11A first account August 21.docx

11A first account August 21.docx

《11A first account August 21.docx》由会员分享，可在线阅读，更多相关《11A first account August 21.docx（22页珍藏版）》请在冰豆网上搜索。

11AfirstaccountAugust21

PUBLICFINANCEANDPUBLICPOLICY:

RESPONSIBILITIESANDLIMITATIONSOFGOVERNMENT

Copyright,AryeL.Hillman,Bar-IlanUniversity,Israel（hillman@mail.biu.ac.il）

CambridgeUniversityPress,2003

October15,2018

Chapter1

MARKETSANDPROPERTY

1.1Afirstaccount

1.2Propertyrightsandtheruleoflaw

1.3Lifeundermaximalgovernment

1.1

Afirstaccount

Themarketandefficiency

Individualfreedom

Spontaneousorder

Responsibilitiesofgovernment:

Whythemarketmaynotbeenough

Normativeandpositivequestions

Paretoefficiency

Socialjustice

Limitationsofgovernment

Theprivatecostofpublicfinance

Summary

Themostimportantquestionthatcanperhapsbeaskedineconomicsiswhenshouldweforgothepersonalindividualdecisionsofmarketswherewechoosehowtoearnandhowtospendincome,andinsteadrelyondecisionsofgovernment.Thisbookleadsusalongapaththataddressesthisfundamentalquestion.Weshallstudytheresponsibilitiesofgovernmentandalsothelimitationsofcallingupongovernmenttomakedecisionsforus.

Thebackgroundforourstudyistheexistenceofmarkets.Marketsallowpeoplevoluntarilytobuyandsell.Assigningresponsibilitiestogovernmentingeneralrequirestaxes,whicharenotvoluntarilypaid,althoughpeoplemaybequitecontenttopaytheirtaxesgiventhetax-financedbenefitsreceivedfromgovernment.Nonetheless,marketsarebasedonprivateindividualdecisions,whileassigningresponsibilitiestogovernmentrequirescollectivedecisionstobemade.Weshallthereforehavetostudycollectivedecisionsasmadethroughvotingbyindividualtaxpayers,andthroughrepresentativegovernmentonbehalfoftaxpayers.

Weshallbehappywithmarkets,ifmarketsachievetwobasicobjectives:

（1）efficiencyand

（2）socialjustice.Ifmarketscannotachievetheseobjectives,weshallhavetoconsiderreplacingtheprivatedecisionsmadeinmarketswiththecollectivedecisionsofpublicfinancethroughgovernment.Thepublicfinanceofgovernmentisaccompaniedbypublicpolicy.Publicpolicydetermineshowpublicspendingisfinancedthroughdifferenttaxesandperhapsgovernmentborrowingthroughsaleofbonds,andalsodeterminesthepurposesofpublicspending.

Weshallnowbeginourinvestigationoftheneedforpublicfinanceandpublicpolicywithmarketswhereneitherpublicfinancenorpublicpolicyispresent.Fromthisstartingpointwithoutgovernment,weshallinvestigatewhetherorhowpublicfinanceandpublicpolicycanimproveoutcomesofprivate,individuallymade,marketdecisions.

1.Themarketandefficiency

AcaseforthevirtueofprivatemarketdecisionswithoutgovernmentcanbetracedbackatleasttothewritingsofAdamSmith（1723-1790）.Smith,whowasaprofessorofmoralphilosophy,onanumberofoccasionsreferredinhiswritingstoaninvisiblehandthatguidespersonalself-interesttooutcomesthatbenefitanentiresociety.

Voluntarymarketdecisionsarenecessarilypersonallybeneficial,sinceapersonwhobelievesthatamarketdecisionisnotinhisorherbestinterestcansimplychoosenottobuyornottosell.Theinvisiblehand,accordingtoAdamSmith,ensuresthatpersonallybeneficialmarketdecisionsarealsoatthesametimesociallybeneficial.

Theformofsocialbenefitprovidedbytheinvisiblehandthroughpersonalmarketdecisionscanbeidentifiedtobeefficiency.Theinvisiblehanddoesnotpromisesocialjustice.Efficiencyandsocialjusticearethetwoobjectiveswithwhichweshallbeconcernedinthisbook.Weshallpresentlybemorepreciseaboutthemeaningsofefficiencyandsocialjustice,andweshallseethatthetwosocialobjectivesmaynotbesimultaneouslyachievable.

AdamSmithproposedthat,becauseoftheinvisiblehand,virtuousmenandwomenareabletopursuetheirself-interestthroughmarketswithoutfeelingsofguilt.ThereareelementsofmoralphilosophyinSmith’ssuggestion.Smithwassayingthatpeoplewhopursuetheirself-interestthroughmarketsshouldnotfeelguiltythatforfailingtosetthemselvesbroadersocialobjectives,becausetheinvisiblehandwilldirectpersonalself-interesttothegoodofallsociety.Thatis,whenmarketsexist,todosocialgood,peopleneedonlyseektodopersonalgoodforthemselves.

AdamSmithalsopointedoutthatsocialgoodachievedthroughtheinvisiblehandisunintentional.Peopledonotsetouttodosocialgoodwhenmakingself-interestedmarketdecisions.TheabsenceofintenttodosocialgoodwasseenbyAdamSmithasavirtue,becausehypocrisycouldbeabsentfrommarketdecisions.Smithwrote:

“Ihaveneverknownmuchgooddonebythosewhoaffectedtotradeforthepublicgood.”

