Tag Archives | Public Finance

Pareto Efficiency in Allocation of Goods (With Diagram)

Welfare economics is the study of efficiency and equity of resource allocation. Allocative efficiency is the point at which allocations maximize total net benefits of society. Pareto efficiency or optimality is another way to measure efficiency. Developed by Vilfredo Pareto, (1848 – 1923) Pareto efficient allocation of goods occur when no other possible allocation makes […]

Negative Externality and Economic Inefficiency

In this article we will discuss about how negative externality becomes a source of economic inefficiency. Suppose John an ambitious rock musician, resort to the practice of playing electronic guitar, every day for five hours in his house. However John’s immediate neighbor, Peter does not enjoy listing to the ear-storming guitar notes. The practice time […]

6 Major Instances of Market Failure | Public Finance

This article throws light upon the various instances of market failure which calls for government intervention for correction. The instances are: 1. Externalities 2. Provision of Public Goods 3. Decreasing Cost  4. Uncertainty as a Source of Market Failure 5. The Distribution Function 6. Market Efficiency and Income Distribution. Market Failure: Instance # 1. Externalities: […]

Prof. Musgrave Approach to Public Household

In this article we will discuss about the multiple theory of public household. Economists have paid much attention to the formulation of theories that examine the problems of consumer households, business firms, trade unions and other decision making units in the economy. How­ever they have not made any serious attempt to develop a corre­sponding theory […]

Positive Externalities and Allocative Efficiency

After reading this article you will learn about the relationship between positive externalities and allocative efficiency. Positive externality occurs whenever private markets fail to allocate resources on the basis of full social benefits. I­mmunization against communicable disease, external benefits from edu­cation at schools are typical examples of positive externalities. Indi­viduals who are external to the […]

Corrective Policy and Negative Externalities

This article throws light upon the top three policies taken by government that will correct negative externalities. The policies are: 1. Taxation 2. Subsides 3. Regulation. Type # 1. Taxation: Corrective taxation of negative externality, forces market participants to account for the opportunity costs of all resources allocated in private market. Consider the case of […]

Stabilization Policy and Its Instruments

Stabilization Policy: Budgetary policy has its own bearing on the performance of a na­tional economy. That is on targets such as high employment, a reasonable degree of price stability, soundness of foreign accounts and an acceptable rate of economic growth. These macro targets cannot be materialized automatically. But it requires deliberate and well planned policy […]

Classification of Goods: 2 Types

1. Private Goods: Private goods are those goods which yield utility only to the person consuming the good. Only the person who drink a cup of tea for example benefit from the consumption of that cup of tea. The cup of tea consumed by one person cannot be consumed by anyone else. Therefore private goods […]

Top 3 Approaches to Public Goods Allocation

This article throws light upon the top three approaches to public goods allocation. The approaches are: 1. The Marginal Utility Approach of Public Goods Allocation 2. Voluntary Exchange Approach 3. Samuelson’s Approach to Public Goods Allocation. 1. The Marginal Utility Approach of Public Goods Allocation: Professor A. C Pigou has made a heroic attempt to […]

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