ABSTRACT
The analysis of policy-induced changes in a closed economy raises the question of the nature of government that should be postulated in developing an economic theory relevant to the analysis of economic policy. Two types of budgetary policy will be discussed in this chapter: changes in budgetary scale with the pattern of government expenditure and taxation held constant; and budgetary substitution. Economic theorists have come to identify the role of government primarily with the provision of goods or services whose technical nature in consumption is such that allocation of resources to them cannot be efficiently performed through the private market. An expenditure substitution on the other hand involves the more simple economic problem of taking the general equilibrium effect of a change in government tastes at constant prices, private tastes being held constant. The analysis of changes in budgetary scale assumes that the patterns of both government expenditure and taxes are constant.
