PUBLIC ECONOMICS 1. THE MODERN ECONOMIC THEORY OF PUBLIC ACTIONS: AIM AND SCOPE.

Public Economics is the study of the public economy, i.e. of economic questions which are not purely market, intra-household or intra-rm, with emphasis on logic-intensive (scientic) analysis and on ethical-normative questions. What must the government do? Is therefore at large part of the problem to which Public Economics sets out to provide answers, with the widest understanding of the government, and no real limitation in scope as to which acts it applies this is because the term economic is so extensive and in studies of this kind often denes more an approach, a point of view, than at domain in the substantive sense. Public expenditures, taxes, regulations of many kinds, public production and prices, public debt and money, exchange rate policies, etc., are the variables to be chosen. With a public sector using 30 to 70 per cent of GNP in Western developed countries - and much more in Eastern socialist ones with multifarious regulations, a vast array of bodies in between the purely public and the purely private, plus the global macroeconomic regulation of the market sector, the scope for Public Economics is a priori vast. But where the public sector must, or must not, lay its hands is the rst question of Public "Economics (not to intervene is a possible solution to the problem of what to do or how to do it). The discipline aims to provide specific and scientific answers to this question, rather than leaving it to ideologies. In fact, most Public Economics has been concerned with the interface between the private and the public sectors, seeking to analyse its place and structure and advise about it. Institutionally, Public Economics is concerned with the behaviour and existence of public bodies in the largest sense governments at all levels, quasi-public organizations such as public social insurance or health and education services in many countries, public firms and utilities etc. it has a deep interest in the border or common domain between the public economy and the market, that is the voluntary associations of various kinds and aims. And of course, the factual working of the private economy (markets and intro-agent), and normative judgements about it are crucial for Public Economics, since it undertakes to advise on how to correct its defects. Public economics in its final aim; is thus largely an applied normative intellectual endeavour, which finds both means and aims in man and society and their environment, and for which constraints and possibilities contain capabilities and motivations both of private agents and of persons or groups constituting the public sector (civil servants. politicians in government or in parliaments, etc). However, at some point social ethics must intervene in the reasons for public sector activities in a way in which it does not for those of the private sector be it through an ethic of the Public Service, a constitution, the higher aims of politicians or the social the objectives of the voting electorate - if only because the State has the monopoly of dominant force. In societies where the economy is based primarily on a market system supported by an ethos praising its virtues, Public Economics naturally began with analyses of what came to be called failures of the market, i.e. aspects where some intervention or another kind of organization and decision making might improve performance. Phenomena such

as public goods, externalities, non-discriminating monopolies, absence of futures markets, barriers to entry, poverty and distributive justice, widespread unemployment, inflation, destabilizing speculations, process preferences on the type of economic relations, effects of exchange and market relations on man and on culture and society, norm and status roles of prices and wages, many kinds of ignorance, etc., were in turn analysed with a view to helping, supporting, supplementing, correcting or straightening the market, or eventually replacing some of its elements by other defined decisionmaking processes or criteria. Public Economics was then supplemented by the analysis of the possibilities and limitations of non-market decision-making, in particular of political and public administrative choices a research programme referred to as Public choice. Born in the early 19th century and enriched by a small but pt steady flow of studies, Public Economics - apart from leg important but ill-found macroeconomics experienced a burst of activities after the mid-l96Os (when it was named), at time of rapid government growth in the West. This development was the Old Public Economics, which was superseded in the 1980s by the New Public Economics. Both engage in refined analysis of economic relationships. But the ethical part of the former was either primitive or incomplete (Pareto-optimality) or unacceptable (Social Welfare Function); in fact it was not even explicitly thought to be ethics, and this seriously impaired the practical acceptance, application and usefulness of its ideas. By contrast, the New Public Economics takes into account the relevant properties of the ethical question (a development that was influenced by the simultaneous upsurge in the analysis of social ethics in political philosophy, which itself borrowed much from economics). (The term Public Economics, like its original ideas, seems to have been coined in France, a market economy endowed by spent history with a large public sector, important public firms, a civil service ethic and institutions, an ideology for some