Public Finance, 3rd Edition

Introduction

Part II presents the first-best analysis of public expenditure and tax theory in the context of a market economy. Recall from the discussion in Chapter 3 that a first-best policy environment exists if the market economy is perfectly competitive and the government can use whatever policy tools that are necessary to achieve full pareto optimality and the interpersonal equity conditions of a social welfare maximum. In other words, the government can bring the economy to the bliss point on its first-best utility-possibilities frontier.

The first-best policy environment may seem unduly restrictive, but first-best analysis is the appropriate way to begin the study of the public sector. It serves as the baseline for all public sector analysis ...