Public Economics 1

Samsubar Saleh
Dea Yustisia
Parallel with Artidiatun Adji
Before we begin…
The syllabus is posted online  eLok Public Economics 1
For most of you, attendance is important if you want to get a good grade

If reading this size font is difficult, I urge you to sit near the front

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Before we begin…

I expect you to know the following tools

Calculus
Derivatives, integrals, partial derivatives
Microeconomics 1
Macroeconomics 1 (although not as important for this public
finance class)

If you are lacking on any of these skills, please make

sure you are comfortable with these skills by next week

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Textbook for this class
Rosen/Gayer
Public Finance, 9th edition
Published by McGraw-Hill/Irwin

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Extra credit
To encourage dialogue and discussion in class, each student that makes at least one intelligent question or
comment during the quarter in lecture will receive one percentage point added to her or his final grade
In order to receive your extra credit, you will need to include your name when you state your question or
comment

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Lecture slides
I will post a subset of lecture slides on-line
Usually posted 2 days after lecture
On-line slides are not meant to be a replacement to lecture

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More on this class
Early on, I will lecture the entire time
Later on many lectures will be about 50-60 minutes, followed by problem solving
Most lectures will be devoted to a single topic
Some topics will require the presentation of journal/case studies by the students related to
topics

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Problems
Problems have been posted on the class website for you to practice on
I will also do some problems at the end of many lectures
As we get closer to each test, I will devote some time to solving problems on the class website

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Today
What is public finance?
An introduction to Public Economics 1
What will we cover over the next weeks?
Introduction to public finance
The role of government
Organic and mechanistic views of government
Size of government
Tiebout’s model

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What is public finance?
Analyzing government taxation and spending
Examples
Preserving the environment
The roads you drive on
Health care reform
Social security sustainability
Fairness of income distribution
Taxation of income: Tax evasion versus tax avoidance

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An introduction to Public Economics
This class some units of public policy analysis
Unit 1: Introduction and Microeconomic tools
Unit 2: Public goods, externalities, and government
Unit 3: Health care and income redistribution
Unit 4: An introduction to taxation

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Unit 1 (begins today)
Introduction and Microeconomic tools
Chapter 1: Introduction to public finance and government
Most of Chapter 2: Empirical tools
Part of Chapter 3: Economic theory tools
Most of Chapter 8: Cost-benefit tools
Part of Chapter 22: The Tiebout model

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Unit 2
Public goods, externalities, and government
Chapter 4: Public goods
Chapter 5: Externalities
Chapter 6: Government and political economy
Chapter 7 & the end of Chapter 8: Government spending on education

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Unit 3
Health care and income redistribution
Chapter 9: Problems of insurance in the health care market
Chapter 10: Government’s role in health care
Most of Chapter 11: The structure of Social Security; stresses caused by the baby boom
generation
Most of Chapter 12: Conceptual issues of income redistribution
Most of Chapter 13: Programs for the poor

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Unit 4
Primary and secondary effects of taxes
Most of Chapter 14: Taxation and partial equilibrium
Part of Chapter 15: Excess burden
Part of Chapter 16: Tax evasion & tax avoidance
Other taxation topics from Chapters 17 and 18

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Before moving on…
If you think that you are weak on your Microeconomics skills, you should read the Appendix at the end of the
book or look at an intermediate Microeconomics textbook

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Defining the Field of Study

Field of economics that analyzes

Public Finance –

government taxation and spending activities.

Public Sector Economics or Public Economics

Terms that better capture the fundamental issues of this

field of economics - government’s role in the allocation
of real resources - that includes, but is not limited to,
government’s financial behavior.
Focus on microeconomic functions of government.

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Public Finance and Ideology

• Organic view of government

– Society is a natural organism
• Government is the heart.
• Individuals are parts of the organism that have
significance only as part of the community, which is
stressed above the individual.
• Mechanistic view of government
– Government is not an organic part of society, but
created by individuals for individuals.
• Libertarians vs. Social Democrats: Role of government

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 Government at a Glance:
The Legal Framework
• Federal Government: Constitutional Provisions
• Article 1, Section 8
– Congress will “pay the Debts and provide for the common Defense and
general Welfare of the United States.”
– “The Congress shall have Power to lay and collect Taxes, Duties,
Imposts and Excises.”
• Article 1, Section 9
– “No…direct Tax shall be laid, unless in Proportion to the Census or
Enumeration herein before directed to be taken”.
• 16th Amendment
– “Congress shall have power to levy and collect taxes…”
• 5th Amendment
– “No person shall be…deprived of life, liberty, or property, without due
process of law…”

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 Government at a Glance:
The Legal Framework
State Governments

Federal Constitution gives state governments board

autonomy to spend and tax.
Federal Constitution 10th Amendment controls states’
international economic policy.
States’ Constitutions vary in spending and taxing
restrictions and the economic issues with which they deal.
Local Governments

Derive power to tax and spend from the States.

