17.1 Public Economics

In our analysis thus far, we have analyzed transactions from the perspective of the outcomes for individual agents. That is, we have been considering how each agent’s actions affect their own individual payoffs: for example, we think about how an individual consumer trades goods, from their perspective, by comparing their utility from their consumption bundle before the transaction with the utility from their consumption bundle after the transaction.

There is another way of analyzing more general economic phenomena, though, which is to think about how all agents’ actions affect all agents’ payoffs. The branch of economics called game theory is a general framework for analyzing these kinds of situations. In this part, we will motivate the need for game theory by analyzing some common applications of this kind of situation:

• Situations with externalities, in which one agent’s actions affect those around them. These externalities may be negative (like pollution) or positive (like beautifying your front yard).
• The provision of public goods, such as national defense or public radio, whose benefits accrue to a large group of people and can’t be excluded just to those who pay for them.

We’ll also analyze public choice, which is the study of how societies choose how many or what sort of public goods to provide.

Together, the study of these kinds of economic phenomena are often grouped in the subfield of economics called “Public Economics.” Of all the topics we study, these are in many ways the most broadly applicable to the most pressing problems facing us today, from climate change to political polarization to arguments over the appropriate size and role of government.