Economics and Public Finance: Pad 5004-001
ECONOMICS AND PUBLIC FINANCE: PAD 5004-001
SPRING 2006
MONDAY 7-9:45 pm NC 1316
Dr. Elizabeth Hoffman (303) 315-2748 – phone
Office Hours: Monday 3-5 pm or by appointment (303) 315-2749 – fax
Office: 1380 Lawrence St, 440K
Assistant: Maureen Ediger (303) 315-2753
Office: 1380 Lawrence St, 440L
An understanding of economics is one of the most important intellectual tools for decision making in public affairs. Economic and budgetary decisions often shape public program priorities and constraints, in good times and especially in difficult times.
Most analysts of public affairs (with the exceptions of a few Presidential advisors, Federal Reserve Board members, Wall Street forecasters, and some academic economists) deal much more with microeconomic issues. Consequently, this course will focus primarily on microeconomic issues and analysis.
Economics also provides a valuable set of tools for analyzing public choices. These tools are based upon the concept of “methodological individualism,” where consumers and businesspeople are assumed to strive to maximize their utility (based upon their own preferences) subject to some form of budget constraints, including money, time, energy, etc. These individual choices are then aggregated into market settings, where transactions take place. Most approaches to public policy argue that when markets are functioning well, there are no efficiency arguments for public policy intervention (though there may well be important arguments about the equity of market outcomes). Thus, it is valuable to understand when and how markets work well. Analysts have also developed a sophisticated theory of “market failures” in which a few specific problems with markets makes them less then fully efficient, leaving a possible case for public policy to improve the efficiency of outcomes. We will assess this approach in some detail. Since these tools are fairly well developed, we will sometimes employ graphical or simple mathematical methods to better understand the concepts.
Finally, though the American economy is heavily shaped by billions of private decisions made each day by consumers and firms, public policy decisions by governmental actors also have a huge impact on the economy. All markets require a fundamental set of infrastructures to operate effectively, including property rights, the enforcement of contracts, adjudication mechanisms – in short, a legal and police system designed to make people feel comfortable engaging in economic transactions. Most modern governments intervene much more in their economies, particularly to address equity issues and provide social insurance. The area of public finance is devoted to understanding better how governments raise funds, through taxation and other mechanisms, and how they spend them. The latter part of the course will focus on these issues.
Required Text and Websites you will need:
Stiglitz, Joseph. Economics of the Public Sector. 3rd Edition. 2000. W.W. Norton &
Company Inc. ISBN 0393966518
Schelling, Thomas C. The Strategy of Conflict. 1960. Harvard University Press.
ISBN 0674840313 (There are copies available in both the Auraria and the Denver
Libraries as well as many copies used and new – around $20 – available online. It will also be available in the Auraria bookstore under PAD 5004-001 soon.)
CQ Electronic Library – “CQ Researcher” available through Auraria library
The Economist – available through Lexus Nexus through Auraria library article databases
Readings will be assigned from the Stiglitz text book, Schelling’s book, and other supplemental readings that will be available either through the library, course reserves, or through online links. Readings may be added from time to time as the instructor sees fit. If you have any questions about how to find articles through library databases (Lexis Nexus, JSTOR, etc.), you should ask for help IMMEDIATELY!
Suggested Reading:
Levitt, Steven D. & Stephen J. Dubner. Freakonomics: A Rogue Economist Explores the
Hidden Side of Everything. 2005. ISBN 006073132X
Riker, William H. Liberalism against Populism: A Confrontation Between the Theory of
Democracy and the Theory of Social Choice. 1982. ISBN 0881333670
Graded Assignments:
Short Papers: At the first class session, students will be divided into three groups – A,B, and C. Each student in each group will be responsible for writing a well-written and well-researched policy paper that further explores a topic of their choice from the week’s readings and topic. Please see the weekly schedule for paper topic ideas, weekly themes, reading assignments, and due dates for each group. Three short papers (5 to 10 pages in length) are required over the course of the semester. In addition to their own thought processes, students should utilize their research skills to explore other materials.
The goal of these papers is to demonstrate that the student has done some careful thinking about a specific policy area, can write a clear paper on the topic, and can also apply economic reasoning to the policy issue. Papers should not be one-sided – they should present alternative policy analyses. Extra consideration will be given to papers that utilize graphical or mathematical reasoning. Grades will reflect an attention to detail and grammar. In any week, students also have the option of writing their papers on the week’s debate topic. To receive an “A”, a paper must be well written and researched, carefully analyzed, and virtually error free.
