincial government have to

discriminate against outside residents,
or tax other provinces products?
How to measure the size of
government?
Hint: employers, employees,
expenditures, revenues, etc.

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Continued..

In US, personal income and social

security payroll taxes are currently
the largest sources of government
revenue
Question:
What are currently the largest
sources of Indonesian government
Revenue ?
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Tools of Positive Analysis

Interview studies
Social and laboratory experiments
Econometric analysis
All attempts to measure both the
direction and size of the effect of
government policy changes on
behavior
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Tools of Normative
Analysis
Edgeworth Box

Indiference curves
Pareto efficient allocation
(making better off without other
people worse off)
Production Possibility Frontiers
Welfare Economics: study of the desirability of
alternative economic states
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Role of Government restated!!

Reasons:

Society may prefer an inefficient

allocation on the basis of equity,
justice, or others
Needs for handling market failure
which may occur in the presence of
market power or when markets do not
exist
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