economic role for the State (from Colbert to the Plan) and bodies of both public-minded and mathematically oriented State engineers. The present authors Fondements econimie publique , irrrrarizicrfon d Ia zhorie du role conamfque de lEtat (1964) probably first used the term in print, and Leif Johansens Public Economic (1965) soon followed. But, of course, Richard Musgrawfs previous Theory of Public Finance (1959) was Public Economics, and at crucial landmark in the field. From I966 on there came, under this name, regular meetings, an association and journal founded by A. B. Atkinson) 2. THE ETHICAL FOUNDATION. For Public Economics to reach its results, the problems it meets must be evaluated by ethical criteria, which are thus as important as technical and as behavioural structures. Society reveals these criteria in the form of desires and rights. The traditional ideas supplied by Welfare Economics are of little help. The maximization of a Social Welfare Function depending upon individuals preferences is in fact an ethic rejected by everybody in society because the resulting allocation concerning one person would depend upon structures of preferences of other persons in ways which are considered unacceptable. Paretooptimality (the impossibility of improving the situation for one person without hurting some other) does not provide the unique solution and distribution which is required for practical application, and the corresponding

efficiency' alone is of no avail - that is why so many proposals by economists are rejected by the practical men who would have to apply them. Various compensation schemes have the same detects. Furthermore, anything the public sector does is bound to displease someone, so that with respect to these relevant variables the existing situation is always Pareto-optimal, and the practical problem is to choose between various solutions all having this property. Yet Pareto-optimality is a useful subordinate and partial criterion as will be seen below. De facto, the most pervasive form of social judgement is that such specific action is legitimate because it respects legitimately held or acquired rights (legitimate, an ethical notion, is distinct from the juridical concept of legal). Then, deducing from individual freedom both the legitimate ownership of oneself and thus of one's own labour, and the right to give or give up services or rights (the property of an object is a bundle of rights concerning its use) - hence the right to Freely (unanimously) exchange or agree between two persons or more there results, if previous relevant acts were legitimate, the basic legitimacy of the free market, of voluntary associations, and of the resulting allocations of rights and ownerships. But legitimate, free and unanimous exchanges or agreements between any number of persons may fail to be directly and explicitly achieved because of a series of phenomena which are difficulties, costs or impossibilities in the realization of transactions, in the informational requirements of exchange, of bargaining, of transmitting demands and propositions {and to begin with of knowing the other parties), in the writing of contracts and in guaranteeing their implementation (through checking Facts and acts and enforcement), in exclusion from the benefits of a public good or of receiving a positive externality or of creating a negative one, in relations between persons who do not exist at the same time, etc. To implement by public means what these impeded legitimate agreements would have decided if they had spontaneously emerged is the unavoidable ethical basis of modern Public Economics: it is unanimously desired at levels of both specific decisions and of general freedom-based principles. This precludes neither a primary concern for welfare and redistribution, nor the necessity of the use of force in the implementation. On the contrary, Public Economics is concerned -with welfare and redistribution because people are, and one of its main tasks is to find out what transfers direct general agreements would have produced. Secondly, private contracts are made of two parts: the voluntary unanimous agreement between the parties, and the implementation which is obligatory under the threat of public force. In the implicit contracts which establish this public ethic, the first part does not show explicitly, and there remains only the second one, compulsory implementation: hence the apparent pure obligation in public actions such as taxation or regulation. In order to find out (or to make the public sector achieve) the content of these implicit, putative and tacit contracts, modern Public Economics draws upon theories of choice, exchange and bargaining, statistics, polls and observation of political_ processes, and it offers advice about those political structures or processes which would help to reveal the necessary information or achieve the right outcome (aspects of constitutions, referenda on public issues and their financing, optimal decentralization of public choices and levels of government, etc.). Each of these implicit contracts (called

