Chapter 15: Public Finance and Public Choice

Start Up: Where Your Tax Dollars Go

You pay sales taxes on most of the goods you purchase. If you smoke or drink or drive a car, you pay taxes on cigarettes, alcohol, and gasoline. If you work, you may pay income and payroll taxes.

What does the government do with the taxes it collects? If you go to a public school, you are a consumer of public sector services. You also consume the services of the public sector when you drive on a public street or go to a public park. You consume public sector services since you are protected by law enforcement agencies and by the armed forces. And the production of everything else you consume is affected by regulations imposed by local, state, or federal agencies.

The public sector is a crucially important segment of the economy, due in part to its size. The nearly 90,000 government jurisdictions in the United States, from local fire protection districts to the federal government, either produce or purchase nearly one-fifth of all domestic goods and services. The U.S. government is the largest single purchaser of goods and services in the world.

This chapter examines the role of government in a market economy and the ways in which the taxes that support government affect economic behavior. The study of government expenditure and tax policy and of their impact on the economy is called public finance.

We will also explore the economics of public sector choices. Economists put the notions of self-interest and the marginal decision rule to work in the analysis of choices made by people in the public sector—voters, government employees, interest groups, and politicians.