Economics 445 Marcus Berliant

Fall 2024

COURSE DESCRIPTION

This course is a survey of modern public …nance. Public …nance is the

study of the economic functions or role of a government and its associated insti-
tutions. In particular, the microeconomic aspects of this role will be emphasized,
although not to the extent of excluding the macroeconomic aspects (the latter
are found in courses on macroeconomics). We shall study the market failures
that fall into the realm of public …nance such as public goods and externali-
ties, the role of government policy in correcting for these market failures, and
how government action at the federal, state and local levels a¤ects the econ-
omy through taxation and expenditure. We use public …nance as a vehicle for
learning how to think like economists.

According to the o¢ cial listing, this is a 4011 prerequisite course. However,

the course is self-contained, so it is possible to take this course without having
taken 4011. Students who have not taken 4011 will probably …nd themselves at
a disadvantage relative to those who have taken 4011. Knowledge of intermedi-
ate microeconomic theory (Economics 4011) or econometrics (Economics 413)
would be helpful and would make this course easier to comprehend. Knowledge
of basic calculus (Math 121-122 or 131-132) would also greatly facilitate com-
prehension of the material. Finally, the material covered in an urban economics
course (Economics 460) is quite complementary to the material we cover in this
course.

WARNING: As students who have taken this course previously have

noted, I expect a lot from you, but I also know that you are quite capable. In
particular, we will use extensively modern economic theory, mathematics, and
econometrics. In that sense, this is a quantitative course that will borrow and
use material from many other areas. So it is integrative, but it will also be
challenging. This course is not for everyone. If you don’t have the appropriate
background, it will be necessary for you to put in time and e¤ort to learn what
you need. It would be impossible to give the formal prerequisites for this course,
as we use bits and pieces from many other courses, so the list would be long.
But we will not use all the material from any particular course or area.

COURSE MECHANICS

Canvas will be the hub for this course. All course materials will run through
it, including announcements.

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 Lectures will take place Mondays and Wednesdays 10:00 - 11:20 in Seigle
103.
I encourage students to work together on homework! Regardless of how you
come by your answer, you must write up the answer on your own.
Exams will be closed book and in class. Old exams can be found on Canvas,
and some old exam questions will appear on your homework.

COURSE REQUIREMENTS AND GRADES

By the end of this course, you are expected to understand the basic theory
of public …nance, the economic functions of taxation and public expenditure,
and the role of government in public policy. There will be four homework sets
during the term, each worth 5% of the grade (for a total of 20%). Exam 1, worth
40% of the grade, will be given in class near the middle of the term (its timing
is negotiable). Exam 2 is scheduled for the last class meeting on Wednesday,
December 4, and is worth 40% of the grade. There will be 500 total points
possible in the course. Points will be allocated to homework sets and exams
according to their respective percentages. The course will be curved so that
the mean total points (out of 500) will be approximately a borderline A-/B+
grade. Thus, only points matter. Letter grades for the individual exams and
homework will not be assigned.

Exam 1 will focus on the material covered from the beginning of the course
until Exam 1. Exam 2 will focus on the material covered from the time of
Exam 1 to Exam 2. The class prior to each exam will be a review session, with
no new material covered.

WARNING: Students taking my courses in the past have often waited

until the last moment to begin work on their homework, and as a consequence
have found that they have had insu¢ cient time to complete it. Public …nance
problems are generally much more di¢ cult than they might appear to be at …rst
glance. You will have approximately two weeks to complete each homework
set.

In order to preempt many questions that often arise after the …nal exam, the
following information will be of use. To be fair, no opportunity will be given to
any student in the class that is not o¤ered to all students. It is also desirable
to have a course that actually terminates. Thus, there will be no extra credit
beyond the 500 points in the course, no extra papers for the course, and no
exam retakes. Grades are based on performance in the course, not on need.

Regarding AI, of course I have used it myself to see what it can do. For this
course, it is restricted completely: https://ctl.wustl.edu/resources/language-
for-course-policies-on-arti…cial-intelligence-ai/ The reasons for this are twofold.

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First, the exams will be in class and I will want to evaluate your ability (not
AI’s) to think like an economist. The homework problems will prepare you
for the exams, so if you use AI to complete them, you will not be prepared.
Second, AI is not very good at economics — yet. I don’t want you learning
material that is just wrong. I’ve found that AI is much better at composing
poetry than economic analysis.