liberal social contracts) determines a set of public actions and expenditures, and of taxes, which is desired by a group of citizens and violates no legitimate right of any citizen. It is such that no sub-group of the concerned persons could quit this cooperative agreement while securing to each of its members a situation he prefers, given that this person is in general influenced by what all others find their best interest to do (this 'last proviso differentiates this concept from the traditional one called the core) and if this sub-group is not itself impeded in a similar manner, etc. This condition implies Pareto-optimality with respect to the constraints which have not been abstracted from in defining the putative Free agreement (the omitted constraints bear upon information, transaction, possibilities to constrain or exclude people, etc.). We shall consider now the various elements that constitute Public Economics. 3. COLLECTIVE CONCERNS AND CONSUMPTION, PUBLIC GOODS. The existence and analysis of collective concerns and consumption, and public goods, is central in Public Economics. A collective concern is something which concerns several persons or agents. Something which pleases several persons together came to be called a public good for them. If it displeases them it is a public bad, the decrease of which is a public good for them. In particular this good can be a genuine good or service in the sense of economies, and then there is a collective consumption (either final or intermediary or both together). Non-rivalry in consumption is the term sometimes used (Musgrave) to characterize- the difference with private goods. A private profit-making agent can produce a public good if he can exclude the would-be beneficiaries from its benefit, so as to grant them access only in exchange for payment of a fee or price or toll. These receipts may cover the costs of producing the good and allow a profit. The producers problem is to obtain information about the willingness to pay, since if he asks too little he may not be able to cover costs, and if he asks too much for some access he may prevent it, whereas the user would be ready to pay more than the individual specific costs he causes (which may be zero). In addition, the producer may not be able to discriminate his price sufficiently between the beneficiaries, not only because of difficulties in discerning differences (which is an information problem), but also because he may not be able to prevent them From reselling between themselves the rights to access or private goods produced thanks to the public good, or for reasons of practicability or Fairness. These problems of course interfere with the quantity of the good the producer decides to create. The tack of unanimous collective agreement between the beneficiaries, in addition to exchanges between them and the producer, may prevent the latter from knowing that he can extract extra prices which would cover the extra cost of producing more, or from achieving this extraction (the extra contribution that each beneficiary is ready to give usually does not by itself cover the cost); this is at cause of underproduction of the public good. But overproduction is also possible, because the producer may attribute some of the beneficiaries global willingness to pay which he extracts to their willingness to pay for the last units.

In addition, exclusion from the benefit of the public good may not be possible. More generally, it has costs, difficulties or inconveniences which at some point deter the producer from excluding or the consumer from demanding access to the benefit of the good. These are of the following kinds: (I) Costs to the excluder such as doors, walls, Fences, screens, guards, scrambling devices for herzian waves, hiding information, suing trespassers, etc. (2) Costs to users by inconvenience in consumption, use or benefit, as would For instance be the case of toils on urban streets. (3) Costs to users by co-exclusion from other services, a case to be found notably when exclusion would be achieved by excluding from 21 complementary consumption, an important example being exclusion from a location (on private or public space) where the collective benefit can be received. (4) In the latter cases, the producer of the public good may not have the right to exclude from these other services (without problems 3 and 4 exclusion could always be made, for instance by banishment or even killing). (5) Logical impossibility such as when the desire for the consumption requires experiencing the consumption so that exclusion destroys demand or the related situation described below in the very important ease of collective gifts. If exclusion is not possible, or is too difficult or costly, production through individual initiative does not occur. Whatever the situation of excludability, the solution is a unanimous collective agreement between the beneficiaries and the producer(s), as to the good to produce and to each beneficiarys contribution to its financing. It is right and legitimate if the concerned persons use only legitimate rights to reach and achieve the agreement. But two things may prevent its spontaneous emergence. Firstly, if exclusion from the benefit of this public good is impossible or too difficult, a beneficiary is induced not to take part in the collective agreement, so as to benefit from the good produced thanks to others without contributing (he would be a free rider); the result is inefficient, and if ouch beneficiary does that, relies on the others and is relatively small, no quantity of the good is produced at the limit. Secondly, whatever the situation as to exclusion, the transaction and information Costs necessary to reach the agreement may prevent its achievement all the more so when the number concerned is large. In these cases, there arises an ethical duty for a public service to achieve as far as possible what these free agreements would have done. This implies both the production of the public good and paying for it in the form of taxes.

