Economics of the Public Sector

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1 Lecturer: Steven Kivinen Classteacher: Natalia V. Rakuta Course description Economics of the Public Sector This course provides the basis for the economic analysis of public policy issues. It analyses the role of the public sector in the economy, its functions, management techniques, taxation, and the efficiency of resource usage. The focus of the course is on the main parts of public finance - taxation and spending. Issues related to the role of the state, public choice, management of public assets and liabilities, and fiscal federalism are also examined. The course develops an analytical framework for the evaluation of public policy. Course prerequisites The prerequisites of the course are intermediate microeconomics, intermediate macroeconomics, and calculus. Course Objectives. The main objective of the course is to develop analytical tools and demonstrate their application to key policy issues relating to spending, taxation, and financial activities of government. After studying the course, students should know the main theoretical concepts and models, be able to analyze the influence of taxation and public spending on the economy, discuss different questions related to the public sector, and solve problems. Teaching Methods During the course the following methods and teaching forms are used: Lectures Classes Group presentations Self-study tasks Student s self-study tasks include reading chapters in the textbook and additional literature (articles) about the current economic situation in the public sector, preparing individual and group presentations, and solving homework problems. Assessment Control takes the following forms: written home assignments (4 units); group presentations (2 times); midterm test (80 min); final exam (120 min).

2 Grade Determination All types of assessment are graded on a 100-point scale. The course grade is determined by: Home assignment (40 points), class discussions (20 points), and presentations (40 points) (the weight of this part for the total mark is 25%); midterm test (25%); final exam (50%) The following scale is used to convert grades from 100 to 10 point scale: 0-19 = 1; = 6; = 2; = 7; = 3; = 8; = 4; = 9; = 5; = 10 Literature Main Тexts Hinders, J. and G.D. Myles Intermediate Public Economics. (Cambridge: MIT Press, 2013) 2nd edition [HM]. Supplementary Reading Textbooks: Stiglitz, J. Economics of the Public Sector. (W.W. Norton & Company, 2000) 3rd edition. Cullis, John G., and Philip R. Jones Public Finance and Public Choice: Analytical Perspectives. (Oxford: Oxford University Press, 2009) Mueller, D.C. Public Choice III. (Cambridge: Cambridge University Press, 2003) Rosen, H., Gayer T., Civan A. Public Finance. (McGraw-Hill/Irwin, 2014) 10th edition. Articles: Akerlof, G. The market for lemons: quality uncertainty and the market mechanism, Quarterly Journal of Economics , pp

3 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

4 Buchanan, J.M. and R.A. Musgrave Public Finance and Public Choice: Two Contrasting Visions of the State. (Cambridge: MIT Press, 1999) [ISBN hbk]. 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]. 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 criticallevel enquiry, Journal of Public Economics , pp 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

5 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 Han, Y., Pieretti P., Zanaj S., Zou B. Asymmetric competition among nation states: A differential game approach, 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]. Levy, N., Pauzner A. Government's credit-rating concerns and the evaluation of public projects, Journal of Public Economics , pp Marie, O., Castello J. V. Measuring the (income) effect of disability insurance generosity on labour market participation, Journal of Public Economics 96 (1-2) 2012, pp Myles, G.D. On the optimal marginal rate of income tax, Economics Letters, (66) 2000, pp

6 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]. Peacock, A.K. and J. Wiseman The Growth of Public Expenditure in the United Kingdom. (Princeton: Princeton University Press, 1961) [ISBN hbk]. Roberts, K. Voting over income tax schedules, Journal of Public Economics, (8) 1977, pp 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]. Spataro, L., Renström T. I. Optimal taxation, critical-level utilitarianism and economic growth, Journal of Public Economics 96 (9-10) pp Tanzi, V. and L. Schuknecht Public Spending in the 20th Century: A Global Perspective. (Cambridge: Cambridge University Press, 2000) [ISBN pbk]. 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 19, 1986, pp

7 Course outline 1. Introduction to Public Economics (Ch. 4, 5) Introduction. Public Economics. Subjects and methods. Government. Historical development. Measurements. Revenues and expenditures. Functions of the Public Sector. The minimal state. Market failure. Redistribution. Public sector growth. Excessive government. 2. Equilibrium and Efficiency (Ch. 2) The first and second fundamental theorems of welfare economics. Pareto efficiency. Source of market failure: competition failure, incomplete markets, information failure, externalities, public goods. 3. Market Failure I: Public Goods, Externalities (Ch , 7-8) Public goods. Public mechanism design. Club goods and local public goods. Efficiency: public provision, Lindahl equilibrium. Externalities. Solutions to externalities: taxation, licences. Coase Theorem. 4. Market Failure II: Imperfect Competition, Asymmetric Information (Ch. 9, 10) Imperfect competition: monopoly/monopsony, oligopoly, monopolistic competition. Industry concentration. Inefficiency. Taxation. Regulation of monopoly and oligopoly. Asymmetric information. Moral hazard. Adverse selection. Market unravelling. Screening. Signalling. Government intervention. 5. Political Economy (Ch. 11, 12) Voting. Arrow s Impossibility Theorem. Majority Voting: May s theorem, Condorcet paradox, Median Voter Theorem. Agenda manipulation. Alternatives to majority voting. Voting paradox. Political competition. Rent-seeking behaviour. Special interest groups and lobbying. 6. Equity and Redistribution (Ch. 13, 14) Social optimality. Equity and efficiency. Social welfare functions. Comparability. Alternative theories of the role of the state. Redistribution and its effects. Inequality and poverty. Measurement. Unequal opportunity. Intergenerational inequality. 7. Taxation (Ch. 15, 16, 18) 7

8 Commodity taxation: optimality, tax rules, equity and efficiency. Income taxation: optimality, labour supply, equity and efficiency. Voting over taxes. 8. Issues of Time (Ch. 22, 23) Overlapping generations model: equilibrium, efficiency. Pensions. Crises and sustainability. Ricardian equivalence. 9. Multiple Jurisdictions (Ch. 19) Fiscal Federalism. Arguments for multi-level government. Optimal structure. Risksharing. Evidence on decentralization. Preliminary distribution of hours by topics and types of work Topic Lectures Classes Selfstudy 1. Introduction to Public Economics Equilibrium and Efficiency Market Failure I Market Failure II Political Economy Equity and Redistribution Taxation Issues of Time Multiple Jurisdictions Total:

Prerequisites Students should be familiar with the basics of first year graduate microeconomics.

Prerequisites Students should be familiar with the basics of first year graduate microeconomics. Syllabus: ECON 9450, Advanced Public Finance I Fall, 2017 Instructor: Prof. Andrew Feltenstein Office Hours: M 2:00 4:00 Phone: 404 413 0093 Office: Andrew Young 524 Email: afeltenstein@gsu.edu Class Meetings: