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PUBLIC ECONOMICS (ECON 6211)

SPRING 1999 Time: M,W,F 12:00 -12:50 Room: Econ 16

COURSE DESCRIPTION:

Charles de Bartolome Office Hours: Office: Econ 202

This course considers the rationale for and design of government expenditure programs and the tax structures by which they are financed. The course describes the normative outcome achieved by a benevolent government, and the positive outcome achieved under rules of collective choice.

The course is an overview, stressing important topics and associated empirical work. It is designed to prepare MA students for taking the PhD courses in expenditure theory (Econ 8221) and tax theory (Econ 8211).

REQUIRED TEXTS: Rosen, H.S. , (1999), Public Finance , 5th Edition. McGraw Hill. Baker, S., and C. Elliott, (1997), Readings in Public Finance, 2nd Edition. Southwestern

PRE-REQUISITES: Applied Microeconomic Theory (Econ 6070).

EXAMS: The midterm will be given in the evening on:

Monday 1 March 7:00 - 9:00 p.m.

The final exam will be given on: Saturday 8 May 3 :30 - 6:30 p.m.

You must bring a blue-book to each exam.

GRADING: The grade of the student will be determined as: 45% Midterm, 45% Final, 10% Paper.

NOTIFICATION OF CLASS GRADE: University rules prevent me from posting your grade. If you wish to be notified by me of your grade, you must give me a stamped addressed card at the final exam.

COURSE OUTLINE: Attached is a list of topics to be covered and likely dates.

11 Jan: OVERVIEW OF U.S. GOVERNMENT

Topics: Government budget

Readings: Rosen, Chapters 1,2,3 .

13, 15, 20 Jan: PRIVATE GOODS

Topics: (Pareto) efficiency. Competitive outcome. First fundamental welfare theorem. Second fundamental welfare theorem.

Readings: Rosen, Chapter 4. Binger, B.R. and E. Hoffman, (1998), Microeconomics with calculus (2nd Edition). Chapter 14.

22, 25, 27, 29 Jan 1, 3, 5, 8 Feb: PUBLIC GOODS

Topics Non-rivalness and non-excludability. Efficient provision. Free-rider problem. Public vs. private provision. Public vs. private production.

Readings

General: Rosen, Chapter 5. (Omit Appendix). Samuelson, P.A., (1954), "The pure theory of public expenditure," Review of Economics and

Statistics 36, 387-389. Samuelson, P.A., (1955), "The diagramatic exposition of the theory of public expenditure,"

Review ofEconomics and Statistics 37, 350-356.

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Experiments in free-riding: Issac, R.W., K.F.McCue and C.R. Plott, (1985), "Public goods provision in an experimental

environment," Journal of Public Economics 26, 51-74. Issac, R.M. , and J.M. Walker, (1988), "Group size effects in public goods provision: the

voluntary contributions mechanism," Quarterly Journal of Economics 103, 179-199.

Competition and costs: Caves, D. W. , and L.R. Christensen, (1980), "The relative efficiency of public and private firms

in a competitive environment: the case of Canadian railroads," Journal of Political Economy 88, 958-976.

Hoxby, C.M., (1994), "Do private schools provide competition for public schools?" National Bureau of Economic Research Working Paper 4978.

Hoxby, C.M., (1994), "Does competition among public schools benefit students and taxpayers?" National Bureau of Economic Research Working Paper 4979.

Levels of Government: Rivlin, A.M., (1991), "Distinguished lecture on economics in government: strengthening the

economy by rethinking the role of federal and state governments," Journal of Economic Perspectives 5, 3-14. Reprinted in RinPF as Selection I.

10, 12 Feb: PUBLIC DECISION-MAKING: NORMATIVE

Topics: Benefit-Cost Analysis (Kaldor Compensation Criterion).

Readings: Rosen, Chapter 12. Buchanan, J.M., (1959), "Positive economics, welfare economics, and political economy,"

Journal of Law and Economics 2, 124-138. Reprinted in RinPF as Selection 2.

15, 17, 19, 22 Feb: PUBLIC DECISION-MAKING: POSITIVE

Topics : Informed voters: - majority voting - median voter theorem. Uninformed voters: - the iron triangle.

Readings: Rosen, Cha per 7.

Median voter hypothesis: Pommerehne, W.W., (1978), "Institutional approaches to public expenditure," Journal of Public

Economics 9, 255-280. Husted. T.A., and L.W. Kenny, (1997), The effect of the expansion of the voting franchise on the

sise of government," Journal of Political Economy 105, 54-82. de Bartolome, C.A.M., (1997), "What determines state aid to school districts? A positive model

of foundation aid as redistribution," Journal of Policy Analysis and Management l 6, 32-47.

Cycling: Neufeld, J.L., Hausman, W.J., and R.B. Rapoport, (1994), "A paradox of voting: cyclical

majorities and the case of Muscle Shoals," Political Research Quarterly 47, 423-438. Reprinted in RinPF as Selection 11.

24, 26 Feb 3, 5, 8, 10, 12 Mar: EXTERNALITIES

Topics: Efficient behavior. Coase theorem. (Pigou) taxes and subsidies. Regulation.

Readings: Rosen, Chapter 6.

Coase Proposition: Coase, R.H., (1960), "The problem of social cost," Journal of Law and Economics 3, 1-44.

Reprinted in Rin PF as Selection 3. Hoffman, E. , and M.L. Spitzer, (1982), "The Coase Theorem: some experimental tests," Journal

of Law and Economics 25, 73-98. Grossman, M., Sindelar, J.L., I. Mullahy and R. Anderson, (1993), "Alcohol and cigarette taxes,"

Journal of Economic Perspectives 7, 211 -222. Cropper, M.L. and W.E. Oates, (1992), "Environmental economics: a survey," Journal of

Economic Literature 30, 675-740. Reprinted in Rin PF as Selection 4. Ridker, R.G., and I.A. Henning, (1967), "The determinants ofresidential property values with

specific reference to air pollution," Review of Economics and Statistics 49, 246-257. Robinson, H.D., (1985), "Who pays for industrial pollution abatement?" Review of Economics

and Statistics 67, 702-706.

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15, 17, 19 Mar: INCOME DISTRIBUTION

Topics; Process or end-state criterion. Equity and social welfare functions. Utilitarianism. Max-min and the original position. Equity v. efficiency trade-off.

Readings: Rosen, Chapter 8.

29, 31 Mar: HOW TAXES CHANGE BEHAVIOR

Topics: Do labor taxes reduce effort? Do capital taxes reduce savings?

Readings: Rosen, Chapter 1 7

2, 5, 7, 9 Apr: TAX SHIFTING (TAX INCIDENCE)

Topics: Short-run and long-run shifting of sectoral taxes. Short-run and long-run shifting of factor taxes.

Readings: Rosen, Chapter 13.

12, 14, 16, 19, 21, 23 April: EFFICIENCY LOSSES

Topics: Compensated demand and expenditure functions. Excess burden. Inverse elasticity rule.

Readings: Rosen, Chapters 14, 15. Binger, B.R. and E. Hoffman, (1998), Microeconomics with calculus (2nd Edition). Chapter 8. Hausman, J, (1981), "Exact consumer's surplus and deadweight loss," American Economic

Review 71, 662-676.

26, 28, 30 Apr, 3 May: PUBLIC FINANCE: TAX OR DEFICIT FINANCING?

Topics Ricardo equivalence. Keynes view. Overlapping-generation model. Traditional argument. Crowding-out of capital.

Readings: Rosen, Chapter 19