Public Economics: Islamic Perspective

Introduction

  • 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

  • Allocative
  • Redistribution
  • Regulatory
  • Stabilization

Allocative

  • 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

Excludable Non Excludable
Rivalrous Private goods Common goods
Non-rivalrous Club goods Public goods

Consensus

  • 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

Regulatory

  • There is no sin tax in Islam. When something is prohibited in Islam, government has to ban it, at least for muslims

Redistribution

  • 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?
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