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The Elgar Companion to Public Economics

Empirical Public Economics

Edited by Attiat F. Ott and Richard J. Cebula

Attiat Ott and Richard Cebula have recognised the need to present, in an accessible and straightforward way, the voluminous literature in the public economics arena. Advances in econometric techniques and the spillover of knowledge from other disciplines made it difficult, not only for students but also for lecturers, to accurately find the information they need.
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Chapter 2: The Empirics of the Three Branch Model

Attiat F. Ott


Attiat F. Ott 1 Introduction In his chapter in this volume (Chapter 1), Musgrave reopened that treasure box of ideas that have shaped the development of public finance to reveal the well-known three branch model. The three branches are: allocation, distribution and stabilization. Although treated separately, they are linked in the formation of a consolidated budget plan. Such interdependence and consolidation into a single budget was laid out in Chapter 2 of Musgrave’s, The Theory of Public Finance, where numerical values were assigned to each branch using a simple set of equations. Musgrave’s illustration involves a community consisting of two individuals, X and Z. Society’s income is distributed between the two in such a fashion that YX/YZ < 1. The allocation branch provides the basket of public goods preferred by X and Z. The tax share is derived from the preference function of each. Under a Lindahl type allocation, each individual tax share will be determined by the equality with own marginal benefit at the level of provision. In this framework, the sum of X’s tax payments plus Z’s tax payments is sufficient to cover the cost of provision in the allocation branch. In the allocation branch budget we have, a TX + TZa = G a a Ga being the allocation branch expenditures on public goods; TX , TZa stands for tax payments by X and Z respectively. The distribution branch is given the function of moving the ‘market’ distribution of income towards what Musgrave calls ‘the proper state of...

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