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Introduction to Normative Public Sector Theory

Richard W. Tresch, in Public Finance (Third Edition), 2015
Public sector economics is the study of government economic policy. Its primary goal is to determine whether government policies promote a society's economic objectives. This happens to be quite an ambitious goal. The advanced Western market economies experienced enormous growth in the size and influence of their government sectors during the last half of the twentieth century, and economic analysis of the public sector has reflected this growth. No single textbook on public sector economics can possibly hope to capture the variety and richness of the professional economic literature on government policy, even at an introductory level. Consequently, a public sector text must begin by defining its limits.

Public Sector Banking Analysis and Risks Management in Developing Economies

Learning focus and objectives

The public sector is—and will for a long time remain—a critical target market for banking in developing economies. However, banks should have strong liquidity base, acquire advanced IT capability, and employ and retain competent staff in order to meet and mitigate risks of its current and future banking needs. Thus banks should devote themselves to build these capabilities considering the significance of the sector. I have used government and public sector—throughout this chapter and elsewhere in this book—as interchangeable terms. It refers to all nonprivate economic units, institutions, and establishments—whether or not engaged in business—that are oriented to politics, governance, or provision of social services in a country. The learning focus and objectives of this chapter are geared to:
identify the characteristics of public sector banking in developing economies;
examine the significance of risk control for bank marketing in the public sector;
assess the banking potential of the public sector;
formulate framework for public sector banking analysis, and risk control; and
explore risk-based issues in marketing and managing public sector banking relationship.

Training Finance

Fund augmentation

Public sector funds available for the support of training institutions through subventions may be augmented from other sources. Earmarked training taxes, usually levied on the payrolls of enterprises, have emerged as the most widely adopted alternative to central government budgetary allocations for training. Payroll levies of this type were first introduced in Brazil in the 1940s, spread widely to other countries in Latin America (a recent discussion is provided in Galhardi, 2002) and has been adopted by training systems in many other countries. Levies are usually set at between 1% and 2% of the total wages bill of the enterprise; proceeds are used mainly to support public sector training provision, with the emphasis on initial training at formal public training institutions. Training levies can constitute a stable and protected source of funding for national training provision. However, the expectation that levy income would complement existing government financing, thus providing an additional source of funding, has not always realized in practice, and levy income has displaced government subventions for training. There are also notable cases of the opposite tendency, where earmarked training taxes are absorbed into general government revenues rather than being used for the financing of public training. A fuller treatment of payroll levies is provided in Ziderman (2008).
Governments in developing countries may turn to donor institutions to provide funding, either to the government or directly to individual training institutions; in some country settings, donor funding constitutes a very important finance source for public sector training institutions.

Introduction to Second-Best Analysis

Richard W. Tresch, in Public Finance (Third Edition), 2015
Public sector economists thus face something of a dilemma in trying to inform public policy. They can recommend that policy makers try to approximate the definitive results from first-best theory, knowing that the underlying first-best model is patently unrealistic, or they can recommend that policy makers try to approximate the results from one or more second-best models, knowing that the results depend on the particular constraints that have been chosen in the name of realism and that the real world is many times more constrained than any one model can hope to capture.

The Theory of Decreasing Cost Production

Richard W. Tresch, in Public Finance (Third Edition), 2015
Public sector economics has traditionally concerned itself only with the most extreme example of decreasing cost, in which a single firm's average cost declines all the way to total market demand. This is referred to as a natural monopoly, because a single firm can supply the entire industry output most cheaply. The problems arising in less-extreme instances of decreasing cost production that lead to oligopolistic market structures have traditionally been covered in courses on industrial organization. In keeping with this tradition, this chapter analyzes only the natural monopoly, so that “decreasing cost” means decreasing unit cost to total market demand.

Public Sector Organizations

Public sector organizations’ are entities that have been formed to manage the policy and operating requirements that enable a government to achieve its goals of public governance. The term ‘public governance’ has been defined as the management of a nation through the use of political power (Rainey 1991), or more simply put, answers the question: ‘How should government govern, and what should it do’ (Peters 1996, p. 19)? Such a broad definition of public governance permits a wide range of activities to be undertaken by public sector organizations as the administrative arm of government.

