Economics of the Public Sector. Syllabus

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1 Economics of the Public Sector. Syllabus Course description Lecturer: Natalia V. Rakuta Class teacher: Natalia V. Rakuta Prerequisites: Intermediate microeconomics, Calculus Course Type: elective Learning objectives The main aim of the course is to develop analytical tools and their application to key policy issues relating to the spending, taxation and financial activities of the government. After studying the course students should know main theoretical concepts and models, be able to analyze the influence of taxation and public spending on the economy, discuss different questions, connected with public sector economics, and solve problems. Learning Outcomes After studying the course students will: - know main theoretical concepts and models, - be able to analyze the influence of taxation and public spending on the economy, - be able to discuss different questions, connected with public sector economics, and solve problems. Course plan 1. Introduction to Public Economics Introduction. Public Economics. Subject and methods. Government. Historical development. Measurements. Revenues and expenditures. Functions of the Public sector. The minimal state. Market failure. Redistribution. 2. Market Failure The first and the second fundamental theorems of welfare economics. Pareto efficiency. Source of market failure: competition failure, incomplete markets, information failure, externalities, public goods. The theory of externalities. Coase theorem. Pigouvian taxation. The theory of public goods. Club goods and local public goods. Efficiency conditions for public goods. Mechanism design. Private provision of public goods. Second-best principle. Imperfect competition and government regulation. Welfare loss. Asymmetric information and government solutions.

2 3. Voting Public mechanisms for allocating resources: problems of eliciting preferences and reconciling differing views. Voting. Majority voting: the median voter theory and the voting paradox. Arrow s Impossibility Theorem. 4. Rent-seeking Special interest groups. Rent-seeking behaviour. Controlling rent-seeking. Theory of bureaucracy. Principal - agent problem. Government failure. 5. Income, inequality and poverty Pareto efficiency versus alternative criteria. Equity and efficiency. Social welfare functions. Alternative theories of the role of the state. Redistribution and its effects. Inequality and poverty. The role of social insurance. Health care. Retirement pensions: funded and pay-as-you-go state pensions. Efficiency: effects on savings and retirement decisions. Approaches to income support. Welfare programs, targeting and incentives. Integrating taxes and benefits. 6. Commodity taxation Types of taxes. The five desirable characteristics of a tax system. Tax incidence in competitive and monopolised markets. DWL and price elasticity. Equivalent taxes. Achieving tax neutrality. Effects of globalisation. Optimal commodity taxation: the Ramsey rule. 7. Income taxation Taxes and labour supply: taxes and the individual budget constraint; income and substitution effects; non-linearities due to progressive taxation. Taxation of capital. Taxes and savings. Distributional considerations. Modelling tax evasion. Policies to reduce tax evasion. 8. Theories of the public sector The size of public expenditures. Wagner s law, Baumol s law, a political model, budget-setting, etc. Public provision versus public procurement. Efficiency of public expenditures. Cost-benefit analysis. 9. Social Insurance and Welfare Programs Information problems and the market for insurance. The role of social insurance. The case of unemployment insurance. Health care. Retirement pensions: funded and "pay-as-you-go" state pensions. Efficiency: effects on savings and retirement decisions. Approaches to income support. Welfare programs, targeting and incentives. Means-testing. The contributory principle. Integrating taxes and benefits. 10. Cost-Benefit Analysis Private cost-benefit analysis. NPV and IRR methods. Social cost-benefit analysis. Measuring non-monetized costs and benefits. Shadow prices and market prices.

3 Discount rate for social cost-benefit analysis. The evaluation of risk. 11. Managing the Public Sector's Assets and Liabilities Privatisation: efficiency and equity arguments about state intervention. Forms of intervention. Public versus private ownership. Competition and quasi-markets. Regulation. Managing public sector liabilities: issues in domestic and external debt management. 12. Multiple Jurisdictions Fiscal federalism. Arguments for multi-level government. The division of responsibilities. Principles of fiscal federalism: club theory and local public goods, Tiebout hypothesis. Production versus finance. The incidence applied to local public finance. Fiscal competition: problems of multi-jurisdictional taxation; income distribution; inter-governmental transfers. Distribution of hours # Topic Total Contact hours Self hours Lectures Seminars study 1. Introduction to Public Economics Market Failure Voting Rent-seeking Income, inequality and poverty Commodity taxation Income taxation Theories of the public sector Social Insurance and Welfare Programs Cost-Benefit Analysis Managing the Public Sector's Assets and Liabilities 12. Multiple Jurisdictions Total: Reading list Required: 1. Hindriks, J. and G.D. Myles Intermediate Public Economics. (Cambridge: MIT Press, 2013) second edition 2. Cullis, John G., and Philip R. Jones Public finance and public

