About this paper

Since the 18th National Congress of Communist Party of China (CPC)，the CPC Central Committee has evaluated the“new normal”of China's economic development and made important strategic decisions for comprehensively deepening reforms，proposing to “enable the market to play a decisive role in resources allocation and the government to function better”． This pronouncement shows that fiscal reform is still the focus of comprehensively deepening reforms; the essence of such reform is the balance between the government and the market． How to reconcile“the decisive role of the market”and the ability of“the government to function better”is a fundamental question for public finance． The Decision of the CPC Central Committee on Several Important Issues of Comprehensively Deepening Ｒeform clearly defines public finance as “the foundation and important pillar of state governance”． Does this declaration mark the new functional position of public finance in the current economic and social context? Or has the Chinese leadership always been keenly aware of this function，even though public finance theory has not been given due interpretation and expression? These questions require Chinese scholars topresent deeper theoretical summaries and judgments on the role of public finance under new historical conditions．

A review of the development of contemporary fiscal theory shows that since the mid-1990s，Anglo-Saxon fiscal theory ( based on market failure theory) has been the mainstream in the field of public finance in China． Anglo-Saxon fiscal theory bears the distinctive characteristics of fiscal policy science，and uses the economics paradigm as the primary method for research into and evaluation of fiscal policy． However，fiscal policy analysis is only one function of public finance; its main purpose is to reveal the laws of fiscal activities，describe and explain fiscal phenomena，assess the performance of fiscal activities，and predict their effect．The pragmatic nature and policy-oriented function of market failure theory thus undermines the development and explanatory power of public finance．

This paper starts by asking what kind of theoretical basis public finance needs，and offers a thorough review of development of market failure theory． It finds that the shortcoming of Anglo-Saxon fiscal theory lies in the vulnerability and insularity of its theoretical foundation: the basic assumptions of welfare economics are not an optimal benchmark for public finance; Pareto optimality cannot accurately explain the logic of collective action; and the definition of “market failure” is often departed from in fiscal practice． There are also theoretical errors in the definition of the relationship between government and market． The limitations of this theoretical basis are also reflected in practice． Therefore，we further design the matrix of a“lateral-center”model to test three kinds of classic phenomenon of“market failure”，which also proves that market failure theory is not applicable to public finance．

This study makes two contributions． First，although market failure theory is unable to explain many fiscal phenomena，Western finance still follows the applied economic routine and logic of“fiscal policy”． Therefore，it is difficult to get rid of the fetters of the single economic analysis paradigm． This paper proves the“failure”of market failure theory as the theoretical basis of contemporary fiscal science，promoting and stimulating disciplinary development and theoretical innovation in public finance． Second，although China's fiscal and tax reforms have always served to lead the socialist economic system reform，our knowledge of China's public finance is still limited to the description of phenomena and facts． Based on the argument that market failure theory is not the optimal basis for public finance theory，against the background of changes in China's fiscal function and practice，this paper calls for reconstructing the theoretical basis of public finance with Chinese characteristics to integrate“the theory of social common needs”，“public choice theory”，and the public governance model． This paper is thus a first step in establishing a public finance 

Reference

Li Junsheng, Yao Dongmin. What Kind of Theoretical Basis Does Public Finance Need—Commenting on the “Failure”of the Market Failure Theory [J]. Economic Research, 2018, 53(09): 22-38.