Applying First-Best Principles of Taxation—What to Tax and How

Sacrifice Principles of Vertical Equity

Public sector economists had long worked on the problem of vertical equity from the sacrifice perspective of the ability-to-pay principle, but without much success until 1988. This line of research had pretty much died out by the 1980s. The main suggestions for vertical equity in the tax literature at that time dated from the late 1800s to the early 1900s. Then, in 1988, H. Peyton Young achieved a substantial breakthrough. Building on one of the earlier principles, Young used the methods of cooperative game theory to develop specific recommendations for the tax structure. Young's game-theoretic approach appears to be a promising avenue for future research.11
The two long-standing principles of vertical equity in taxation before Young wrote were minimum aggregate sacrifice and equal sacrifice.

Patents and Other Incentives for Pharmaceutical Innovation

Abstract

The public sector helps finance the drug discovery enterprise through a variety of mechanisms. These include grants for biomedical research conducted in public sector labs, tax subsidies for private drug plans, and the extension of intellectual property privileges to drug developers. The cost of bringing new drugs to market has increased markedly during the past two decades. This has raised questions about whether existing forms of public sector support is optimal, and, in particular, if alternative forms of public support would result in more therapeutically valuable drugs per dollar spent. This article reviews the advantages and deficiencies of existing forms of government support for drug R&D, and the features of the alternative arrangements that their proponents suggest will improve in the current system. The authors review both ‘push’ programs – schemes that make private investment in pharmaceutical R&D more profitableby reducing the private cost of the R&D – and ‘pull’ programs – schemes that increase the revenues accruing to companies that manage to bring new drugs to market. The chapter concludes with an assessment of the issues that need to be resolved for these alternative forms of support to be actually implemented.

Individual, Professional and Organisational Ethics

Public Sector Ethics

Public sector ethics is an applied ethics that affects all the cultures, and that is considered a powerful mechanism of public power control and a key factor of the quality. It is, similarly, an ethics of service, therefore the characteristics that define it (intangibility, heterogeneity, simultaneity and expiration) make the standards of excellence take place around reliability, sensitivity and speed of response, skills in each kind of service, accessibility, courtesy, communication, credibility, security and understanding (Hartman, Desjardins, & Espinoza, 2011).
The factors that in recent years have influenced the development of the public sector ethics are the lack of resources, the growing demands of the citizenship, the restructuring of the public sector, and the change in the social norms and the international context. These conditions have led to the creation of an ethical infrastructure based on ethics institutionalisation means in the mentioned organisations. A report carried out by the Organisation for Economic Co-operation and Development (OECD) in the late 1990s (INAP, 1997) describes the initiatives and the new ethics management trends undertaken by the governments of different countries. These initiatives refer, firstly, to the detection of gaps in the ethics management and, for this reason, Committees (Nolan Committee in the United Kingdom) and working groups were created for performing an analysis of the situation (Norway or Finland for senior positions); establishing preventive policies (Netherlands), or promulgating more detailed rules about the conduct of public workers (United States). Secondly, initiatives for integrating the ethics management in the global administrative management, such as the elaboration of codes of ethics or other conduct guidelines, or the management of the performance. And thirdly, measures for the Modernisation of the Public Administration, on whose basis programmes of quality and creation of ethical frameworks have been established in countries such as Portugal, Spain or Mexico.
With regard to the ethics management trends detected by the OECD report (INAP, 1997), we highlight the attempt to redefine global values of the public service once checked the high level of homogeneity existing in all the countries, and the inclusion of new emerging values in the ethical codes, such as efficiency, effectiveness, citizen service or respect for the environment. Another trend on the rise are the procedures that allow making known the nonethical, unnoticed or deliberate conducts (Drabenstott, 1986, cited by Candás, 2010, p. 90), through reporting mechanisms used by both, public workers and citizens in general. They are considered a commitment to transparency that can put an end to the traditional tensions between the values of transparency and loyalty to the institution. Last but not least, there exist other initiatives such as the declaration of economic interests on the part of the senior positions, that imply, similarly, to finish with the tension, in this case, between values of transparency and intimacy.
With regard to the new management models, the public administration is evolving from the exhaustive regulation of the procedures towards the improvement of responsibility mechanisms, defining clearly the people responsible in each case and developing global systems of monitoring, accountability and assessment. As a consequence of this evolution, three management models are observed (INAP, 1997):
1.
A model based on the integrity, where there exist rules, but the emphasis lies on the results to be achieved, instead of the conducts to be avoided. It is based on the definition of values, the writing of positive deontological codes, methods for achieving results and good behaviour encouragement (instead of monitoring and punishing). This is the model followed in New Zealand.
2.
A model based on the compliance of rules, administrative procedures and legal regulations, where there exist deontological codes but these are focused on describing what it must be done and the behaviour that must be avoided, with monitoring and pursuit measures for misconducts (United States, Portugal or Mexico).
3.
An intermediate model, with a tendency towards integrity, where a gradual change happens in the rules towards results, from the procedures detailed to the guidance, although certain rules continue existing (Norway, Finland and the Netherlands).
These possibilities have matured over the years until today and, regardless of the models selected by one or another country, they set a common goal: adding to the three Es of Economy, Efficiency and Effectiveness, a fourth one, the E of Ethics.