This principle indicates both what quantity of the good must be produced and what the taxes must be. This implicit exchange implies that the good must be produced up to the point where what the beneficiaries are ready to pay For an extra unit ceases to cover the cost of the latter (Dupuits condition). It also lmpiil1S that each beneficiary must not contribute to the payment more than the monetary equivalent of its value to him, whereas their total contribution must not fall short of total cost. This is benefit taxation, but for implementation this tax can either be levied specifically in relation to this advantage (and eventually be ear-marked for the provision of this good), or be aggregated to other notional taxes paid by the person for other specific reasons, i.e. into a more general tax scheme. Furthermore, this principle is not sufficient since it only gives an upper limit for each of the taxes and at lower limit for their sum and it does not say how the surplus due to the provision of this public good is allocated. The implicit agreement principle however implies that the surplus is allocated between the putatively contracting parties, the beneficiaries and the producer(s) of the good (for

its primary allocation, since general economic interdependence induces further effects). Not infrequently the sole information that taxes must not exceed willingnesses to pay and must not in total amount to less than cost defines them relatively precisely, in particular when beneficiaries have alternatives to the consumption of this public good. For the general case, the levels of these taxes, or the distribution of the surplus, are determined thanks to the bargaining theory which is relevant to the situation. This theory relies on the fact that the pre-agreement allocation and distribution is a legitimate starting point from the very definition of the general ethical theory. it deduces, in general, that the surplus must be allocated in relation to the agents legitimate bargaining power. The latter is itself determined by the fact that the solution must not be such that a group of persons can prefer to leave the general agreement and eventually build and finance a public good for themselves. The members of this group are influenced by the choices of the others (in opposition to the usual assumption in the concept of the core), and in particular by what the others decide to produce of the public good if these dissidents can still benefit from it. The result thus depends very much on this structure and on the possibility of exclusion from the benefits of the good, but the general ethical theory leads to the adoption of a solution which assumes the possibility of exclusion (i.e., which disregards its difficulties) as a principle of what the taxes and the surplus allocation must be. The practical application of the theory to determine the right amounts of public goods and the corresponding taxes requires the estimation of agents willingness to pay and potential bargaining power. A whole array of various methods is available and more or less used, to gather information about these variables (Kolm, l97274, l973a, l974b). For the monetary values, knowledge of technology and production functions provide the answer when agents are firms or when the public good benefits consumers through the technical production of some more final good. These values can also be inferred from the observation of market values of consumptions which are substitute or complementary to the public good (for example private material protection for public police protection, land values or rents For environmental quality differences, wage as value of time to estimate the worth of improved transportation infrastructure, etc.). Furthermore, in a poll asking people about the value of the public good to them (or of a variation of its quantity), they have no incentive to lie if they perceive that the public good produced and what they will pay are unrelated to their answer. If the beneficiaries are numerous, the relatively small ones know that their own answer will practically not influence the quantity chosen and, therefore, their payment through this way (except, perhaps, if it is considered as representative in a small sample). This allows us to gather easily the information necessary to produce the good, but not the one to set individual taxes (we would for instance gather the answers in an anonymous way). However, empirical experiences show that, de facto, people's answers do not differ much according to whether their payment is tied or not to their answers (Bohm, 972). The political process is also often a notable source of information on the variables under consideration. And quasi-political processes can also be set in order to help solve the problem; for instance, the right quantity of public good and corresponding taxes, compared to nothing, gain unanimity in a referendum. Several types of social situations and psycho-social phenomena help to secure the spontaneous collective realization of public goods or, at least, the relatively truthful

revelation of preferences for them. Simultaneous contributions with each contributor watching the others contribute are possible in small groups, and, even in somewhat larger ones, the recurrence of similar situations allows retaliatory threats against free riding. But the most important are social norms and ethical behaviours (which are similarly necessary for private goods through the respect for property which establishes free exchange rather than widespread theft). These norms and behavioural patterns are acquired through socialization or, eventually, selection, and they tend to act better when the individual costs are either relatively small (voting, non-polluting) or dramatic (individual or collective danger). They include truth-telling, Kantian categorical imperative, altruism, communitarian feeling, internalized or approved good citizenship, imitation, the helping behaviour studied by social psychology, gratitude and return gifts, general reciprocity, etc. Economists have also devised