Aims

The first semester of the module focuses on the problems that public goods pose for market-based economies, and the consequent implications for the role of the state in the economy. This involves a brief examination of what is meant by social welfare, and how economists typically evaluate social arrangements. The notion of market failure is then examined with particular emphasis being placed on public goods. Various allocation mechanisms are considered which illustrate problems with government provision. The working of the political system itself is an important theme, with some time spent looking at voting and lobbying.

The second semester of the course examines the economics of local public goods, which are public goods whose benefit is spatially defined. It leads to a discussion of local government, fiscal federalism and the opportunities for political participation. The second part of the module looks at how individuals interact to determine the appropriate level of public goods. This is social decision-making and it discusses how decisions are made in practice through intermediaries in the form of parties, leading to theories of the political business cycle. The remaining part looks at tax theory - known as optimal taxation - and the practice of taxation, focusing on the UK experience. Much of this is concerned with the efficiency aspects of taxation, known as the excess burden.

Outline Of Syllabus

SEMESTER 1: FOUNDATIONS, PUBLIC GOODS AND THE PUBLIC SECTOR

I.       FOUNDATIONS OF PUBLIC ECONOMICS

•       The problem of collective action
•       Value judgements in economics
•       The Arrow Possibility Theorem
•       Escaping from the Theorem
•       Significance of the Theorem

II.       WELFARE ECONOMICS

•       Exchange and the Edgeworth-Bowley Box Diagram
•       Production and full Pareto Optimality conditions
•       Pareto Optimality and Competitive Equilibrium
•       Fundamental Theorems of Welfare Economics
•       Market failure and prices.

III.       PENSIONS AND TRANSFERS

•       Defining Pension Schemes
•       Pensions and Saving: The Golden Rule in the Solow Growth Model and PAYG systems.
•       Pensions and Saving: The Golden Rule in an Overlapping Generations model and PAYG systems.
• The Golden Rule and the Aaron-Samuelson Rule: Pareto Optimality in Steady State.
• The effect of population growth with and without a pensions scheme.

IV       PUBLIC GOODS

•       Defining public goods
•       Efficiency conditions: The Samuelson Analysis
•       The Lindahl Mechanism for the provision of public goods, links to efficiency.
• Incentive Compatibility and the Clarke-Goves mechanism.
•       Provision of Public Goods in Large Economies

V.       VOTING, PRESSURE GROUPS AND RENT SEEKING

•       Majority Voting, Median Voter Theorem
•       Efficiency of Majority Voting, coalitions
• The Becker Model of Political Competition
• The Peltzman Model of Regulation

SEMESTER 2: COLLECTIVE DECISION MAKING AND TAXATION

VI. TIEBOUT MODEL

•       Pure public goods, local public goods and club goods.
•       The Tiebout model. Existence and efficiency
•       Tiebout model with homogeneous individuals and heterogeneous communities
•       Tiebout model with heterogeneous individuals.

VII. FISCAL FEDERALISM

•       Fiscal federalism and political participation
•       Decentralisation theorem and inter-governmental grants
•       Political participation.

VIII. COLLECTIVE DECISION-MAKING

•       Social Choice Theory, Impossibility Theorem and Voting Paradox
•       Social Choice Rules in Practice
•       Intensity of Preference

IX. REPRESENTATIVE DEMOCRACY

•       Downs model of party competition and extensions
•       Political business cycle and criticisms. Rational expectations models
•       Models of partisan behaviour.

X. TAX THEORY

•       Excess Burden of Taxation, Measuring the Welfare Loss
•       Incidence of Taxation, Shifting of Taxes and Tax Capitalization.
•       Equity Considerations and the Equity-Efficiency Trade-offs.
•       Optimal Commodity Taxes and the Ramey and Corlett-Hague Rules.
•       Optimal Income Taxation. Linear and Non-Linear Taxes.

Teaching Rationale And Relationship

Lectures provide an exhaustive and in-depth treatment of the core course material. Seminars facilitate small group interaction with the seminar leader to reinforce learning. Structured guided learning give opportunities to develop lecture material, discussions and pre-assessment material. Private study facilitates review and understanding of lecture material and problem sets.

Assessment Rationale And Relationship

The exam tests the student's grasp of the module material, understanding of some of the core models concepts, and ability to tackle analytical problems. Choice restricted in exam to test knowledge of whole syllabus.