ECON 652: Graduate Public Economics I

Transcription

1 ECON 652: Graduate Public Economics I Lesley Turner Fall 2013 Week 1: Introduction and Course Overview

2 Plan for Today 1. What is public economics (and why should you care)? 2. Semester road map

3 What is Public Economics Broadly considers the role of government in the economy How do government policies aect the economy? How should government policies be designed to maximize welfare? Motivation Policy relevance given size/scope of government Close ties to other elds Methodology Note: This lecture is adapted from the lectures of Raj Chetty (Harvard) and Emmanuel Saez (Berkeley).

4 Size and Scope of Government Government expenditures 1 of GDP in U.S. 3

5 Size and Scope of Government Government expenditures 1 of GDP in U.S. 3 As high as 50% in some European countries

6 Size and Scope of Government Government expenditures 1 of GDP in U.S. 3 As high as 50% in some European countries Two-thirds of expenditures from federal government

7 Size and Scope of Government Government expenditures 1 of GDP in U.S. 3 As high as 50% in some European countries Two-thirds of expenditures from federal government E.g., social insurance programs (Medicare, Social Security), public goods (highways, defense)

8 Size and Scope of Government Government expenditures 1 of GDP in U.S. 3 As high as 50% in some European countries Two-thirds of expenditures from federal government E.g., social insurance programs (Medicare, Social Security), public goods (highways, defense) State/local governments contribute remainder of spending (e.g., K-12 education)

9 Size and Scope of Government Government expenditures 1 of GDP in U.S. 3 As high as 50% in some European countries Two-thirds of expenditures from federal government E.g., social insurance programs (Medicare, Social Security), public goods (highways, defense) State/local governments contribute remainder of spending (e.g., K-12 education) Additional role of regulatory agency E.g., minimum wage, Clean Air Act, compulsory education

10 Size and Scope of Government Government expenditures 1 of GDP in U.S. 3 As high as 50% in some European countries Two-thirds of expenditures from federal government E.g., social insurance programs (Medicare, Social Security), public goods (highways, defense) State/local governments contribute remainder of spending (e.g., K-12 education) Additional role of regulatory agency E.g., minimum wage, Clean Air Act, compulsory education Macroeconomic stabilizer E.g., scal stimulus, ination control by central bank

11 Rationale for Govt Intervention in the Economy 1. Eciency (First Welfare Theorem) 2. Equity (Second Welfare Theorem)

12 First Welfare Theorem

13 First Welfare Theorem Private market equilibrium is Pareto ecient given:

14 First Welfare Theorem Private market equilibrium is Pareto ecient given: 1. No externalities 2. Perfect information + complete markets 3. Perfect competition 4. Rational agents

15 First Welfare Theorem Private market equilibrium is Pareto ecient given: 1. No externalities 2. Perfect information + complete markets 3. Perfect competition 4. Rational agents Failure of any of these conditions may provide a rationale for government intervention

16 Externalities

17 Externalities E.g., pollution (incomplete market due to lack of prices), clean air (public goods)

18 Externalities E.g., pollution (incomplete market due to lack of prices), clean air (public goods) When the actions of an agent directly aect another agent's welfare and this impact is not transmitted via prices

19 Externalities E.g., pollution (incomplete market due to lack of prices), clean air (public goods) When the actions of an agent directly aect another agent's welfare and this impact is not transmitted via prices Key questions:

20 Externalities E.g., pollution (incomplete market due to lack of prices), clean air (public goods) When the actions of an agent directly aect another agent's welfare and this impact is not transmitted via prices Key questions: 1. How do we measure externalities?

21 Externalities E.g., pollution (incomplete market due to lack of prices), clean air (public goods) When the actions of an agent directly aect another agent's welfare and this impact is not transmitted via prices Key questions: 1. How do we measure externalities? What is the long-run impact of pollution on health (Chay & Greenstone 2003)? Does a highly educated workforce increase aggregate productivity (Moretti 2004)?

22 Externalities E.g., pollution (incomplete market due to lack of prices), clean air (public goods) When the actions of an agent directly aect another agent's welfare and this impact is not transmitted via prices Key questions: 1. How do we measure externalities? What is the long-run impact of pollution on health (Chay & Greenstone 2003)? Does a highly educated workforce increase aggregate productivity (Moretti 2004)? 2. What is the optimal method for correcting externalities?

23 Externalities E.g., pollution (incomplete market due to lack of prices), clean air (public goods) When the actions of an agent directly aect another agent's welfare and this impact is not transmitted via prices Key questions: 1. How do we measure externalities? What is the long-run impact of pollution on health (Chay & Greenstone 2003)? Does a highly educated workforce increase aggregate productivity (Moretti 2004)? 2. What is the optimal method for correcting externalities? Regulation/command and control (e.g., limits on pollution imposed by CAA) Pigouvian (corrective) taxation (e.g., sin taxes) Coordination (e.g., cap and trade arrangements)

24 Public Goods Specic type of externality

25 Public Goods Specic type of externality Key questions:

26 Public Goods Specic type of externality Key questions: 1. What public goods should the government provide and in what quantities?

27 Public Goods Specic type of externality Key questions: 1. What public goods should the government provide and in what quantities? To what extent do publicly provided goods crowd-out provision by private sector agents (Hungerman 2005)?

28 Public Goods Specic type of externality Key questions: 1. What public goods should the government provide and in what quantities? To what extent do publicly provided goods crowd-out provision by private sector agents (Hungerman 2005)? 2. What activities should take place at which level of government? E.g., federal government regulates K-12 education (e.g., NCLB), local government provides most funding

29 Public Goods Specic type of externality Key questions: 1. What public goods should the government provide and in what quantities? To what extent do publicly provided goods crowd-out provision by private sector agents (Hungerman 2005)? 2. What activities should take place at which level of government? E.g., federal government regulates K-12 education (e.g., NCLB), local government provides most funding 3. Is it ecient to have local provision of public goods?

30 Public Goods Specic type of externality Key questions: 1. What public goods should the government provide and in what quantities? To what extent do publicly provided goods crowd-out provision by private sector agents (Hungerman 2005)? 2. What activities should take place at which level of government? E.g., federal government regulates K-12 education (e.g., NCLB), local government provides most funding 3. Is it ecient to have local provision of public goods? Do dierences in the bundle of local public goods lead to competition and/or sorting (Hoxby 2000, Urquiola 2005)?

31 Incomplete Markets and Asymmetric Information Some agents have more information than others

32 Incomplete Markets and Asymmetric Information Some agents have more information than others Key questions:

33 Incomplete Markets and Asymmetric Information Some agents have more information than others Key questions: 1. To what extent are specic markets not complete? E.g., capital market imperfections and access to higher education: individuals cannot borrow against future earnings (human capital) to nance college education in the current period (Cameron & Taber 2004).

34 Incomplete Markets and Asymmetric Information Some agents have more information than others Key questions: 1. To what extent are specic markets not complete? E.g., capital market imperfections and access to higher education: individuals cannot borrow against future earnings (human capital) to nance college education in the current period (Cameron & Taber 2004). 2. Why have social insurance (rather than private or no insurance)? E.g., adverse selection and health insurance: private information about health leads healthier individuals to drop out of private market, may lead to market unraveling

35 Incomplete Markets and Asymmetric Information Some agents have more information than others Key questions: 1. To what extent are specic markets not complete? E.g., capital market imperfections and access to higher education: individuals cannot borrow against future earnings (human capital) to nance college education in the current period (Cameron & Taber 2004). 2. Why have social insurance (rather than private or no insurance)? E.g., adverse selection and health insurance: private information about health leads healthier individuals to drop out of private market, may lead to market unraveling 3. Why type of social insurance system maximizes welfare? Trade o between consumption smoothing benet and costs due to distortion

36 Imperfect Competition What is the role of government when rms have market power?

37 Imperfect Competition What is the role of government when rms have market power? Traditionally addressed in Industrial Organization literature Growing overlap between PE and IO E.g., optimal subsidies for higher education when rms (schools) have market power

38 Failure of Individual Rationality Foundation of Behavioral Economics eld

39 Failure of Individual Rationality Foundation of Behavioral Economics eld Myopia/hyperbolic discounting If myopic agents do not save enough for retirement, what is the role for government to correct this behavior? Forced savings (e.g., social security) versus incentives to save (tax credits)

40 Failure of Individual Rationality Foundation of Behavioral Economics eld Myopia/hyperbolic discounting If myopic agents do not save enough for retirement, what is the role for government to correct this behavior? Forced savings (e.g., social security) versus incentives to save (tax credits) Default options Large impact of default option (i.e., opt-in or opt-out) on decision to contribute to retirement plan

41 Failure of Individual Rationality Foundation of Behavioral Economics eld Myopia/hyperbolic discounting If myopic agents do not save enough for retirement, what is the role for government to correct this behavior? Forced savings (e.g., social security) versus incentives to save (tax credits) Default options Large impact of default option (i.e., opt-in or opt-out) on decision to contribute to retirement plan Primarly covered in ECON 752

42 Second Welfare Theorem

43 Second Welfare Theorem Given an ecient allocation (1st WT holds), it is always possible to achieve a dierent PO allocation of resources via lump sum redistribution

