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Public Finance in Practice and Theory


  • Alan J. Auerbach


Public finance has both normative and positive elements, and moving between theory and practice requires attention to help us understand both what policies government should adopt and whether it is likely to do so. We should not be surprised when bad policies are adopted in spite of better policies being available if our political system is structured to deliver bad outcomes, for example, if our political environment gives politicians strong incentives to serve narrow interests at the expense of the common good. But this article focuses on examples where the contrast between normative and positive outcomes is not so clearly explained, and thus where understanding the reasons for observed policy practices might help us develop better positive theories. The four cases analyzed are: piecemeal progressivity, minimum taxes and other individual limits, quantity-based restrictions and dedicated taxes. While a full explanation for the anomalies discussed lies beyond this article's scope, some lessons can be drawn from them. (JEL codes: H11 and D78) Copyright The Author 2009. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email:, Oxford University Press.

Suggested Citation

  • Alan J. Auerbach, 2010. "Public Finance in Practice and Theory ," CESifo Economic Studies, CESifo, vol. 56(1), pages 1-20, March.
  • Handle: RePEc:oup:cesifo:v:56:y:2010:i:1:p:1-20

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    References listed on IDEAS

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    Cited by:

    1. Bridgman, Benjamin & Qi, Shi & Schmitz, James A., 2015. "Cartels Destroy Productivity: Evidence from the New Deal Sugar Manufacturing Cartel, 1934-74," Staff Report 519, Federal Reserve Bank of Minneapolis.
    2. Konstantinos Angelopoulos & George Economides & Apostolis Philippopoulos, "undated". "What is the best environmental policy? Taxes, permits and rules under economic and environmental uncertainty," DEOS Working Papers 1014, Athens University of Economics and Business.

    More about this item

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation


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