Public Economics

(1)

Vrije Universiteit Amsterdam BSc in Economics and Business Economics

Public Economics

course ID: EBE2_PE

Syllabus

• Winter 2016

This document is subject to change – most recent version on blackboard [last update: March 4, 2016; MG]

1 Basic Information

1.1 Contacts

coordinator: Pr. Maarten Lindeboom, teacher: Dr. Mathilde Godard

Pr. Stefan Hochguertel VU

office: 10A-64 10

^th

floor

office hours: after lecture/by appointment after lecture/by appointment

e-mail: m.lindeboom@vu.nl M.Godard@vu.nl

phone: (020) 598 3941

1.2 Set-up

This is a 6 week course, typically with 2 double hours of lecture and 1 double hour of workshops/tutorials per week. We offer a mix of theory and policy lectures, complemented by hands-on applications in tutorial sessions. Lectures will be held on Mondays and Wednesdays, tutorials on Fridays (details: see schedule, below). We are fortunate to have a number of guest lecturers that both excel in terms of academic expertise and experience in the policy domain.

1.3 Prerequisites

The course builds and extends in important applied fields on previous and concurrent courses in the BSc EBE program, in particular, Microeconomics I. Familiarity with contents of that course is assumed.

Familiarity includes a working knowledge of how to apply economic models in context and how to select

and use appropriate graphical tools of analysis. It will also be very helpful and we highly recommend (but

it is not strictly required) for students to attend the course Microeconomics II of the same program.

(2)

2 Course Overview

2.1 Content

This course covers an array of topics central to economic policy making, and will discuss underlying economic theory, but also embed it in the context of empirical research on policy evaluation that has given new impetus to public economic thinking. Classic topics include those relating to allocative government activity in the presence of externalities (e.g. health care and health insurance) and public goods (e.g., coordination of policies to combat climate change), as well as those related to social insurance and the welfare state where distributional goals are being pursued as well. The course discusses the welfare implications of taxation of incomes and consumption and implied by adverse incentive effects on economic behavior. We discuss aspects of economic inequality and poverty, of regulation and/or liberalization of complicated markets.

The central trade-off in public finance is that between the dual goals of efficiency and equity, and the course shows that government policy is at most second-best. The course will also reflect on the behavioral public finance aspects that point to limitations and challenges to economic policy making when citizens are boundedly rational and may not react as desired to public interventions. Problems triggered by asymmetric information constitute another central aspect of modern public finance, and will receive due attention.

2.2 Goal, Approach, and Learning Outcomes

Public economics (public finance) is concerned with the role of the public sector (and in particular the government) in a market economy. Every one of us is confronted with government activity in daily life:

financing studies through a student loan, paying taxes, receiving social benefits, or buying electricity or health insurance contracts on a liberalized or regulated market – public policy has to do with every facet of societal life. Policy areas in which the government is involved are often highly complex, affect many different people often differentially, and have to trade off many diverging interests.

The objective of this course is to identify, justify, analyze and evaluate policy options to various current economic problems, including issues in the fields of labor markets, social insurance, pensions, development, environment, and product market competition. Using problem sets and exercises, along with work on economic data will increase and deepen understanding and help broaching a large number of microeconomic policy fields.

Upon completion of the course, the student will:

 know what the empirical importance and theoretical role is of the public sector in the economy

 understand why there is a main trade-off between efficiency and equity in policy making and grasp the concept of the second-best

 know the theoretical underpinnings for allocative market failures associated with externalities and

public goods

(3)

 be familiar with theoretical microeconomic analyses of taxation and their implications for the measurement of welfare

 be familiar with concepts and measurements of inequality in incomes and wealth

 be able to assess the meaning and importance of asymmetric information in (pension and) insurance markets and the role of policy

 apprehend the role of behavioral biases in economic decision making and the government’s role as choice architect.

During the course both theoretical and empirical economic work in policy context is discussed.

2.3 Workshops (Tutorials)

Workshops are being held on Fridays. During these meetings, the students will present a paper from the literature or present findings based on empirical data (from sources such as the OECD, the

IMF/Worldbank, or the CBS/Statline). We will have 2 presentations per meeting (no presentations in week 1). To perform the task, students will be allocated into teams of two or three. This presentation will be graded at the group level. Failing to present the paper/data will result in a grade of 0 for the task.