OFFICE HOURS

My o¢ ce is located at 387 Seigle, my e-mail address is [email protected],

and my o¢ ce phone is now disconnected. I am happy to answer questions via
e-mail.
O¢ ce hours are Mondays and Wednesdays 13:30 — 15:30, and by appoint-
ment. In general, I’m happy to see you, unless I’m busy with urgent matters.
I am teaching ECO 460 Mondays and Wednesdays 16:00 — 17:20 and ECO 503
for the …rst half of the term Tuesdays and Thursdays 11:30 — 12:50, so I am
busy during those lectures. Students from those courses might also be present
during o¢ ce hours.
The assistant in instruction for the course is to be announced. They will
grade homework and hold o¢ ce hours.

READINGS

The homework and exams will be based on both the lectures and readings,
but primarily on the lectures. Thus, it is important to attend the lectures.
I have used a variety of texts over the 40+ years that I have taught versions of
this course. None has been completely satisfactory. Students have used colorful
language to describe these texts, so I have followed their advice and not ordered
a required textbook. Therefore, the main text is only recommended.1 The
main textbook for the course is:

Ted Gayer and Harvey S. Rosen, Public Finance ninth edition (McGraw-
Hill, 2010). [The tenth edition is available and …ne to use as well, but the
ninth edition is cheaper and still readily available.] In course evaluations, some
students have actually said that they like this text, which is why I have settled
on it.

It is on reserve at the library. You should use it to supplement and clarify

lectures. Also available at the library are alternate texts:
1 When I have listed the text as required, students have said it should only be recommended.

When I have listed the text as recommended, students have said it should be required.

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 Richard Musgrave and Peggy Musgrave, Public Finance in Theory and
Practice (McGraw-Hill).

It covers material similar to that covered in Gayer and Rosen, and should
be used if you …nd Gayer and Rosen incomprehensible.

Jean Hindriks and Gareth D. Myles, Intermediate Public Economics

(MIT Press, 2006).

It has a focus on the theory and calculus.

Between the texts and supplementary readings below, I have tried to …nd
the books that are most appropriate to the material and level of this course. It
is impossible to order a text that doesn’t exist.

Note: In the past, students have suggested that someone type up the course
notes and post them on the course web site. This is a good and interesting
suggestion as a substitute for a text. I experimented with it in a graduate
course. There are two issues, one major and the other minor. The major issue
is that, in spite of our best e¤orts, there were errors in the notes. Even worse,
they made their way into students’exam answers. Big mess. The minor issue
is that students often ask questions in class, leading to digressions or discussions
of material I didn’t intend to cover. Thus, the notes are generally incomplete.
If this material appears on an exam or homework, there are complaints. Please
be aware that I am not perfect, and do make mistakes in class.

SUPPLEMENTARY READINGS

The purposes of the supplementary readings are to cover material not pre-
sented in the text and to provide further reading for those interested in the
various topics. Use them to better your understanding of the material if the
lecture isn’t clear. The books are on reserve for the course at the library. For
the articles, there is no reason to construct a reader, since you probably won’t
want to access all of them. The library subscribes to all of these journals, so
there is easy electronic access. You will need to go to the Washington Uni-
versity libraries web site, either on campus or using a proxy server, to obtain
access. From there, go to e-journals and …ll in the name of the journal. Or
from campus you can simply search on the title of the article or author, and
obtain a .pdf …le very quickly.

Samuelson, P.A. (1954), “The Pure Theory of Public Expenditure,”Review

of Economics and Statistics, November.
Samuelson, P.A. (1955), “Diagrammatic Exposition of a Theory of Public
Expenditure,” Review of Economics and Statistics, November.

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 Nicholas Muller, Daniel Tong, and Robert Mendelsohn (2009) “Regulat-
ing NOx and SO2 Emissions in Atlanta,” The B.E. Journal of Economic
Analysis and Policy: Vol. 9: Iss.2 (Contributions), Article 3. Available at:
http://www.bepress.com/bejeap/vol9/iss2/art3
Coase, R. (1960), “The Problem of Social Cost,” Journal of Law and
Economics, October, 1-44.
Marcus Berliant and Paul Rothstein (2003), “Possibility, Impossibility, and
History in the Origins of the Marriage Tax,”National Tax Journal, 303-317.
Feldstein, M. (1975), “The Income Tax and Charitable Contributions,”Na-
tional Tax Journal.
Boskin, M. (1976), “On Some Recent Econometric Research in Public Fi-
nance,” American Economic Review.
Leonard E. Burman and Joel Slemrod, Taxes in America: What Every-
one Needs to Know (Oxford University Press, 2013).
Many authors (2012), “Forum: The Mirrlees Review,”National Tax Jour-
nal volume 65, no. 3, September.