AdamSmithwouldthusadviseusbewaryofpersonswho,whenofferingtobuyorsell,claimtohaveobjectivesotherthantheirownpersonalself-interest.Weshouldbecautiouswhenofferstobuyorsellareaccompaniedbyclaimsofaltruisticmotives.Thesaying,“donotlookagifthorseinthemouth”,advisesusnottoexaminetoocloselythequalityofagiftthatweareoffered.Inamarket,however,giftsarenotgiven.Rather,moneyandgoodschangehands.AdamSmithadvisedustobewareofgiftsorbargainsinmarkets.Since,toachievebothprivateandsocialgood,peopleneedonlyprofesstoseektheirownpersonalbenefitwhentheyoffertobuyorsell.

Efficiencyinacompetitivemarket

ThereisnoformalproofinAdamSmith’swritingsthatpersonalself-interestexpressedthroughmarketdecisionsisbeneficialforasociety.InthecenturiessinceSmith’swritings,variouswayshavebecomeavailableofmoreformallyconfirmingthesocialbenefitofmarkets,whensocialbenefitisdefinedasachievinganefficientoutcome.Thesimplestmeansofproofistolookatasinglecompetitivemarketasinfigure1.1,andtoobservethatmarketdemandexpressesmarginalbenefitofbuyersthroughwillingnesstopay,andthatmarketsupplyexpressesthemarginalcostofsellers.Sincethemarketiscompetitive,individualbuyersandsellershavenoinfluenceovermarketprices.BuyerschoosequantitiestobuybysettingthemarketpriceequaltotheirpersonalmarginalbenefitMB.SellerschoosequantitiestosellbysettingmarketpriceequaltotheirmarginalcostofsupplyMC.Thereisonemarketpricethatisthesameforallbuyers,andthereforeallbuyershavethesamerealizedpersonalMBfromtheirpurchasedecisions.MarketdemandreflectstheequalizedpersonalMBofallbuyers.ThemarketsupplyfunctionlikewisereflectsthecommonMCofsellers.AtthepointEinfigure1.1thetotalquantitydemandedbyallbuyersisequaltothetotalquantitysuppliedbyallsellers,andthepricethatbuyersarewillingtopayisequaltothepricethatsellersrequireinordertosupply.WecanconfirmAdamSmith’sclaimthatpersonalmarketdecisionsaresociallybeneficial,ifwecanshowthatthemarketoutcomeatthepointEisefficient.Wewouldthenofcoursehavedefinedsocialbenefitasefficiency.

Wedefineefficiencyasmaximizingnetsocialbenefit,

（1.1）

whereBistotalbenefitandCistotalcost.InseekingamaximalvaluefornetsocialbenefitW,wearenotaskinghowtotalbenefitsBandtotalcostsCaredistributedinapopulation.Wearenotaskingwhetherthepeoplewhobenefitorincurcostsarerichorpoor.Suchquestionsaredistributional,andweaskthesetypesofquestionswhentheobjectiveissocialjustice,andnotefficiency.Inthemarketshowninfigure1.1,BisthetotalbenefitofallbuyersinthemarketandCisthetotalcostofallsuppliers.Wisthedifferencebetweentotalbenefitofallbuyersandtotalcostofallsellers,andthereforemeasuresthenetbenefitforsocietyfromexistenceofthemarket.

Themarketcansupplymanydifferentquantitiesofoutput.EfficiencytomaximizeW=B-Crequiresthataquantityofoutputbesuppliedandsoldforwhich

（1.2）

.

SinceMBofbuyersisindicatedbythedemandfunctionand-MCofsellersisindicatedbythesupplyfunction,theoutputatwhichMB=MCisuniquelyatthepointEwheredemandandsupplyareequal.ThemarketoutcomeatEinfigure1.1isthereforeefficient.Thisismoreovertheonlyefficientoutcome.TheshadedareaAEOinfigure1.1isthemaximalvalueofW=B-Cthatthemarketcanoffer.

MC（SUPPLY）

Figure1.1:

Theefficiencyofacompetitivemarket

DemandexpressesmarginalbenefitMBofbuyers.SupplyexpressesmarginalcostMCofsuppliers.AtthepointEwheredemandequalssupply,MBandMCareequal,andW=B-Cisthereforemaximized.MaximalWistheareaAEO.

IfthepointEisefficient,howcanwenonethelessknowthatthemarketwillbeattheefficientpointEandnotsomewhereelse?

AcompetitiveadjustmentmechanismwillbringthemarkettothepointE,andonceatEthemarketwillstaythere.Thecompetitiveadjustmentmechanismisillustratedinfigure1.2.

WedenotethepricethatbuyersarewillingtopayforadditionaloutputbyPB.ThepricePBisdeterminedfromthedemandfunction.WedenotethepricethatsuppliersrequiretobepaidinordertosupplyadditionaloutputasPS.Thispriceisgivenfromthesupplyfunction.

AtthequantityQ1infigure1.2,thepricePBthatbuyersarewillingtopayforadditionaloutputexceedsthepricePSthatsuppliersrequireinordertosupplyadditionaloutput.Sincebuyersarewillingtopaythehigherpricethatsellersasktosupplymoreoutput,outputsuppliedincreasesfromQ1.OutputsuppliedcontinuestoincreaseuntiltheefficientoutputQEatthepointEisreached.AtoutputQE,thepricePBthatbuyersarewillingtopayandthepricePSthatsuppliersrequireinordertosupplyareequaltothepricePE.Outputnowstaysconstant.Eisthereforethepoint