Undergraduate

modules

Modules

ECO3014 : Public Economics

Semesters
Semester 1 Credit Value: 10
Semester 2 Credit Value: 10
ECTS Credits: 10.0

Aims

The first semester of the module focuses on the problems that public goods pose for market-based economies, and the consequent implications for the role of the state in the economy. This involves a brief examination of what is meant by social welfare, and how economists typically evaluate social arrangements. The notion of market failure is then examined with particular emphasis being placed on public goods. Various allocation mechanisms are considered which illustrate problems with government provision. The working of the political system itself is an important theme, with some time spent looking at voting and lobbying.

The second semester of the course examines the economics of local public goods, which are public goods whose benefit is spatially defined. It leads to a discussion of local government, fiscal federalism and the opportunities for political participation. The second part of the module looks at how individuals interact to determine the appropriate level of public goods. This is social decision-making and it discusses how decisions are made in practice through intermediaries in the form of parties, leading to theories of the political business cycle. The remaining part looks at tax theory - known as optimal taxation - and the practice of taxation, focusing on the UK experience. Much of this is concerned with the efficiency aspects of taxation, known as the excess burden.

Outline Of Syllabus

SEMESTER 1: FOUNDATIONS, PUBLIC GOODS AND THE PUBLIC SECTOR

I.       INTRODUCTION

Prologue: Political Philosophy and Social Welfare
•       Government as a coercive agent
•       The Social Contract
•       The General Will
•       The Social Contract in modern Public Economics
•       Paretianism and its Variants: Bentham and Rawls

II.       FOUNDATIONS OF PUBLIC ECONOMICS

The Arrow Possibility Theorem
•       The problem of collective action
•       Value judgements in economics
•       The Arrow Possibility Theorem
•       Escaping from the Theorem
•       Significance of the Theorem

Basic Welfare Economics
•       Exchange and the Edgeworth-Bowley Box Diagram
•       Production and full Pareto Optimality conditions
•       Pareto Optimality and Competitive Equilibrium
•       Fundamental Theorems of Welfare Economics
•       Market failure and prices.


III.       PENSIONS AND TRANSFERS

•       Defining Pension Schemes
•       The Beveridge Report and the Negative Income Tax
•       Pensions and Saving: The Golden Rule in the Solow Growth Model and PAYG systems.
•       Pensions and Saving: The Golden Rule in an Overlapping Generations model and PAYG systems.
• The Golden Rule and the Aaron-Samuelson Rule: Pareto Optimality in Steady State
• The effect of population growth with and without a pensions scheme
• Market Failure and Human Capital


IV       PUBLIC GOODS

Public Goods: Optimality
•       Defining public goods
•       Samuelson public goods
•       Definition and efficiency conditions: The Samuelson Analysis
•       The Lindahl Mechanism
•       Olson’s conjecture: the greater inefficiency of large groups
• Incentive Compatibility and the Clarke-Goves mechanism, weaknesses

V.       THE SEARCH FOR OPTIMALITY

Majority Voting
•       Majority Voting, the political process and rent seeking
•       Median Voter Theorem
•       Bowen-Black Model
• Efficiency of Majority voitng, coalitions
• Rent seeking and social waste


SEMESTER 2: COLLECTIVE DECISION MAKING AND TAXATION

VI. PUBLIC GOODS AND FISCAL FEDERALISM

•       Pure public goods, local public goods and club goods.
•       The Tiebout model. Existence and efficiency
•       Tiebout model with homogeneous individuals and heterogeneous communities
•       Tiebout model with heterogeneous individuals
•       Fiscal federalism and political participation
•       Decentralisation theorem and inter-governmental grants
•       Political participation.

VII. COLLECTIVE DECISION-MAKING

•       Social Choice Theory, Impossibility Theorem and Voting Paradox
•       Social Choice Rules in Practice
•       Intensity of Preference
•       Downs model of party competition and extensions
•       Political business cycle and criticisms. Rational expectations models
•       Models of partisan behaviour


VIII. TAX THEORY

•       Excess Burden of Taxation, Measuring the Welfare Loss
•       Incidence of Taxation, Shifting of Taxes and Tax Capitalization.
•       Equity Considerations and the Equity-Efficiency Trade-off.
•       Optimal Taxation.
•       Commodity Taxes and the Ramey and Corlett-Hague Rules.
•       Optimal Income Taxation. Linear and Non-Linear Taxes.
     
VIX. TAX PRACTICE

•       Tax Bases, Defining Income
•       The UK Income Tax System
•       Tax Avoidance and the Laffer Curve.
•       Taxes on Goods and Services, Ad valorem and unit taxes
•       Switch to commodity taxation. Regressiveness of Indirect Taxation
•       Alternative Tax Bases. Wealth tax and Expenditure tax

Teaching Methods

Teaching Activities
Category Activity Number Length Student Hours Comment
Guided Independent StudyAssessment preparation and completion164:0064:00N/A
Scheduled Learning And Teaching ActivitiesLecture281:0028:00N/A
Guided Independent StudyDirected research and reading150:0050:00N/A
Scheduled Learning And Teaching ActivitiesSmall group teaching81:008:00N/A
Guided Independent StudyIndependent study150:0050:00N/A
Total200:00
Teaching Rationale And Relationship

Lectures provide an exhaustive and in-depth treatment of the core course material. Seminars facilitate small group interaction with the seminar leader to reinforce learning. Private study facilitates review and understanding of lecture material and problem sets.

Assessment Methods

The format of resits will be determined by the Board of Examiners

Exams
Description Length Semester When Set Percentage Comment
Written Examination1802A100N/A
Formative Assessments
Description Semester When Set Comment
Essay2MLimited to one per student
Assessment Rationale And Relationship

The exam tests the student's grasp of the module material, understanding of some of the core models concepts, and ability to tackle analytical problems. Choice restricted in exam to test knowledge of whole syllabus.

Reading Lists

Timetable