Table Of ContentPUBLIC FINANCE IN THEORY AND PRACTICE
j
j
j
j
j
j
j
j
j
j
j
. j
j
j
j
j
j
j
j
j
j
j
j
j
j
j
j
j
j
j
j
j
j
j
PUBLIC FINANCE
IN THEORY
AND PRACTICE
Fifth Edition
Richard A. Musgrave
H. H. Burbank Professor of Political Economy, Emeritus
Harvard University
Adjunct Professor of Economics
University of California at Santa Cruz
Peggy B. Musgrave
Professor of Economics
University of California at Santa Cruz
McGRAW-HILL BOOK COMPANY
New York St. louis San Francisco Auckland Bogota Caracas Colorado Springs
Hamburg Usbon london Madrid Mexico Milan Montreal New Delhi Oklahoma City
Panama Paris San Juan sao Paulo Singapore Sydney Tokyo Toronto
PUBLIC FINANCE IN THEORY AND PRACTICE
INTERNATIONAL EDITION 1989
Exclusive rights by McGraw-Hill Book Co- Singapore
for manufacture and export. This book cannot be re-exported
from the country to which it is consigned by McGraw-Hill.
Copyright© 1989, 1984, 1980, 1976, 1973 by McGraw-Hill, Inc. All rights
reserved. Except as permitted under the United States Copyright Act of 1976,
no part of this publication may be reproduced or distributed in any form or by
any means, or stored in a data base or retrieval system, without the prior written
permission of the publisher.
6 7 8 9 20 MPM 20 9 8 7 6 5 4
This book was set in Times Roman by the College Composition Unit
in cooperation with Arcata Graphics/Kingsport.
The editor was Scott D. Stratford;
the designer was Rafael Hernandez;
Project supervision was done by The Total Book.
New drawings were done by Fine Line Illustrations, Inc.
Library of Congress Cataloging-in-Publication Data
Musgrave, Richard Abel, (date).
Public finance in theory and practice I Richard A.
Musgrave, Peggy B. Musgrave.-5th ed.
p. em.
Bibliography: p.
Includes index.
ISBN 0-07-044127-8 ISBN 0-07-044128-6 (pbk.)
1. Finance, Public-United States. I. Musgrave, Peggy B.
II. Title.
HJ257 .2.M87 1989 88-13317
336.73-dc19
When ordering this title use ISBN 0-07-1 00227-8
Printed in Singapore
About the Authors
Richard A. Musgrave is H. H. Burbank Professor, Emeritus, at Harvard Univer
sity and adjunct professor of economics at the University of California, Santa Cruz.
After undergraduate work at Heidelberg University, he came to the United States in
1933 and received his Ph.D. from Harvard University. Having served at the Fed
eral Reserve Board during the 1940s, he taught at the University of Michigan,
Johns Hopkins, and Princeton before returning to Harvard in 1964. Professor
Musgrave has authored numerous volumes and papers in the fields of public fi
nance and fiscal policy. Named Distinguished Fellow of the American Economic
Association and Honorary President of the International Institute of Public Finance,
he has been elected to the National Academy of Science, and has been a recipient
of the Frank A. Seidman Distinguished Award in Political Economics and of hon
orary doctorate degrees.
Peggy B. Musgrave is a professor of economics at the University of California,
Santa Cruz. She received her undergraduate training at Cambridge University, a
Master's degree at American University, and a Ph.D. at Johns Hopkins University,
specializing in international aspects of public finance. Professor Musgrave has
worked with the International Tax Program of Harvard Law School and has con
sulted with the World Bank, the U.S. Treasury Department, the Senate Foreign
Relations Committee, and the United Nations. She is the author of many books and
journal articles dealing with various international aspects of public finance. Her
current teaching interests include public finance, cost-benefit analysis, law and
economics, and women in the economy. Dr. Musgrave is currently involved in re
search and writing on international tax coordination.
v
Contents
Preface to the Fifth Edition XV
Excerpt from the Preface to the First
Edition xvii
PART ONE WHAT THE PUBLIC SECTOR
IS ABOUT
Chapter 1 Fiscal Functions: An Overview 3
A Introduction 3
B The Allocation Function 7
c
The Distribution Function 9
D The Stabilization Function 11
E Coordination of Budget Functions 13
F Summary 14
Chapter 2 Public Sector in the Economic
Accounts 15
A Public Sector in the Circular Flow 15
B Public Sector in the National
Income Accounts 17
Chapter 3 Fiscal Institutions 21
A Survey of United States Fiscal
Structure 21
B The Constitutional Framework 23
c
Implementation of Expenditure Policy 31
D Implementation of Tax Policy 33
E Other Aspects of Implementation 35
F Summary 37
vii
viii CONTENTS
PART TWO ALLOCATION, DISTRIBUTION,
AND PUBLIC CHOICE
Chapter 4 Public Provision for Social Goods 41
A Social Goods and Market Failure 42
B Provision for Social Goods 45
C Mixed Goods 49
D Giving as a Social Good 55
E Merit Goods 55
F Summary 58
Chapter 5 Social Goods Considered Further 59
A Meaning of Efficiency 60
B Efficient Provision of Private Goods 60
C Efficient Provision of Social Goods 65
D Social-Goods Allocation in the
Budget 68
E Allocation or Distribution: Which
Comes First? 71
F Summary 71
Chapter 6 Equity in Distribution 73
A Does Equity Belong in Economics? 74
B Approaches to Distributive Justice 76
C Limits to Redistribution 82
D Summary 85
Chapter 7 Public Choice and Fiscal Politics 87
A Direct Democracy 88
B Representative Democracy 96
C The Leviathan Hypothesis 99
D Classes and Interest Groups 106
E Summary 108
PART THREE EXPENDITURE STRUCTURE AND POLICY
Chapter 8 Public Expenditures: Structure
and Growth 113
A Public Expenditure Growth 114
B Growth by Type of Expenditure 116
C International Comparison 119
D Causes of Expenditure Growth 119
E Summary 128
CONTENTS lx
Chapter 9 Expenditure Evaluation: Principles 130
A Decision Rules 131
B Fundamentals of Project Evaluation 135
c
Types of Benefits and Costs 137
D Measurement of Benefits and Costs 139
E Assigning Weights in Project
Selection 143
F Efficiency and Equity Once More 147
G Discounting and the Cost of Capital 150
H Risk and Economic Change 160
Summary 161
Chapter 10 Case Studies in Expenditure Policy:
( 1) Public Services 164
A National Defense 164
B Highways 167
c
Outdoor Recreation 177
D Education 180
E Summary 185
Chapter 11 Case Studies in Expenditure Policy:
(2) Low-Income Support and Social
Insurance 187
A Low Income Support Programs 188
B Effects on Work Incentives 190
c
Social Insurance Programs 195
D Issues in OASI 199
E Summary 206
PART FOUR PRINCIPLES OF TAXATION
Chapter 12 Introduction to Taxation 211
A Categories of Revenue 211
B Requirements for a "'Good'' Tax
Structure 216
c
Summary 217
Chapter 13 Approaches to Tax Equity 218
A Application of Benefit Principle 219
B Ability to Pay: (I) Horizontal
Equity and Choice of Tax Base 223
c Ability to Pay: (2) Vertical Equity
and Rate Structure 228
D Summary 231
