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Why Study Public Finance? 1

1.1 The Four Questions of Public Finance

1.2 Why Study Public Finance? Facts on Government in the United States and Around the World

1.3 Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education

1.4 Conclusion

Dan Sacks edited by Achmad Nurdany

P R E P A R E D B Y

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The Four Questions of Public Finance

1.1

Public finance: The study of the role of the government in the economy.

Four questions of public finance:

When should the government intervene in the economy?
How might the government intervene?
What is the effect of those interventions on economic outcomes?
Why do governments choose to intervene in the way that they do?

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When Should the Government Intervene in the Economy?

1.1

Economics generally presumes that markets deliver efficient outcomes, so why should government do anything?
Primary motive for government intervention is therefore market failure.
Market failure: Problem that causes the market economy to deliver an outcome that does not maximize efficiency.

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1.1

APPLICATION: Covid 19 Pandemic

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1.1

APPLICATION: Covid 19 Pandemic

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1.1

APPLICATION: Covid 19 Pandemic

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Apakah saat ini anda sudah mengikuti program vaksinasi dari pemerintah?
Vaksinasi gratis adalah bentuk dari role/intervene of the government in the economy = public finance
Questions rise:

When should intervene? How? What effect?

Jika vaksin tidak gratis apakah anda akan tetap melakukan vaksinasi?

1.1

APPLICATION: Covid 19 Pandemic

Jika vaksinasi tidak dilakukan oleh pemerintah, dibiarkan sesuai dengan menakisme pasar, tingkat vaksinasinya tidak akan setinggi itu, semakin banyak yang tidak vaksin akan menimbulkan biaya yang lebih besar = negative externality

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When Should the Government Intervene in the Economy?

1.1

Even if the market is well-functioning, an efficient outcome is not necessarily socially desirable.
Redistribution is a second reason for government intervention.
Redistribution: The shifting of resources from some groups in society to others.

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1.1

Tax or Subsidize Private Sale or Purchase

Use the price mechanism, changing the price of a good to encourage or discourage use.

Taxes raise the price for private sales or purchases of goods that are overproduced.
Subsidies lower the price for private sales or purchases of goods that are under-produced.

How Might Governments Intervene?

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1.1

Restrict or Mandate Private Sale or Purchase

Quotas restrict private sale of goods that are overproduced.
Mandates require private purchase of goods that are under-produced.

Public Provision

The government can provide the good directly.

Public Financing of Private Provision

Governments pays, private companies produce.

How Might Governments Intervene?

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Interventions have direct and indirect effects.

Direct effects: The effects that would be predicted if individuals did not change their behavior in response to the interventions.

With 49 million uninsured, providing universal health insurance covers 49 million people.

Indirect effects: The effects that arise only because individuals change their behavior in response to the interventions.

If people drop private coverage, many more people may end up covered by the public plan.

1.1

What Are the Effects of Alternative Interventions?

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Governments do not always choose efficient or socially desirable outcomes.
Political economy: The theory of how the political process produces decisions that affect individuals and the economy.

1.1

Why Do Governments Do What They Do?

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The government is a huge part of the economy:

Government spending represents a large sector of the economy, in the United States and around the world.
This spending is financed with taxes or with debt, and these affect every facet of the economy.
Many sectors of the economy are also directly affected by regulation.

1.2

Why Study Public Finance?

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1.2

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A key feature of governments is the degree of centralization across local and national government units.
Centralization: The extent to which spending is concentrated at higher (federal) levels or lower (state and local) levels.
In the United States, state and local spending is about one-fourth of total government spending.

Decentralization

1.2

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Distribution of Spending

Public goods: Goods for which the investment of any one individual benefits everyone in a larger group.

Example: Defense spending

Social insurance programs: Government provision of insurance against adverse events to address failures in the private insurance market.

Example: Health insurance

Over time, spending has shifted dramatically toward social insurance, especially health insurance.

1.2

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Regulatory Role of the Government

The government regulates a wide range of economic and social activities:

BPOM (Badan Pengawas Obat dan Makanan)
KPPU (Komisi Pengawas Persaingan Usaha)
Bappeti (Badan Pengawas Perdagangan Berjangka dan Komoditi)
BPKP (Badan Pengawas Keuangan dan Pembangunan)
BPK (Badan Pemeriksa Keuangan)

1.2

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Many heated policy debates concern the impact of major public programs:

The role of Social Security, health care, and education are all contentious subjects.
“Liberal” and “Conservative” positions hold differing views on how to approach these major policy issues.

Why Study Public Finance Now? Policy Debates over�Social Security, Health Care, and Education

1.3

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Ada orang sakit, perlu berobat, haruskah membayar?

Jika tidak, rumah sakit butuh pemasukan, darimana?

Di bayari pemerintah, anggaran nya dari mana? APBN?

Tidak cukup, utang boleh? Naikkan pajak, mau?

Ada solusi, namanya BPJS, sistemnya iuran bulanan, urunan bersama, untuk membayari yang ‘kebetulan sakit’ saat itu. Bayar nya mahal?

Ada skema PBI dan Mandiri (Kelas 1, 2, dan 3)

Should government intervene? Atau serahkan saja kepada mekanisme pasar?

Why Study Public Finance Now? Healthcare

1.3

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Sama halnya dengan Kesehatan

Pendidikan juga begitu, sekolah harusnya gratis atau bayar? Lebih milih mana bayar tapi bagus atau gratis tapi biasa? Ada tidak pilihan bagus tapi gratis?

SD – SMA negeri saat ini banyak yang ‘gratis’, tapi sekolah bayar mahal juga tidak bangkrut.

Kalau anda jadi pemerintah mau bagaimana melihat ‘pasar’ pendidikan yang seperti ini?

Government intervene? BOS, Sertifikasi Guru dan Dosen, Beasiswa, dll

Why Study Public Finance Now?

1.3

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Government plays a central role in the lives of all Indonesian.
There is ongoing disagreement about whether that role should expand, stay the same, or contract.
The facts and arguments raised in this chapter provide a backdrop for thinking about the set of public finance issues that we explore in the remainder of this book.

1.4

Conclusion

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