Public Economics

Units

1. 1

   Efficiency and the role of government

   4 lessons

   1. The welfare theoremsState the first and second welfare theorems, show with consumer and producer surplus why a competitive market picks the efficient quantity, and see on a utility possibility frontier why redistribution, not price controls, is the tool for fairness.
   2. Market failures and the case for interventionName the four sources of market failure (externalities, public goods, market power, asymmetric information), measure the deadweight loss of one of them, and match each failure to the policy that answers it.
   3. Equity and social welfare functionsTurn a fairness view into a social welfare function W, and show on a utility possibility frontier where the utilitarian, Rawlsian and product (Nash) welfare contours touch it and why the chosen point differs.
   4. Size and growth of governmentMeasure the size of government as a share of GDP, read what US federal outlays buy and how that changed, and test two explanations of its growth, Wagner's law and the Baumol effect, with numbers.
2. 2

   Externalities

   4 lessons

   1. Negative externalities and social costShow that when a producer's costs spill onto others, marginal social cost MSC = MPC + MEC lies above the supply curve, so the market overproduces, and compute the efficient quantity and the deadweight loss with a constant and with a rising marginal external cost.
   2. Pigouvian taxes and subsidiesSet a tax equal to the marginal external damage at the efficient quantity, show it as an upward shift of supply with a revenue rectangle, split the burden, and mirror it with a subsidy for a positive externality.
   3. The Coase theoremShow that when property rights are clear and bargaining is cheap, the parties to an externality reach the efficient outcome whoever holds the right, using a marginal benefit and marginal damage diagram and a two-party table of gains, and say when bargaining fails.
   4. Regulation, cap and trade and climate policyCompare a uniform quantity standard, a tax and tradable permits using two firms' marginal abatement cost curves, show that equalizing marginal abatement costs minimizes the cost of a given cut, and see why price or quantity instruments differ under uncertainty and how the social cost of carbon sets the target.
3. 3

   Public goods

   4 lessons

   1. Nonrival and nonexcludable goodsClassifies private, public, club and common-pool goods in a two-by-two table of rivalry and excludability, with examples such as defense, lighthouses, and fisheries and why markets undersupply them.
   2. Efficient provision: the Samuelson ruleDerives the rule that the sum of marginal rates of substitution equals marginal cost, summing demand curves vertically on a graph, in contrast with horizontal summation for private goods.
   3. Free riding and private provisionShows underprovision when people can free ride, using a voluntary contribution game matrix and reaction curves for two donors, and the Lindahl pricing idea, comparing the result to the efficient level.
   4. Public choice and collective decisionsApplies majority voting and the median voter theorem to public spending, drawn as single-peaked preferences on a line with the median marked, with Arrow's impossibility theorem and rent-seeking.
4. 4

   Tax incidence and efficiency

   4 lessons

   1. Statutory versus economic incidenceShows who bears a tax regardless of who writes the check, with the burden split depending on elasticities, on a supply and demand graph with the wedge between buyer price and seller price.
   2. Incidence and elasticitiesDerives consumer share of the burden as E_S / (E_S - E_D), with two graphs where steep demand versus steep supply give different burden splits, and examples of payroll taxes and cigarette taxes.
   3. Deadweight loss of taxationMeasures excess burden as roughly one half t² times the elasticity times base, drawing a deadweight triangle that grows with the square of the tax rate, and the Harberger triangle.
   4. Optimal taxation: Ramsey and the Laffer curvePresents the Ramsey inverse elasticity rule, and optimal income tax tradeoffs, with a Laffer curve of revenue against tax rate peaking at the revenue-maximizing rate.
5. 5

   The income tax and behavior

   4 lessons

   1. The US tax systemDescribes federal income, payroll, corporate and state taxes, with a pie chart of federal revenue by source and a staircase graph of marginal and average tax rates by bracket.
   2. Taxes and labor supplyAnalyzes income and substitution effects of a wage tax on work hours with a budget line that pivots inward and indifference curves, and the evidence on elasticities.
   3. Taxes on savings and corporationsStudies the effect of capital taxation on saving and investment, with a two-period budget line, the double taxation of dividends, and a bar chart of statutory corporate rates across countries.
   4. Tax avoidance, evasion and reformModels evasion with expected penalty and audit probability, and reviews flat tax and consumption tax proposals, with a table comparing the bases and a chart of the tax gap.
6. 6

   Education and health policy

   4 lessons

   1. Public education and its returnsExplains positive externalities from schooling and credit constraints as grounds for public provision, with a marginal benefit graph with a social wedge and the Mincer returns to years of school.
   2. School choice, vouchers and class sizeReviews the evidence on vouchers, charter schools and class size experiments, with a graph of test scores for treatment and control groups and a diagram of competition between schools.
   3. Health insurance and adverse selectionShows how adverse selection can unravel health insurance with a demand curve and average cost curve, the death spiral, and the rationale for mandates and subsidies.
   4. Medicare, Medicaid and health reformDescribes US public health programs and the Affordable Care Act, with a flow diagram of the payers, and a chart comparing health spending as a share of GDP with outcomes across countries.
7. 7

   Redistribution and the safety net

   4 lessons

   1. Measuring poverty and inequalityDefines the poverty line, Gini coefficient and Lorenz curve, with a plotted Lorenz curve against the 45 degree line, an area A and B marked, and US poverty rates over time.
   2. Cash welfare, food stamps and in-kind transfersCompares cash and in-kind transfers with a budget constraint diagram showing a kink for the benefit phase-out, the work disincentive and the implicit marginal tax rate.
   3. The Earned Income Tax CreditExplains the EITC's phase-in, plateau and phase-out, drawn as a credit schedule against earnings plus the shifted labor budget line, with evidence on employment effects of the credit.
   4. Optimal redistribution and basic incomeFrames the equity versus efficiency tradeoff with a leaky bucket diagram, compares negative income tax and universal basic income, and plots the transfer against income for each design.
8. 8

   Social insurance and the budget

   4 lessons

   1. Unemployment insuranceAnalyzes UI as insurance against income loss with moral hazard, drawing the hazard rate of leaving unemployment with a spike at benefit exhaustion and the replacement rate tradeoff.
   2. Social SecurityExplains pay-as-you-go versus funded systems, the return n + g, and the aging problem, with a chart of the worker to beneficiary ratio over time and trust fund projections.
   3. Moral hazard and the optimal insuranceShows the tradeoff between risk-sharing and incentives in disability and workers compensation, with the consumption smoothing graph of utility curve and the coinsurance rate and how copayments restore incentives.
   4. The federal budget, deficits and debtReviews the budget process, entitlements and discretionary spending, with a chart of federal debt held by the public as a share of GDP and the intertemporal budget constraint.