How does public policy affect the market system in a capitalist economy? Do the choices that individuals voters make influence public finance? What is the extent and nature of the relationship between public finance and the price system? These are the issues that Edgar K. and Jacquelene M. Browning address in the third edition of Public Finance and the Price System (New York: Macmillan Publishing Company, 1987). This research uses the text as a basis for examining how government concepts and principles affect society, the economy and the welfare of the citizenry.
To understand the importance of studying the relationship between government and the price system, it is necessary to first appreciate the close economic ties between government and the economy. In 1986, the average American household furnished more than $14,000 to various government agencies through federal, state and local taxes. During 1985, the combined expenditures of these federal, state and local agencies exceeded $1.4 billion. This represents nearly 40 percent of the net national products, showing that the way in which government decides to allocate resources has a direct and significant effect on the economy as a whole (1).
The authors suggest that there are three effects that government taxation and expenditures can have on the economy: allocation, distribution and stabilization (5-7). Allocation refers to the combination of goods and services produced by the economy as a whole, and allocation can be changed by government policy. If the government invests in war materials, for example, it allocates resources to that effort; these resources would otherwise be available for contributions in other areas. Distribution refers to how goods and services are meted out to the public. When considering the distribution effect of a given policy, key question to consider is who benefits and who is harmed. Stabilization refers to the aggregate level of employme...