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Public sector economics (or "public economics" for short) is the study of economic issues that concern the public sector in a mixed economy. While much of economics is based on how markets work, public sector economics focuses on why markets fail, and what issues arise around regulation and planning by government to ensure that goods and services meet people's needs and wants.
It covers public-finance theory and its application to public-policy issues. It includes economic issues beyond the household, firm, or market with emphasis on analytical and scientific methods and normative-ethical analysis (Kolm, 1987, p. 1047). Examples of topics covered are tax incidence, optimal taxation, the theory of public goods, and design of policy (Atkinson and Stiglitz, 1980).
A public good has the feature that the marginal cost of an additional individual enjoying it is zero. Examples include an army, street lighting, radio signals or information. If there is an army defending one person in a country, a street lamp for one person, a radio signal for one person, then it is with no extra cost that two or more people use the service. For information, whose character as a public good was emphasised by Joseph Stiglitz, an old aphorism of philosopher Bertrand Russell holds true,
"If I have one apple and you have one apple and we exchange apples, we both have one apple. But if you have an idea and I have an idea and we exchange ideas, then we both have two."
The problem of the public good is that if people can use the good or service at the same time and cannot be excluded from its use (which with a cost they sometimes can, e.g. encoding a Wifi signal with a password) then people can "free-ride" on its use. Consumers will not be contributing to the costs of production. Because producers cannot recoup enough expenses, there will be an underproduction of public goods. There is therefore a role for state intervention. The government through taxation can get all people to contribute.
characteristics of public goods are non - excludability and transferable. Non excludabilty means the consumption of the goods is not limited on specific group of consumers, that is the satisfaction of the people watching fireworks display is not limited to the owners of the fireworks. The transferability feature of the public goods means that the consumption of an individual will not lead to deprive the other, that is, if a consumer is doing fishing on a pond, another person may do fishing as well on the same pond.
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