** All written assignments must be submitted electronically to both
Betsy & Maureen! No Exceptions!! **
Short papers are due by the beginning of class (submitted electronically) and due dates are firm. Exceptions must be approved prior to the due date or based on unforeseen emergencies (such as accidents, illness, death in the family, etc.) or extraordinary circumstances that occur on the day of class. Accommodations for religious observances or a student’s disability should be discussed with the instructor as soon as possible.
Short paper options beyond those suggested in the weekly schedule:
Suggested readings - For one of their three short papers, students can also choose to substitute a paper on the policy implications of one of the topics discussed in Freakenomics or discuss the implications to public policy in Liberalism against Populism. You must include your own original ideas and evidence of considerable additional research to use one of these options.
Nobel Laureates - Most weeks will feature the contributions of a Nobel Laureate in economics to issues relevant to public policy. Short papers could also focus on issues brought to light by the week’s featured laureate. If you choose this option, you are expected to include other works by the Laureate.
Debate: Also at the first class session, students will be assigned a debate group and topic and either a pro or con position on that topic. The syllabus gives the topics and dates for each of seven debates. Debaters will be expected to prepare their arguments for the debates through research that is in addition to the readings provided for the week. All students are expected to be familiar with the debate topic each week and come prepared to ask the debaters questions. The debate format will be: 3 minute presentation by each side, 2 minutes of rebuttal for each side, and 1 minute of concluding remarks for each side. The purpose of the debate is to highlight public policy issues that reflect the economic themes of each week’s topic and students should place emphasis on economic reasoning in their arguments.
Final Exam: A final exam will be given on April 24 during regularly scheduled class time. The exam will be comprehensive, including short answer and essay questions. Make up exams will only be given under unusual, emergency circumstances similar to those discussed above in regards to paper due dates. Any students needing assistance with the administration of the final exam should discuss their needs immediately with the instructor.
Class Participation: Class participation will be evaluated on both quality and quantity. Please read the material for each week, prior to class, so that you can fully participate in the class and we can have an informed discussion.
Grade Break-down:
3 Short Papers – 45% (15 each for a total of 45%)
Debate – 15%
Final Exam – 30%
Class Participation – 10%
Weekly Class and Reading Schedule
Week 1: Theme: Introductions – course and each other, supply and demand experiment
1/23/06: Readings: - Stiglitz Chapters 1 & 2
Nobel Highlight: Vernon Smith (2002)
Week 2: Theme: Welfare Economics – When and Why Markets Work Well
1/30/06: Readings: - Stiglitz Chapter 3
- Vernon Smith handouts from first class
- Hoffman, Elizabeth and Matthew Spitzer. Symposium on Law and Economics: Experimental Law and Economics: An Introduction. (June, 1985) Columbia Law Review. 85 Colum.L.Rev.991 (available through Lexis Nexis)
- Smith, Vernon. An Experimental Study of Competitive Market Behavior, Journal of Political Economy, Vol. 70, No. 2 (April, 1962) pp. 111-137 (Available through JSTOR)
- Gary Becker, An Economic Analysis of Fertility. (1976) In Chapter 9, The Economic Approach to Human Behavior. (Available on reserves through the Auraria website – GSPA password = banjo)
- The Economist, All Too Human, October 12, 2002
- The Economist, Homo Economicus Gets His Prize, October 17, 1992
Nobel Laureate Highlight: Vernon Smith (2002) and Gary Becker (1992)
Week 3: Theme: Market Failures – When Markets Don’t Work as Well
2/06/06: Guest Speaker: Phil Weiser, CU-Boulder Law School
Potential Paper topics: To what extent is government regulation
necessary to address disaster preparedness and
recovery?
Discuss the role of insurance in personal preparation for disasters.
Explain in your own words how Akerlof’s article describes the second-hand automobile market.
Pick some other significant market failures and discuss why markets might fail.
Explain in your own words Stigler’s argument for regulation.
