Wagner's law

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An observation made in the 19th century by Adolph Wagner (1835–1917) that the share of the public sector in gross domestic product had increased over time. Wagner's law was the prediction that this trend would continue. The law is based on three claims: economic growth results in an increase in complexity requiring continued introduction of new laws and development of the legal structure; urbanization increases negative externalities, such as congestion and crime, which necessitate intervention; and the goods supplied by the public sector have a high income elasticity of demand. If the elasticity of demand exceeds one, public sector expenditure will consequently rise as a proportion of income. It is the third claim that has received most attention but empirical evidence has failed to convincingly demonstrate that the elasticity of demand is above one. Wagner's law has some compelling features but by concentrating solely on the demand for public sector services it overlooks the supply side and the politics of provision.

Subjects: Economics.

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