a series of revelation mechanisms where a public centre receives information from the consumers of the public good and imposes on them incentives so as to induce them to reveal the information about their tastes or needs which is necessary for the efficient production of the good; such devices have been proposed by Vickrey - in a different context - Kolm, Drze and de la Valle Poussin, Malinvaud, Groves, Ledyard, Clarke, Tideman and Tulloclt, Green and Lallont, and a number of others; although some of these mechanisms might eventually find some applicability, their general efficiency still requires that the agents have some motivation of the mentioned categories, beyond exclusive restricted self-interest. The economics of public goods is as old as that for private goods (aside from literary remarks such as those of David Hume about public goods). In Paris in 1838, when Cournot was drawing a demand curve for a private good to theorize monopoly exploitation, Jules Dupuit drew one for a public good in order to choose the socially best quantity and financing of public works. Dupuits demand curve for a public good gives the number of users for each level of a putative toll (if they could be excluded) - i.e. the number of beneficiaries who value the good at more than this level. Equivalently, it is the distribution curve of the willingnesses to pay for this benefit classified in decreasing order. Dupuits surplus, the area under this curve, is thus the sum of all these willingnesses to pay. Dupuit's rule was to implement a variation in the specifications of the good as long as the surplus for this variation exceeded the cost of implementing it. Dupuit then set out to discuss how to discover willingnesses to pay, noting in particular its correlation with capacity to pay as revealed (in part) by the evident belonging of the user to a social class. The history of ideas then leads us through the very perceptive Italian school of public nance (Mazzola, Pantnleoni, etc.) and to Wicksell's and Lindahls just taxation propositions, both of which based, on n clear conception of joint consumption and quantity optimality, ill-justified fiscal schemes. (Wicksell's global public budget chosen at unanimity -quasi for practicality - violates the right of a group of citizens to receive a public good and pay the corresponding taxes even if its effects displease other citizens, as long as it does not violate their legitimate rights. As for Lindahl, his pricing at marginal willingness to pay multiplied by quantity has no more justification than many others and its formal mimic of private good optimality formula is irrelevant. See these authors articles in Musgrave and Peacock, 1958.) Later, Bowen (i943) tried to achieve the optimum through a uniform given charge plus majority voting on the amount of the good, and Samuelson derived the quantity optimality condition from a welfarist, utilitarian, ethic with free lump-sum income redistribution. The observation that the world exhibits few pure public goods, whereas collective concern is widespread, led to the analysis of the various mixtures of privateness and

publicness, and of their consequences for public finance and action. A good may have to be defined by several parameters, some of which are privately divided whereas others are collective concerns. In fact, a uniform quality of a private good is technically a public good increasing returns to scale in production is due to inputs which collectively serve several units of output, and this takes us to the classical public good case when this output is divided between several users (or even measured by the number of users served). A good can be privately divided between collectivities each of which consumes it collectively [this is usual for the intermediary private commodities entering into the production of several different public goods, and an example is the case of local public goods the benefit of which is limited in space). Conversely, a good can be consumed collectively by groups each of which divides it between its members (an example is that of a given space which is fully occupied successively in time by different groups of persons). Different agents can benefit more or less from u public good according to some characteristic (location is an example). Or an extra consumption may neither crowd out another one as for private goods, nor leave other consumers indifferent as is the case with pure public goods, but just decrease some quality of the situation (as docs for instance congestion and relative crowding). Or, also, uniform prices are collective concerns, with the corresponding optimality formula. (A systematic analysis of these pervasive intermediary situations with optimality conditions can be found in Kolm, 1969and l969b.) 4. COLLECTIVE GIFTS AND PUBLIC REDISTRIBUTION AND TRANSFERS. A liberty-based social ethic implies that legitimately held rights and property can be legitimately transferred by gift. The most common n character of benevolence is that a single person is ready to pay something in order for someone in need to receive one dollar more, but far less than one dollar. However, it is commonly the case that several persons, often many, have a disposition of this type towards the needy individual. If the sum of what people are ready to pay for this specific person to receive one dollar more exceeds one dollar, a set of such transfers will be made by free agreement. The welfare of the person helped is a public good for the givers, and this situation is a special case of the public good questions. However, this category of public good is bound to be in a particularly unfavourable situation for spontaneous realization. Firstly, it is a case where exclusion is impossible for a purely logical reason since consuming the public good is knowing the needy person's situation, so that exclusion is hiding it or keeping another in ignorance of it, and thon the potential giver is no longer ready to give (he does not give to know but to improve, if he does not know he docs not give to improve, but if lie knows he