Fiscal independence of local governments.

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 Government at a Glance:
The Size of Government
How to measure the extent to which society’s
resources are subject to control by government.
Annual expenditures
Types of government expenditure
Purchases of goods and services
Transfers of income
Interest payments
Budget documents
Unified budget: Itemized list of federal government revenues and
expenditures.
Regulatory budget: Economic costs of government regulations.

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 The Size of Government
State, Local, and Federal Government
Expenditures (selected years)
Adjusting for Adjusting
Relativefor
to
Inflation Population
Economy

1 2 3 4
Total 2011 Dollars 2011 Dollars Percent of
Expenditures (billions)* per capita GDP
(billions)
1970 295 1,375 6,703 28.4%
1980 847 2,007 8,815 30.4%
1990 1,880 2,948 11,784 32.4%
2000 2,906 3,712 13,155 29.2%
2011 5,410 5,410 17,362 35.9%
*Conversion to 2011 dollars done using the GDP deflator
Source: Calculations based on Economic Report of the President, 2012 [pp. 316, 320, 359, 415].
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 The Size of Government
Government Expenditures as a % of GDP (2011)

United
States

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1-23
Source: Organization for Economic Cooperation and Development [2011b].
The Size of Government
Composition: 2011 Federal Expenditures & Revenues

Source: Economic Report of the President, 2012 [p. 413]. 24

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The Size of Government
Composition: 2011 State & Local
Expenditures & Revenues

Source: Economic Report of the President 2012 [p. 419]. 25

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 The Size of Government
Revenues
• At the Federal level, the personal income tax is
the single most important source of revenue.
• At the State and Local levels:
– Grants from the federal government are over 20%
of revenues
– Sales taxes and Property taxes are each about
18% of revenues.
• Changes in the Real Value of Debt is also an
important source of government revenue.
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Chapter 1 Summary

Public Finance/Public Sector Economics focuses on

government’s role in the allocation of real resources -
that includes, but is not limited to, taxing and govt spending.

• The Mechanistic view vs. Organic view of government.

The U.S. embraces the mechanistic view, which nevertheless
leads to disagreements on the appropriate size of the
government.
Evidence shows that the impact of the U.S. government on the
allocation of national resources has increased over time.

• The U.S. Constitution outlines the roles of and constraints

placed on state, and federal government economic activity.

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 Appendix:
Doing Research in Public Finance
• Public Finance journals
– International Tax and Public Finance
– Journal of Public Economics
– National Tax Journal
– Public Finance
– Public Finance Quarterly
• General-interest journals
– American Economic Review
– Journal of Economic Perspectives
– Journal of Political Economy
– Quarterly Journal of Economics
– Review of Economics and Statistics

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Doing Research in Public Finance

• Other sources
– Journal of Economic Literature
– Brookings Institution’s Studies of Government Finance
– Congressional Budget Office reports
– National Bureau of Economic Research working papers
– Tax Foundation’s Facts and Figures on Government Finance
• U.S. Government Printing Office publications
– Statistical Abstract of the United States
– Economic Report of the President
– Budget of the United States
– U.S. Census of Governments
– Historical Statistics of the United States from Colonial Times to 1970

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Doing Research in Public Finance
Public Finance data available on Internet
Resources for Economists on the Internet (www.rfe.org)
U.S. Census Bureau (www.census.gov)
University of Michigan’s Office of Tax Policy Research (www.otpr.org)
Urban-Brookings Tax Policy Center (www.taxpolicycenter.org)

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3
1

Nirupama Rao, New York University:

Introduction to Public Finance
https://www.youtube.com/watch?v=rto4Me9gSfk&list=PLPClF5HvrYnl5SiVFEdC07HvJY4ut_ZTc

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3
2

Policy Impact Evaluation

1.Observational studies
2.Randomization/ experimental
3.Quasi-experimental

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