44 Second Welfare Theorem Given an ecient allocation (1st WT holds), it is always possible to achieve a dierent PO allocation of resources via lump sum redistribution Fundamentally involves some valuation over the distribution of resources within society

45 Second Welfare Theorem Given an ecient allocation (1st WT holds), it is always possible to achieve a dierent PO allocation of resources via lump sum redistribution Fundamentally involves some valuation over the distribution of resources within society Role for government to address inequality via redistribution (taxation and transfer programs) In practice, redistribution involves trade-o between equity and eciency

46 Second Welfare Theorem Given an ecient allocation (1st WT holds), it is always possible to achieve a dierent PO allocation of resources via lump sum redistribution Fundamentally involves some valuation over the distribution of resources within society Role for government to address inequality via redistribution (taxation and transfer programs) In practice, redistribution involves trade-o between equity and eciency Primarily covered in ECON 752

47 Course Overview Combination of lecture (theory and methods) and discussion (empirical papers) Focus on empirical methods commonly used in applied micro research (e.g., DD, RDD) Link between ultimate parameter of interest and parameter you are able to empirically identify Identifying assumptions Objective: to produce and clearly present original research

48 University of Maryland Department of Economics ECON 652: Fall 2013 Graduate Public Economics I Lesley J. Turner 3115E Tydings Hall (301) turner@econ.umd.edu Class: Tuesday and Thursday, 2:00 3:15pm (1127 Woods Hall) Office hours: Tuesdays 3:30 5:00pm, or by appointment Course Description This course is the first in a two-part graduate sequence in Public Economics. We will focus on the role of government intervention in the economy and cover the following topics: externalities, public goods theory, local public finance (with a focus on the economics of education), and social insurance. For each topic, we will focus on theoretical and empirical evidence as well as relevant empirical research methods. Course Requirements Students are expected to read the assigned papers and participate in class discussions. Additionally, students are expected to attend both the (generally) Thursday Labor/Public/Development seminar (3:30 5:00pm) and the Monday 708 talk (12:30 1:30pm). The grade for the course will be based on: 1) One research proposal 30%. The proposal should include a clearly defined question, motivation as to why the question is economically important, a brief review of the literature, a discussion of the relevant economic theory, and an overview of the data that will be used to analyze the question and methodological approach. A) Students will submit two to three potential questions, each with a short paragraph of motivation by September 12. B) A discussion of the relevant literature and theory will be due October 10. C) The data and methodology section should be submitted by November 7. D) The full proposal is due December 10. 2) Proposal presentations 10%. Students will be expected to make a 30 minute presentation of their proposal and serve as a discussant for a classmate s proposal on December 10 and December 12. To ensure that discussants have sufficient time to prepare useful feedback, slides should be distributed to the discussant at least a week in advance.

49 3) Two data-intensive problem sets/replication exercises 10%. 4) One presentation of a required article 10%. These readings are marked D. Students should me their top three choices by the second class. 5) Three to four short reaction papers (1 2 pages) responding to either Thursday L/P/D seminar or Monday 708 talk 10%. These papers should go beyond summarizing the talk they can discuss strengths, weaknesses, and potential extensions of the paper presented. 6) A take-home final 30%. The final will be distributed on December 12 in class and is due at midnight on December 14. General References Auerbach, A. J. & Feldstein, M., ed. (2002) Handbook of Public Economics, Vol. 3 and 4, Elsevier. Chetty, R., Public Economics Lecture Slides. Available at: Saez, E., Graduate Public Economics. Available at: Econometrics References Angrist, J. & Pischke, J. (2008) Mostly Harmless Econometrics: An Empiricist's Companion, Princeton University Press. Imbens, G. and Wooldridge, J. (2007) What's New in Econometrics: NBER Summer Institute Mini-Course. Available at: Wooldridge, J. M. (2002) Econometric Analysis of Cross Section and Panel Data, MIT Press. Course Outline and Reading List 1. Externalities and Random Assignment [4 lectures] ** Weitzman, M. (1974) Prices versus Quantities, Review of Economic Studies 41(4): ** Chay, K. and Greenstone, M. (2003) "The Impact of Air Pollution on Infant Mortality: Evidence from Geographic Variation in Pollution Shocks Induced by a Recession," Quarterly Journal of Economics 118(3):

50 Semester Road Map 1. Externalities (4 lectures) Random assignment 2. Public Goods (3 lectures) Dierences-in-dierences estimation 3. Local Public Finance (6 lectures) Instrumental variables The regression discontinuity design and extensions 4. Public Provision of Private Goods (3 lectures) The regression kink design 5. Social Insurance (7 lectures) 6. Student Presentations (3 lectures)

51 Next class Externalities: Theory and empirics (if time) Weitzman (1974) Chay & Greenston (2003) me your top three choices for papers to present (marked D)