is not excluded). Secondly, the number and dispersion of co-givers and potential receivers creates information and transaction difficulties which impair direct agreements (this aspect, though, contrary to the free rider aspect, could partially be met by private charitable institutions, which would however tend to be in undersupply because they cannot be profit-seeking), These transfers are thus an essential task of the public sector. As in the general public good case, each payer must be forced to pay the corresponding optimal taxes although he prefers the whole system of these redistributive transfers to its absence. The determination of these transfers uses the whole gamut of means described in the general public good Case. In addition an important source of global information about them consists of analysing the reasons which motivate the co-givers, since these are often cultural and held in common. Beyond the basic relief of wretchedness, some of these reasons are more subtle, yet very important and widespread. One of them is fundamental insurance. Social insurance

against basic life contingencies (disease, old age, cost of children, unemployment, etc.) presently often use as much or more money than public budgets not counting them. They tire mutual insurance schemes which n priori can be private and frequently are. The basic reason why they tire often public involves the idea of fundamental insurance. This is a putative mutual insurance against causes of hardship which happened before an effective insurance could be taken out by the person, such as proneness to disease, genetic disposition, or poor education or motivation resulting in low income in the labour market, etc. The idea is that people who happen to have such bad luck or misfortunes' must be helped by the more lucky or fortunate ones in addition to the insurance consequences of occurrences which happen later. Since insurance against these previous events (allocation of natural abilities, genes or education) cannot be effectively taken out by the existing adults, this market is missing and the public sector must supplement it. A number of insurance markets for future contingencies are also missing for the more standard difficulties of envisioning and defining the risk (this often happens, for instance, for economic downturns and unemployment or for major natural catastrophies). This provides a reason for a second category of implicit insurances achieved by public transfers to people incurring the specific misfortune. More generally, transfers to people in need, for reasons of helping, solidarity or fairness, also imply some equalization of situations, and egalitarian feelings are very common in opinions about public policy actions. These must however be carefully defined, scrutinized and sorted out. Freedom is equality of basic rights. But it so happens that transfers from rich to poor, when no mention is made of the cause of the disparity, and when no disincentive indirect effect makes everybody finally worse off, has an appeal wider than it may seem, as various people approve of diverse redistribution schemes which are equivalent to it although that is not apparent (Kolrn, i966, in Murgolis and Guitton, l968-9). But this has an applicability limited to the distribution of income without previous legitimacy cither from pure chance or from some natural resources. On the other hand, feelings of envy or jealousy are not commonly regarded as ethically defensible reasons for transfers (but equality of opportunities, a principle of wide acceptance, leads to general no-envy and no-jealousy since each person had the opportunity to choose what each other has chosen and he has preferred his own choice). Finally, a recurrent and practical issue about public transfers and assistance is whether they should be in cash or in kind. The decision here rests with the givers who initially own the funds. The arguments are for them to consider, and if cash has the advantage of leaving the receiver free to choose what he prefers, they must be convinced of it. 5. EXTERNALITIES. If a person's action or situation importantly concerns another person without there being an exchange (or a chain of exchanges) between them so as to adjust their interlocking desires, there results (inefficient) externality' and a duty for the public sector to implement what this exchange would have been (from legitimate rights), were it not for the information or transaction difficulties or costs, or uncertainties about rights, which prevent its spontaneous existence. The corresponding compulsory money transfers can be either way between the creator and the receiver of the externality: for an external diseconomy it is a tax on the creator and a compensation to the receiver, or a subsidy to the creator who abstains somewhat, paid by the receiver, and for an external economy it is a payment to the creator from the receiver, or a tax on the creator, who does not create as much as he can be required to, and a payment to the receiver. (The result is Pareto-optimal but, in opposition to the Old Public Economics, welfarist, utilitarian or efficiency view, firstly just to impose the level of the action

