Why study public finance?

The goal of public finance is to understand the proper role of the government in the economy. Why is the government the primary provider of goods and services such as highways, education, and unemployment insurance, while provision of goods and services such as clothing, entertainment, and fire insurance is generally left to the private sector? What kinds of taxes should be levied, who should pay them, and what effects do they have on the functioning of the economy?

Four questions of public finance"
(1) When should the government intervene in the economy?
(2) How might the government intervene?
(3) What is the effect of those interventions on economic outcomes?
(4) Why do governments choose to intervene in the way that they do?

The first motivation for government involvement in the economy is the existence of market failures. The second reason for government intervention is redistribution.

Several different general approaches that the government can take to intervention:
(1) tax or subsidize private sale or purchase

(2) restrict or mandate private sale or purchase

(3) public provision: have the government provide the good directly in order to potentially attain the level of consumption that maximizes social welfare.

(4) public financing of private provision: government finances private entities to provide the desired level of provision.

The direct effects are those that would be predicted if individuals did not change their behavior in response to the interventions. The indirect effects are those arise only because individuals change their behavior in response to the intervention.

A key feature of governments is the degree of centralization across local and national government units.