4 Optional: choice: analytical perspectives. Oxford: Oxford University Press. 1. Akerlof, G. The market for lemons: quality uncertainty and the market mechanism, Quarterly Journal of Economics , pp Alesina, A. and E. Spolaore On the number and size of nations, Quarterly Journal of Economics , pp Alesina, A., Fassarelli F. Regulation versus taxation, Journal of Public Economics , pp Arrow, K.J. A difficulty in the concept of social welfare, Journal of Political Economy , pp Atkinson, A.B. On the measurement of inequality, Journal of Economic Theory , pp Atkinson, A.B. On the measurement of poverty, Econometrica, (55) 1987 pp Banzhaf, H. S., Chupp B. A. Fiscal federalism and interjurisdictional externalities: New results and an application to US Air pollution, Journal of Public Economics 96 (5-6) 2012, pp Barth, E., Moene K. O., Willumsen F. The Scandinavian model An interpretation, Journal of Public Economics , pp Bennmarker, H., Grönqvist E., Öckert B. Effects of contracting out employment services: Evidence from a randomized experiment, Journal of Public Economics 98, pp Bergstrom, T.C., L. Blume and H. Varian On the private provision of public goods, Journal of Public Economics , pp Bird, R.M. Wagner s law of expanding state activity, Public Finance, (26) 1971, pp Blundell, R. Labour supply and taxation: a survey, Fiscal Studies , pp Boadway, R., Tremblay J. F. Reassessment of the Tiebout model, Journal of Public Economics 96 (11-12) pp Buchanan, J.M. and R.A. Musgrave Public Finance and Public Choice: Two Contrasting Visions of the State. (Cambridge: MIT Press, 1999) [ISBN hbk]. 15. Buchanan, J.M., R.D. Tollison and G. Tullock Towards a Theory of the Rent- Seeking Society. (College Station: Texas A and M Press, 1980) [ISBN hbk]. 16. Burgess, D. F. Reconciling alternative views about the appropriate social discount rate, Journal of Public Economics 97 pp Coase, R.H. The problem of social cost, Journal of Law and Economics , pp Cockburn, J., Duclos J.-Y., Zabsonré A. Is global social welfare increasing? A critical-level enquiry, Journal of Public Economics , pp

5 19. Cremer, H., Roeder K. Long-term care policy, myopia and redistribution, Journal of Public Economics , pp Diamond, P.A. and J.A. Mirrlees Optimal taxation and public production 1: Production efficiency and 2: Tax rules, American Economic Review , pp.8 27 and pp Duffie, D. and H. Sonnenschein Arrow and General Equilibrium Theory, Journal of Economic Literature , pp Epple, D. and T. Romer Interjurisdictional sorting and majority rule: an empirical analysis, Econometrica, (69), 2001, pp Epple, D., Romano R. On the political economy of educational vouchers, Journal of Public Economics , pp Feddersen, T.J. Rational choice theory and the paradox of not voting, Journal of Economic Perspectives, (18) 2004, pp Fergusson, L. Media markets, special interests, and voters, Journal of Public Economics , pp Foremny, D., Riedel N. Business taxes and the electoral cycle, Journal of Public Economics , pp Großer, J., Reuben E. Redistribution and market efficiency: An experimental study, Journal of Public Economics , pp Harberger, A.C. Monopoly and resource allocation, American Economic Review , pp Hindriks, J. and P. De Donder The politics of redistributive social insurance, Journal of Public Economics, (87) 2003, pp Hindriks, J. The consequences of labor mobility for redistribution: tax versus transfer competition, Journal of Public Economics , pp Janeba, E., Osterloh S. Tax and the city A theory of local tax competition, Journal of Public Economics , pp Johannesen, N. Tax avoidance with cross-border hybrid instruments, Journal of Public Economics , pp Lakdawalla, D., Sood N. Health insurance as a two-part pricing contract, Journal of Public Economics , pp Laffont, J.-J. Incentives and Political Economy. (Oxford: Oxford University Press, 2002) [ISBN pbk]. 35. Levy, N., Pauzner A. Government's credit-rating concerns and the evaluation of public projects, Journal of Public Economics , pp Mueller, D.C. Public Choice III. (Cambridge: Cambridge University Press, 2003) [ISBN pbk]. 37. Myles, G.D. On the optimal marginal rate of income tax, Economics Letters, (66) 2000, pp Niskanen, W.A. Non-market decision making: the peculiar economics of bureaucracy, American Economic Review , pp Oates, W.E. Fiscal Federalism. (New York: Harcourt Brace Jovanovich, Academic Press, 1972) [ISBN X hbk].

6 40. Peacock, A.K. and J. Wiseman The Growth of Public Expenditure in the United Kingdom. (Princeton: Princeton University Press, 1961) [ISBN hbk]. 41. Rosen, H., Gayer T., Civan A. Public Finance, 10th ed., Mcgraw-Hill/Irwin, Samuelson, P.A. Reaffirming the existence of reasonable Bergson- Samuelson social welfare functions, Economica , pp Sen, A.K. On Economic Inequality. (Oxford: Oxford University Press, 1997) [ISBN pbk]. 44. Tanzi, V. and L. Schuknecht Public Spending in the 20th Century: A Global Perspective. (Cambridge: Cambridge University Press, 2000) [ISBN pbk]. 45. Tiebout, C.M. A pure theory of local expenditure, Journal of Political Economy , pp Traxler, C. Majority voting and the welfare implications of tax avoidance, Journal of Public Economics 96 (1-2) 2012, pp Ujhelyi, G. Civil service reform, Journal of Public Economics , pp Tullock, G. The welfare costs of tariffs, monopolies and theft, Western Economic Journal, (5) 1967, pp Vickers, J. Concepts of competition, Oxford Economic Papers , pp Wilson, J.D. A theory of interregional tax competition, Journal of Urban Economics , pp Knowledge Assessment Control takes the following forms: class participation; 2 group presentations; 2 written home assignments; 2 midterm exam (80 min. each), final exam (120 min). Grading System Course grade consists of two parts cumulative grade (CG) and final exam grade (FEG). Cumulative grade includes: class participation (15%); home assignments (15%); group presentations (10%); midterm exams (30% each).

7 Total mark = 0.6*CG + 0.4*FEG Methods of Instruction During the course following methods and teaching forms are used: Lectures Classes Group presentations Self-study tasks Student s self-study includes studying theoretical concepts, reading publications about current economic problems (referred to public sector), and solving homework tasks.