will not do - there must be compensation; secondly, the tax on or subsidy to the producer of the externality alone will not do -it must be paid to or from the victim or beneficiary, and this even is the aim of the operation, Pareto-optimality being a secondary consequence of it; and thirdly, the reference situation defining the base of the tax or subsidy is a definite right and not any indifferently arbitrary point.) Quite often, an external effect concerns several, or many, persons together, thus mixing externality and public good problems. Conversely, joint production of an effect exists when one cannot identify the specific producer of it (as in car pollution). These collective aspects bring in free rider and transaction costs problems which often prevent direct agreement, thus creating the situation of externality rather than exchange. Such phenomena, along with the question of the allocation of new environmental rights emerging from scarcities created by economic growth, are the core of the problems and theories of the economics of public environment, an outgrowth of Public Economics, buoyant since the early l970s. Extensive studies have been devoted to a special but important case, which is also an essential social phenomenon. This is the situation where a creator of an externality puts himself by the same act in the situation of being receiver of an externality of the same kind. These are called congestion externalities (since this happens particularly in situations of congestion). The problem is that if someone is compensated for the external diseconomies he incurs (or pays for the external economies he creates), this may erase his having to pay for the diseconomies he produces (or what he receives for his external economics), so that the relevant transfers are not possible or are only imperfect, and in particular they cannot induce efficiency. The solution is to devote the product of the tax to improve global quality (For instance more room in the case of Congestion) which is a public good the correct amount of which does not depend upon the decision of any single individual if he is relatively small enough (the financial result depends upon the basic structure of qualitative return to scale: Kolm, l969b, l974a). 6. RECTIFICATIONS. A consequence of the public sectors duty to protect rights is its duty to rectify past violations of legitimate rights. Such judgements are commonly considered by the courts, but one may have to rectify, at least in a global way, the effects of more ancient and deeper violations (given statute of limitations provision). The resulting actions are compulsory transfers and, eventually, some specific measures like education. 7. THE THEORY OF THE PUBLIC DEBT. The public debt is the means of making retro-payments, that is, payments when the payer exists later in time than the receiver: the receiver receives from the public sector which pays out of public borrowing, and the payer pays by later taxes used to redeem the public debt and meet its interest. Time introduces two kinds of constraints on the relations between persons at different dates, hence two causes of market failures. Nothing can be received before it is handed out, and the individuals involved in the exchange cannot make an explicit mutual agreement; the only possible relation is forward transfer (through asset accumulation) decided by the transferer, that is, a forward gift. From its general principle, the public sector must abolish these constraints on free relations if it can. Indeed, it can make retropayments through public debt, and it can attempt to evaluate the desires of future generations. This opens up the possibility of publicly implemented retro-buying intertemporal

exchange and retro-gift. Public debt enables one to buy the earlier production of a durable commodity which yields benefits he desires (to him or to others), and it enables one to make at some ditto a gift which helps satisfy previously existing needs of other people. For instance one can in this manner buy durable improvements (or protection) of the environment, and also give to victims of a previous bad specific or general situation. Of course, even if this buyer or giver desires this, his payment must be compulsory ie., it is a tax, since when it occurs the first payment has already been made. This reason for public intervention and for public debt often intervenes with the other reasons for public intervention the benefit taxation to finance a durable public good implies public borrowing later redeemed thanks to contributions of beneficiaries which actualize their implicit basic agreement with the beneficiaries at other dates; a global reflation through deficit finance, when it works, is paid for by the future beneficiaries of higher employment, demand and capital formation, through taxes which will redeem the debt; there are also collective retro-gifts, inter-temporal implicit - and in particular fundamental insurances, and intertemporal allocation of the values of natural resources. 8. MACROECONOMIC POLICY Another category of market failure has such pervasive effects and implications that a collective rights-preserving unanimous agreement as to corrective action would involve a prohibitively large number of persons, so that the public sector has to intervene. Such phenomena are those which result in mass unemployment and inflation, with possible effects as to large indebtedness to foreigners or slow productivity growth. (Ination and insufficient global demand are public bads. In the case of inflation, the primary reasons are psychosocial effects which disrupt social predictability, general confidence, and the implicit social contract, due to uncertainty and volatility of relative prices; see Kolm, 1984a.) The market failures which cause them involve a whole array of informational limitations, the non-existence of pure market equilibria (at least of those in which no one starves), the lack of at spontaneous tendency to equilibrium of a multimarket system, the income effects of wage decreases which diminish income and employment, the general absence of futures markets which would have guided investment decisions, downward price inflexibilities due to status and norm effects of wages and prices and to average asymmetries in the optimal allocation of selling and buying efforts, monopolistic situations and collusion: (in labour markets for instance), etc. Apart from some direct micro-economic income-price or employment or other policies, the corresponding corrective tools are those of macroeconomic policy; that is, arrangements between public expenditures, taxes, public debt, money supply, foreign money, through decisions about quantities or rates (rates of interest, rates of foreign exchange, and taxes). 9. THE RIGHT TAXATION. What the public sector must do is the whole of all the specific actions described above. In particular, ethical consistency in general requires taxes to be justified by expenditures. institutionally and practically, however, taxes can be pooled and levied more or less as a single tax or as a relatively small number of taxes, The corresponding economy of administration must be balanced against the advantages of decentralized and specialized public services financed by the logically earmarked right taxes, regarding the budget allocated to this service, the closeness of the public management to the users and its better knowledge and awareness of their needs;

