Publicly Funded Activities

Publicly funded activities affect almost all facets of our lives. We attend public universities, send our kids to public schools, drive on public roads, visit public hospitals, rely on public health and pension coverage, etc. The examples are almost endless.

The provision of these and other goods and services by governments implies two things: first, that the goods or services provided are needed, and second, that the public sector will do a better job of providing them than the private sector would. A continuous challenge, however, is that there often is no readily available feedback to shed light on whether these assumptions are reasonable or not.

If the services mentioned above were provided in private sector settings, these questions would typically be resolved by people "voting with their wallets." That is, consumers would provide feedback to private sector entities by paying for only those goods and services they need or want. If goods and services are priced too high or fail to meet people's wants or needs, then they will not be purchased in sufficient quantities and will eventually disappear from the marketplace unless necessary market-driven adjustments occur (e.g., reinvention of the products, lowering of prices, or improvement in the quality of the products).

In public sector settings, however, governments often do not have the luxury of receiving such feedback. An important reason for this is that most government produced goods and services are not paid for by the same people that benefit from them. Rather, they are typically funded by means of general taxes or other revenues that are not directly linked to consumption. This "broken" link between those who benefit from public goods and services and those who pay for them represents a fundamental difference between government finance (i.e., public finance) and private finance. One example that illustrates this broken link is the funding of public schools. These are typically financed by local property taxes. People who own property are required to pay local property taxes, regardless of whether their children attend the school system (e.g., they may be homeschooled).

The subject of public finance provides us with an important starting point for understanding what types of economic activities the public sector ought to be involved in. Or more specifically, it provides us with some basic principles that can be used to guide choices about the use and acquisition of public resources in the absence of a normal market test. Most important, it outlines the theory of market failure, which offers insight into why it might not be in the best interest for a society to rely solely on the private sector to provide goods and services. These market failures are described in Chapter 1 of the Mikesell text and will be discussed on the next page.