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Edited by William F. Shughart II and Laura Razzolini
Chapter 19: Public choice and public choice
19 Public choice and public ﬁnance Randall G. Holcombe 1 Introduction Public choice can be deﬁned as the application of economic methods to the analysis of political phenomena. This deﬁnition ﬁts well with some of the early classic works that launched public choice as a separate subdiscipline, such as Black ( 1987), Downs (1957), Buchanan and Tullock (1962), and Olson (1965). By this deﬁnition, and in the context of those works just cited, public ﬁnance has a distinctly peripheral relationship to public choice, and is relevant only to the extent that it is one of the activities taken on by the public sector. Yet public ﬁnance does have a close relationship to the fundamental ideas of public choice. Buchanan (1987a) gives substantial credit to Knut Wicksell ( 1967) for laying the foundations for what has become modern public choice theory, but Wicksell’s goal was not to analyse political phenomena with economic tools. Rather, he wanted to develop an efﬁcient and just system of taxation and public expenditures. Building on Wicksell’s insights, modern public choice theory shows that one cannot fully understand the government’s taxing and spending activities without also understanding the political decision-making process that determines those policies. A complete understanding of the process of public ﬁnance requires an analysis of the political decision-making process that determines how governments will both raise and spend revenues. In other words, a complete understanding of public ﬁnance requires that it be analysed from a public choice perspective. The importance...
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