Public Finance, 2nd Edition

iture and tax mix in diVerent localities. Once people choose where to live, they

then become voters who inXuence the expenditure and tax mix within that

locality. Therefore, the movement of people across localities can aVect

how well lower level governments perform their assigned functions or,

indeed, whether they can perform certain functions at all. The assignment of

functions and people are the two main issues in the normative theory of Wscal

federalism.

Parts II±IV of the text develop the normative theories of public expend-

itures and taxation under the assumption of a single government. Part V

considers the special problems associated with a federalist system of govern-

ment.

GOVERNMENT EXPENDITURE THEORY:

PHILOSOPHICAL UNDERPINNINGS

The answer a society gives to the Wrst normative question on the legitimate

functions of government is culturally determined. It turns on essentially the

same set of cultural norms and attitudes that lead to the choice of a particular

economic system.

Economic systems are typically characterized as lying along a spectrum

whose endpoints are centrally planned socialism and market capitalism in

their purest forms. All actual economic systems are mixtures of the two. The

four principal characteristics of pure centrally planned socialism are central-

ized economic decision making undertaken by a bureau of the national

government; the use of a national plan developed by the central bureau to

process all relevant economic information and coordinate economic ex-

changes; public ownership of capital, and possibly land as well; and the use

of moral suasion to motivate agents to carry out the national plan ``for the

good of the state.'' The four principal characteristics of pure market capital-

ism are decentralized economic decision making undertaken by individuals

and Wrms; the use of markets to process all the relevant information that

agents need to engage in exchange and to coordinate their economic ex-

changes; private ownership of capital and all other resources; and the use of

material rewards to motive agents to engage in exchange. A society's view of

the legitimate functions of government clearly depends upon whether it has

chosen an economic system closer to centrally planned socialism or to market

capitalism.

Humanism, Consumer Sovereignty, Capitalism,

and the Government

The normative economic theory of the public sector that developed in the

West is closely tied to market capitalism. This is hardly surprising, as all

1. INTRODUCTION TO NORMATIVE PUBLIC SECTOR THEORY 7