BRANDEIS UNIVERSITY

Department of Economics

Economics 134b Mr. Coiner

Public Sector Economics Spring, 2014

Syllabus

Public Sector Economics looks at the long-run effects of government spending programs (e.g., national defense, Social Security) and of the taxes used to pay for these programs. (The short-run effects of government spending and taxes fall under the purview of Macroeconomics.)

This course has three major sections. The first one might be labeled “the economic theory of government.” In this section, we will review the rationale for government intervention in the economy. We will consider situations in which the market fails to be efficient (e.g., externalities, public goods) and show how, in principle, government intervention can improve efficiency. Furthermore, just as economists have developed models of how households behave and how firms behave, we also have models of how the government behaves. We will look at models of direct democracy (where citizens vote on public issues at the ballot box), models of representative democracy (where elected representatives vote for us), and at models of the behavior of appointed government officials (bureaucrats, if you will).

The second section of the course examines the effects of some of the largest public spending programs—Social Security, Medicare & Medicaid (including the Affordable Care Act—Obamacare), and anti-poverty programs such as TANF (Temporary Assistance to Needy Families) and the EITC (Earned Income Tax Credit). For each program, we will look at the arguments for government intervention, at the effect the program has on economic behavior (for example, the existence of Social Security may affect how much people save and at what age they retire), and at the effect the program has on economic efficiency and on the distribution of income. We will also consider what changes might be necessary to make these programs work more effectively, or to make them sustainable in the long-run (this is a particular concern for Social Security and Medicare).

The third major section of the course looks at the economic effects of the different taxes the government collects from us—the personal income tax, the corporate income tax, sales taxes, estate taxes and property taxes. As with the spending programs, for each tax we’d like to know its effect on economic behavior (work hours, saving, risk-taking) and we’d like to evaluate the effect of the tax on efficiency (its deadweight loss) and on the distribution of income. We will also consider some of the proposals that have been made to overhaul and simplify the tax system, and evaluate the benefits and drawbacks of these ideas for reform.

In addition to the three major sections, the course begins with a brief review of some relevant microeconomic theory and the methods economists use to empirically test our theories. The introductory section also examines the effect of government budget deficits and of the national debt.

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Goals of the Course

This course has four broad goals and a number of more specific, narrower goals. At the broader level, each student in this course should acquire a detailed knowledge of some of the major government-created institutions in the U.S. economy, including the Social Security system, Medicare, Medicaid and the personal income tax. Second, each student should acquire a heightened ability to critically evaluate different types of empirical economic studies, and achieve an improved sense of when an empirical result is robust and when it is not. Third, by the end of the course students should be able to apply economic theory and existing empirical evidence to critically evaluate a number of economic policy proposals (e.g., health care reform, Social Security reform) and the arguments used to support or reject those proposals. Finally, this course should increase each student’s ability to comprehend and evaluate articles about economic policy issues that appear in the popular press.

There are a large number of more specific goals, including the following. 1) students should be able to distinguish the substitution and income effects of a change in the economic constraints affecting individuals. 2) students should be able to explain and to give examples of the trade-off between the goals of equity and efficiency. 3) students should be able to explain and give examples of instances of adverse selection and moral hazard. 4) student should be able to distinguish and explain the concepts of horizontal equity and vertical equity. 5) students should be able to articulate the Haig-Simons definition of income, and discuss its limitations. 6) students should be able to predict the incidence of different taxes in both partial and general equilibrium. 7) students should acquire a sophisticated understanding of the excess burden (dead weight loss) of taxes, and apply this understanding to solve problems involving optimal taxation.

Text

The required text is Public Finance and Public Policy (4th edition), by Jonathan Gruber (Worth Publishers, 2013). Additional readings will be assigned occasionally.

Grading Policy and Midterm Dates

There will be two midterm exams, a final exam, and approximately 10 problem sets. Three of the problem sets will arrive just before an exam and do not have to be turned in. You must turn in the other 7 problem sets. Whichever midterm you score higher on will count for 30% of your grade, the other midterm will count for 25% of your grade and the final exam will count for 30% of your grade. The remaining 15% of your grade is based on the 7 required problem sets. The first midterm is Friday, 2/28 (in class). The second midterm is Friday, 3/28 (also in class).

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Contact Information

My office is Sachar 4. My extension is 6-2239. My Brandeis email address is

. It is OK to try to contact me through my home email, which is

, and you may call me at home at 1-508-485-7732. Office hours will be announced shortly.

Special Accommodations

If you are a student with a documented disability at Brandeis University and if you wish to request a reasonable accommodation for this class, please see me right away. Please keep in mind that reasonable accommodations are not provided retroactively.

Academic Honesty

You are expected to be honest in your academic work. The University policy on academic honesty is distributed annually as section 4 of the Rights and Responsibilities handbook. Instances of alleged dishonesty will be forwarded to the Office of Campus Life for possible referral to the Student Judicial System. Potential sanctions include failure in the course and suspension from the University. If you have any questions about my expectations, please ask. Academic Dishonesty will not be tolerated and will be rigorously prosecuted.

Course Outline

Topic Chapter

I. Introduction

Why Study Public Finance? 1

Review of Relevant Micro Theory 2

Empirical Methods Economists Use 3

Effects of Government Budget Deficits & The National Debt 4

II. Economic Theory of Government

Externalities 5

Public Goods 7

Cost-Benefit Analysis 8

Economic Models of how Government Works 9

First Midterm, Friday, February 28th (in class)

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III. Effects of Major Government Programs

The General Theory of Social Insurance 12

Social Security 13

Economics of the Health Care Industry 15

Medicare & Medicaid 16

Programs to Assist Low-income Americans 17

IV. Effects of Taxation

The Definition of Income and the Personal Income Tax 18

Tax Incidence—Who Actually Bears the Burden of a Tax? 19

Second Midterm, Friday, March 28th (in class)

Taxation and Economic Efficiency 20

Effects of Taxes on the Supply of Labor 21

Effects of Taxes on Savings 22

Effects of Taxes on Risk-taking 23

The Corporate Income Tax 24