Papers due: Group A
Readings: - Stiglitz Chapter 4
- Stigler, George. The Theory of Economic Regulation. Bell Journal of Economic Management and Science Stigler (1971) (Available through JSTOR)
- Akerlof, George. The Market for “Lemons”: Quality Uncertainty & the Market Mechanism. The Quarterly Journal of Economics. 1970. (Available through JSTOR)
- The Economist, Noble Even-Handedness, October 23, 1982
- The Economist, Lemons and shirts in Chicago, October 11, 1986
- CQ Researcher – Is the US Ready for Another Disaster? November 18, 2005
Debate: Disaster Preparedness
Nobel Highlight: George Stigler (1982) & George Akerlof (2001)
Week 4: Theme: Addressing Market Failures
2/13/06: Potential Paper topics: Costs and benefits of a minimum wage.
Costs and benefits of a living wage.
Discuss conditions under which you would expect Coase to be right and some of the problems with Coase.
Provide an analysis and critique of the Hoffman and Spitzer article (don’t hesitate to be critical – criticisms will be discussed in class).
Papers due: Group B
Readings: - Stiglitz – Chapter 6 (including appendices) and Chapter 9
- Coase, Ronald. The Problem of Social Cost. Journal of Law and Economics. 1960. http://www.sfu.ca/~allen/CoaseJLE1960.pdf - takes a while to download but it is a good pdf file
- Hoffman, Elizabeth and Spitzer, Matthew, 1982, “The Coase Theorem: Some Experimental Tests,” Journal of Law and Economics, 25, 73-98. (will be handed out in class)
- The Economist, Thoroughly Modern Winner, October 19, 1991
- CQ Researcher – Do Laws Requiring Higher Wages Cause Unemployment? September 27, 2002
Debate: Living Wage
Nobel Highlight: Ronald Coase (1991)
Week 5: Theme: Beyond Market Failures – Equity and other intervention
2/20/06: rationales
Potential Paper topics: Talk about the extent to which eBay is similar to and
different from an English or 2nd Price Auction.
Explain in your own words how each of the auctions work and how they are different from one another.
Defined benefit plans vs. defined contribution plans – how does this relate to social security reform?
Papers due: Group C
Readings: - Stiglitz – Chapters 5, 14 and 15
- Vickrey, William. Counter speculation, auctions, and
competitive sealed tenders. Journal of Finance. 1961. p. 8-37 (Available through JSTOR)
- Look over this website and become familiar with the various types of auctions http://www.agorics.com/Library/auctions.html
- eBay article – TBA
- The Economist, Economics Focus: Secrets and the Prize, October 12, 1996
- CQ Researcher – How Should America’s Retirement System be Saved? September 24, 2004
Debate: Social Security Reform (new CQ)
Nobel Highlight: William Vickrey (1996)
Week 6: Theme: Public Choice, Expenditure Theory and Bureaucracy Arrow
2/27/06: Impossibility Theorem
Potential Paper topics: Explain why what rule you use to count votes matters.
Good week to write a paper about Liberalism against Populism.
Explain why people often wonder why public decisions seem irrational compared to the decisions that individuals might make. (Hints – free rider issues, vote counting, the problem of adding up the preferences of those who disagree)
How does Groupthink come into play in public decision making?
Why is the cost of health care rising faster than almost everything else that people purchase regularly?
Papers due: Group A
Readings: - Stiglitz – Chapters 7, 8, and 12
- The Economist, George Mason University; A Nobel prize for public choice, October 25, 1986
- CQ Researcher – Are Lawsuits out of Control? February 14, 2003
Debate: Medical Malpractice
Nobel Highlight: James Buchanan (1986) & Kenneth Arrow (1972)
Week 7: Theme: Introduction to Game Theory
3/6/06: Readings: - Schelling, Thomas C. The Strategy of Conflict. 1960.
pp. 3-172 and 205-254
- The Economist, The Games Economists Play, October 15, 1994
- Selten, Reinhard. “The Chain Store Paradox”
Theory and Decisions, Vol. 9 pp.127-159 (on reserve)
Nobel Highlight: John Nash (1994) & Reinhard Selten (1994)
Week 8: Theme: National Defense
3/13/06: Potential Paper topics: What is the “Chain Store Paradox”?
Relate Schelling to current Iraq situation.
How was US Foreign policy shaped by Schelling?
Relate Schelling to current national defense strategy.
* Note to those writing a paper this week: I am not interested in an argument for or against the war in your paper. I want a paper that explains how game theory explains the situation – whether you agree with the war or not. Game theory can be used to justify both going to war and not going to war – discuss how.
Papers due: Groups B & C
Readings: - Stiglitz Chapter 13
- Schelling, Thomas C. The Strategy of Conflict. 1960.