You should use all of these readings to supplement and clarify lectures.

A list of topics and associated readings follows. We will not spend exactly
one lecture on each topic or sub-topic, nor will we cover the entire textbook.

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 LECTURE OUTLINE AND READINGS

[Chapters in brackets refer to chapters in the Gayer and Rosen book.]

[Authors in brackets refer to supplementary readings.]
Unbracketed readings refer to the supplementary books on reserve at the
library.

0. Organizational Matters

I. Introduction

A. The Structure of the Field [Ch. 1]

B. A Brief Review of Private Goods [Ch. 2, 3, Appendix]

1. Optimality
2. Equilibrium
3. Welfare Theorems

II. Allocation Branch — Theory [Ch. 4, 5]

A. Market Failures

B. Social Goods

1. De…nitions
2. Remedies [Samuelson 1954, 1955; Muller, Tong, and Mendel-
sohn; Coase]

a. The Problem
b. The Optimum
c. Possible Solutions

i. Lindahl Taxes - Public Goods

ii. Pigouvian Taxes - Externalities
iii. Cap & Trade - Externalities
iv. Demand Revelation
v. The Coase Theorem

III. Expenditure [Ch. 8]

A. Consumer Surplus
B. Foundations of Consumer Surplus
C. Cost-Bene…t Analysis
D. Theory of the Second Best
E. An Example

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 F. Applications to Pigouvian Taxes

IV. Equity [Ch. 12, 14]

A. Normative Theory — Equity Principles

B. Positive Theory

1. Who Pays the Tax?

2. E¤ects on Income Distribution

V. Taxation of Private Goods [Ch. 15, 16]

A. Good Tax Systems

B. Partial Equilibrium

1. Types
2. E¢ ciency
3. La¤er Curves

C. General Equilibrium

—————————————————————–
This is the boundary between theory and applications.

VI. Policy Analysis and Evaluation of Tax Reform Proposals

VII. The Individual Income Tax [Ch. 17, 18], Burman and Slemrod

A. Introduction
B. Tax Bases
C. E¤ect of a Tax on Capital
D. E¤ect of a Tax on Labor
E. Deductions
F. Tax Preferences
G. Alternative Minimum Tax
H. Tax Rates
I. Choice of Taxable Unit [Berliant and Rothstein]
J. In‡ation and the Income Tax
K. Credits
L. State and Local Income Taxes

VIII. Classical Research

A. Introduction
B. Feldstein [Feldstein]
C. Boskin [Boskin]

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 IX. The Corporate Income Tax [Ch. 19], Burman and Slemrod

A. Justi…cation
B. Structure

1. Introduction
2. Income De…nition
3. Exemptions and Deductions
4. Rates
5. Credits
6. Other Provisions
7. State Corporate Income Taxes
8. Conclusions

X. Taxes on Property and Wealth [Ch. 21, 22]

A. Introduction
B. Justi…cations

1. E¢ ciency
2. Equity

C. The Base
D. Property Tax
E. Incidence

1. Four Views
2. Capitalization

F. The Tax in Other Parts of the World - Net Worth

XI. Consumption and Sales Taxes [Ch. 21], Burman and Slemrod

A. Flat Rate Consumption Taxes

B. E¢ ciency and Equity Analysis of Consumption Taxes
C. The Consumption Tax Base
D. Turnover Taxes
E. Value Added Tax — Theory
F. VAT — Administration
G. Equity and E¢ ciency Analysis of VAT

XII. Corporate Integration [Ch. 19]

XIII. Cutting Edge Tax Reform: The Mirrlees Review [Forum in

the National Tax Journal]

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Instructions for all of us from the Vice Provost for Educational Initiatives

https://t.e2ma.net/click/uifxxn/28giu1ac/id7lfmb