First-Best and Second-Best Analyses and the Political Economy of Public Sector Economics

Reactions to the Arrow and Gibbard–Satterthwaite Theorems

Public sector economists have reacted in one of three ways to the problematic nature of the social welfare function. Two are mainstream reactions; the third is associated with the public choice school.
One mainstream reaction, commonly associated with Paul Samuelson, might be termed the technocratic response: Economists should stop worrying about the social welfare function. A social welfare will emerge from the political process by whatever means; societies do make distributional judgments. Economists should simply ask the government's policy makers what the social welfare function is and then advise them how to maximize social welfare. All policy problems are constrained optimization problems consisting of objectives, alternatives, and constraints for which the given social welfare serves as the objective function. Economists can help the policy makers fill in the remaining elements of each economic policy problem, the relevant alternatives and constraints, and then describe how to solve the problem. Economists know how to solve constrained optimization problems.
A second mainstream reaction sees a more instructive role for the social welfare function. It calls for the use of flexible-form social welfare functions in normative policy exercises that allow for the full range of ethical rankings, from utilitarian to Rawlsian. The purpose of this type of analysis is to show policy makers how different ethical rankings influence optimal policy rules. This approach is not contradictory with the first approach, since the flexible social welfare function could include the government's actual social welfare function as one of the options.
Joseph Stiglitz dubbed the application of flexible form social welfare functions the “New, New Welfare Economics,” because he viewed it as a direct reaction to the so-called New Welfare Economics of the 1930s and 1940s Stiglitz (1985). The older “New Welfare Economics” held that interpersonal comparisons of utility are meaningless. Economists can say nothing about situations in which some people gain and others lose, because there is no meaningful way to compare the increased utility of the gainers with the decreased utility of the losers. This older view rules out a social welfare function defined in terms of individuals' utilities and along with it any hope of an economic solution to the quest for distributive justice.
The balancing of gains and losses through redistributions is the central economic issue in achieving distributive justice. The newer breed of economists who subscribe to the “New, New Welfare Economics” want to say something about distributive justice, and in doing so they completely reject the older view. To make the flexible-form approach operational in applied work, the researcher must specify a particular social welfare function and particular utility functions to serve as arguments in the social welfare function. Once the particular functions are specified, utility becomes cardinal and fully comparable across individuals, in direct opposition to the older view.13
The third reaction to the problems associated with the social welfare function, commonly associated with the public choice economists, is essentially one of indifference. Public choice economists do not care that the social welfare function is problematic because they do not accept it as a valid concept. They deny that citizens enter the political process to help resolve the public interest in distributive justice. Instead, they argue that a society's distributional policies must be understood as evolving from the desires of self-serving individuals who want to maximize their own utilities. People do not spend their political energies trying to formulate social welfare functions. There is no social welfare function, and no need for one in public sector theory.

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