Public Economics: Islamic Perspective
- Public economics is a study of government activities
- Public economics is a field in economics which normative analysis is right in the center of the stage
- Government is the only agent in economic analysis which does not pursue self interest, instead it is often assumed to be a benevolent social planner
Social Welfare Function
- In a society with diverse values, some mean of increasing utility to some individuals decrease the utility of others.
- Having common values help to assign a common preference for many issues, reducing dispute in the policy making
Efficiency and Equity
- The First Welfare Theorems show the equivalent outcomes of decentralized market multi-agent optimization and centralized social planner optimization.
- The Second Welfare Theorems show any pareto optimal allocation can be achieved by redistribution of initial endowment
- Even when there is no non-distortionary means of redistribution, the resulting allocation can be preferable by society than the initial pareto optimal allocation
Government vs Market
- Theory of the firm explains that organizing production in a firm can be more efficient than market mechanism due to transaction costs.
- People form organizations to serve various purposes. Firm is just one type of organization whose main purpose is seeking profits. Government is the ultimate type of organization.
- The big size of government leads to the prevalence of principal agent problems both within government and between government and constituents.
The Roles of Government
- Tax distort market efficiency when market prices already reflect the true costs and benefits
- Wherever market failures exist, tax could instead improve efficiency
- The benefits of tax-financed expenditures need to be weighed in the analysis.
- The benefits of government spending could be higher or lower than the tax money spent on it.
Type of Goods
- Government provides public goods and private goods that have positive externalities, since market will underprovide it
- The utilization of common goods need to be regulated either through voluntary arrangement or forced by government
- There is no sin tax in Islam. When something is prohibited in Islam, government has to ban it, at least for muslims
- Redistribution policies is justified on the equity ground although it decreases efficiency
- When zakat has been collected, does a government still have rights to levy additional redistributive taxes?