Public Finance Cheat Sheet

The core ideas of Public Finance distilled into a single, scannable reference — perfect for review or quick lookup.

PiqCue — piqcue.com/public-finance/cheatsheet

Quick Reference

Taxation

The compulsory transfer of resources from private individuals and businesses to the government, used to fund public expenditures. Taxes can be levied on income, consumption, property, wealth, and transactions, and are evaluated based on efficiency, equity, simplicity, and revenue adequacy.

Public Goods

Goods that are non-rivalrous (one person's consumption does not reduce availability to others) and non-excludable (it is impossible or impractical to prevent non-payers from consuming them). Because private markets tend to underprovide public goods, government provision is often justified.

Fiscal Policy

The use of government spending and taxation to influence the economy's overall level of output, employment, and prices. Expansionary fiscal policy involves increasing spending or cutting taxes to stimulate demand, while contractionary fiscal policy does the opposite to cool an overheating economy.

Government Budget Deficit and Surplus

A budget deficit occurs when government expenditures exceed revenues in a given fiscal year, while a surplus occurs when revenues exceed expenditures. Persistent deficits accumulate into public debt, which must be financed through borrowing.

Public Debt

The total amount of money that a government owes to creditors, accumulated from past budget deficits. Public debt can be held domestically or by foreign investors and is typically issued in the form of government bonds and treasury securities.

Tax Incidence

The analysis of who ultimately bears the economic burden of a tax, which may differ from who is legally required to pay it. Tax incidence depends on the relative elasticities of supply and demand in the affected market.

Externalities

Costs or benefits of economic activity that affect parties not directly involved in a transaction. Negative externalities like pollution lead to overproduction, while positive externalities like education lead to underproduction, justifying government intervention through taxes, subsidies, or regulation.

Progressive, Proportional, and Regressive Taxation

A progressive tax takes a larger percentage of income from high earners than from low earners. A proportional (flat) tax takes the same percentage from everyone. A regressive tax takes a larger percentage from low earners, even if the absolute amount is smaller.

Cost-Benefit Analysis

A systematic process for evaluating the total expected costs and benefits of a public project or policy to determine whether it is worthwhile and to compare alternative options. It converts all impacts to monetary values, including non-market goods, and discounts future values to the present.

Intergovernmental Fiscal Relations

The financial relationships among different levels of government, including the assignment of tax and spending responsibilities, revenue sharing, and intergovernmental transfers such as grants. These relationships determine how fiscal federalism operates in practice.

Key Terms at a Glance

Balanced Budget:A budget in which government revenues equal expenditures, resulting in neither a deficit nor a surplus.

Bond:A fixed-income debt instrument issued by a government or corporation to raise funds. The issuer promises to pay periodic interest and return the principal at maturity.

Budget Deficit:The amount by which government spending exceeds revenue in a given fiscal period.

Capital Expenditure:Government spending on long-term assets such as infrastructure, buildings, and equipment that provide benefits over many years.

Cost-Benefit Analysis:A systematic approach to estimating the strengths and weaknesses of alternatives to determine the best option for achieving a public policy goal.

Crowding Out:A reduction in private investment caused by increased government borrowing, which raises interest rates in the loanable funds market.

Deadweight Loss:The loss of economic efficiency that occurs when the equilibrium outcome is not achieved, often caused by taxes, subsidies, or price controls.

Earmarked Tax:A tax whose revenue is reserved for a specific government program or purpose rather than going into the general fund.

Externality:A side effect of an economic activity that affects uninvolved third parties, which can be positive or negative.

Fiscal Federalism:The financial relations among different levels of government, including the allocation of revenue sources and spending responsibilities.

Fiscal Policy:The government's use of taxation and spending to influence the economy's performance.

Free Rider Problem:The issue that arises when individuals can benefit from a public good without contributing to its cost.

Horizontal Equity:The principle that taxpayers in similar economic situations should be treated equally by the tax system.

Incidence:The final distribution of the economic burden of a tax among market participants.

Laffer Curve:A theoretical representation showing how tax revenue changes as the tax rate moves from 0% to 100%, suggesting a revenue-maximizing rate.

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