||The study of public finance is challenging, as it combines both normative and positive economic analysis. On the one hand, it seeks to answer the question: What should the role of the public sector be in influencing resource allocation in a market economy? The determination of a set of normative rules to guide public sector decision-making requires making use of the tools of modern welfare economics. As such, one might classify public finance as applied welfare economics. On the other hand, public finance involves the positive study of how the activities of government (e.g. taxation, expenditures, transfers) influence resource allocation, relative prices, and welfare in the economy. The sheer size and pervasiveness of the public sector ensure that it will play a significant role in determining how the economy’s resources will be allocated by the pricing mechanism. In the positive analysis of the effects of public sector decision-making, it must be recognized that government actions will influence prices and outputs on several markets simultaneously. In other words, a satisfactory analysis of the impact of public sector decisions on the economy must take into consideration some of the general equilibrium effects of the actions.