the better understanding by the taxpayers or the use of their money and of the benefit they derive from it and, therefore, their greater possibility of checking the use of public funds and of controlling the public service by political means. However, the above reasons for specific constitutive taxes imply some general structures of the global taxation faced by the individuals. A large number of specific taxes (in the sense of justied tax elements), taken as function of income, have the form of an increasing tax (often n relatively proportional one) above some exemption level. This tends to be the case for public goods which yield benefits according to some ownership or activity, for redistributive transfers due to collective gifts and in particular to fundamental insurance, for rectification compensations. The summing up of all these taxes therefore yields a progressive tax schedule, and even approximately a succession of tax brackets with flat lax rates increasing from one to the next Furthermore, collective gifts, fundamental insurance and rectication for past infringements of rights, globally conduce to a negative taxation scheme at low income levels (i.e., people whose incomes fall below a certain level receive an assistance which increases with this gap). 10. PUBLIC PRICES, TAXES PRODUCTION. Taxes must be based on observable facts, which practically will often mean quantities or values of commodities of many possible kinds, including incomes whether these are the right base or only proxies adopted to confront informational or management difficulties. To choose these taxes is thus equivalent to choosing the corresponding prices. Now, to choose prices is also at problem the government faces in the case public firms or regulated industries in addition, a standard reason why firms are public or controlled is the existence of strong increasing returns to scale, so that competitive prices would bring them into deficit, and at private monopoly with limited discriminatory power would produce inefficiencies; yet these are financially autonomous firms which must not have a permanent deficit . Therefore, the problems of choosing the socially best taxes in order to provide a public income, and that of choosing the socially best prices respecting a budget constraint, are dc liacto identical. This problem was extended in a general theory of vttluc constraints, which are constraints on elements of budget (global or partial or ratios) and on prices. In addition, the choice of, at non-linear public tariff applicable to several users is isomorphic to that of an income tax structure. Determinations of optimality conditions and structures in all these cases involved the successive works of Colson {l90l5), Divisia (I927), Ramsey (1927), Boitetut (1956), _kolm (1969), Mirrlees {1971), Diamond (1975), Atkinson and Stiglitz L i980), Guesnerie (1980) and others. SITUATION OF PUBLIC ECONOMICS. Public Economics is probably for many reasons the most paradoxical field of economics. It specializes in what has always been the central problem of the discipline - whether it was attacked frontally or treated in a devious, consequential and somewhat hypocritical way: what must be market, what public, and how? Yet it often works at the borderline of the profession, flirting more and more with moral philosophy, political science, organizational studies (public choice and the economics of institutions), with breakthroughs to come with psychology (multidimensional man) and sociology. It specializes in the public sector, yet it must for this reason involve the finest analysis of the market and of its problems, it has a well-defined, specific style and flavour, yet it is hard to circumscribe rationally: for instance does it contain Macroeconomics - which comes more and more to the core of Public Economics as it relies more and more on microeconomic analyses of market

failures? What is its relation to international Economics which studies markets but owes its existence to that of States? It probably contains Public Finance in scope, yet the latter's tradition has a quite different, less analytical, style: and we could go on with Public Choice, Social Choice, the theory of constitutions; Political Economics, the theory of bureaucracy, Welfare Economics whether theoretical or applied, the essential benefit-cost analysis, the economics of socialisms, comparative economic systems, etc. Public Economics is founded on positive views of the public economy and of the market, yet its final aim is almost always normative. It is one of the oldest fields in economics, yet it also is one of its newborns. These distinctions, however, are interesting but not essential. The thing is to take an important problem and to find powerful tools to crack it. Public Economics central question to know what the public sector must do, when the markets work better, or if a hopeful third sector and reciprocity relationships would be a still better possible solution can hardly see its import challenged. As for the tools, it started with sharp economic analysis, but saw its utility impaired by ethical naivet; it is now incurring a new boom in useful results thanks to an equivalent input of social ethics; as for the future, the next threshold will probably be to work out the consequences of a much richer and more truthful account of man's motives and capacities, along with an understanding and a consideration, of institutions, both meaning psychology since it is how institutions enter into an individualistic social theory: through peoples heads and hearts. Ssaoa-Cnatsrortte Koran