Theorizing Public Expenditures: Welfare Theorems, Market Failures, and the Turn From 'Public Finance' to 'Public Economics'


Steve G. Medema


Publication Number: 2022-09

Publication Date: Revised May 2023

Public expenditure theory is a late-comer to the field of public finance, despite laments over the lack of such a theory dating to the late 1800s. This paper documents and attempts to explain this transformation, locating its origins in Richard Musgrave’s normative theory of the public household and the adoption by subsequent thinkers of new developments in welfare theory, which was seen to offer a theoretically sophisticated a vision of the state’s role as a response to the problem of market failure. Keywords: public expenditure theory, market failure, Musgrave, Bastable, general equilibrium, welfare economics.