Teams of students not presenting a paper/data in a given week will have to answer short essay questions.

Each week, these short essay questions will be posted in advance on blackboard: they will relate to the upcoming presentations during the Friday’s workshop, so attendance on Friday is strongly recommended.

These written essays (a total of 4 per group) will also be graded at the group level; each group will have to hand in the written essay through blackboard. Failing to hand this written essay in will result in a grade of 0 for the task. In addition, problem sets will be discussed (those will not be graded).

2.4 Credits and Examination

Exams will take place around mid-March and a resit opportunity is offered in the second half of May. For details, please check information disseminated on VU Net or posted on the website rooster.vu.nl. Exams last 2 hours and 45 minutes.

Course grade is determined as follows: exam grade needs to be 5.0 or higher – in that case: 25% from hand-in assignments and workshop participation, 75% from written exam; else: exam grade. Workshop grade is determined as average based on a total of 4 assignments and the presentation of a paper/data.

3 Reading List

The course focuses on applications in public economics policy fields with a strong microeconomic foundation. This is the reading list (articles and papers will be updated soon), exam reading will be indicated on blackboard.

Main Text

Harvey S. Rosen and Ted Gayer (2014), Public Finance, 10th edition. New York: McGraw Hill. (ISBN:

0078021685).

(4)

Rosen & Gayer is one of the established and highly acclaimed textbooks in public economics used around the world.

We make use of many, but not all, chapters of the book. Students are advised to have a copy at hand.

Background Texts

Goolsbee, A., S. Levitt and C. Syverson (2013): Microeconomics. New York: MacMillan/Worth Publishers (ISBN-13: 978-1-4641-4697-8).

Varian, Hal R. (2013): Intermediate Microeconomics: A modern approach. 9th Edition. New York: W.W.

Norton.

Goolsbee et al is the main reference for the Microeconomics I book and highly recommended as background material.

Varian is one of the standard texts in intermediate microeconomics and used in Microeconomics II. Students can consult those books to dig a little deeper into some (technical) aspects of microeconomics. Both provide excellent foundations.

Articles and Papers – Compulsory reading

Madrian, Brigitte C. (2014): “Applying Insights from Behavioral Economics to Policy Design,” Annual Review of Economics, vol. 6(1), pp 663-688.

Fack, G (2006): “Are housing benefit an effective way to redistribute income? Evidence from a natural experiment in France”, Labour Economics, Volume 13, Issue 6, Pages 747–771.

Milanovic B (2012): “Global income inequality by the numbers : in history and now – an overview”, Policy Research Working Paper No. 6259, The World Bank.

OECD (2001): Restructuring Public Utilities for Competition, OECD Reports.

Nordhaus, W. (2014): "Estimates of the Social Cost of Carbon: Concepts and Results from the DICE- 2013R Model and Alternative Approaches", Journal of the Association of Environmental and Resource Economists, Vol. 1, No. 1/2, pp. 273-312

Articles and Papers – Presented by students

Liu, P. J., Wisdom, J., Roberto, C. A., Liu, L. J., & Ubel, P. A. (2014). “Using behavioral economics to design more effective food policies to address obesity”. Applied Economic Perspectives and

Management, 36, 6–24.

Windmeijer F, and Leicester A. (2004) :“The ‘Fat Tax’: Economic Incentives to reduce obesity”, Institute for Fiscal Studies (IFS) Briefing Notes, Briefing Note No. 49.

Milanovic B. (2014): “The Return of “Patrimonial Capitalism”: A Review of Thomas Piketty’s Capital in the Twenty-First Century, Journal of Economic Literature, 52(2): 519-34

Atkinson A,” (2014): “After Piketty?, The British Journal of Sociology, 65(4).

(5)

Pollitt, M. (2008): “The arguments for and against ownership unbundling of energy transmission networks”, Energy Policy 36, 704-713

Joskow, P.L. (2012): “Creating a Smarter U.S. Electricity Grid”, Journal of Economic Perspectives, Volume 26, Number 1, Pages 29-48.

Nordhaus, W.D. (2007): "Review of the Stern Review on the Economics of Climate Change", Journal of Economic Literature, Vol. XLV pp. 686–702A.

Goulder L.H (2013): "Markets for Pollution Allowances: What Are the (New) Lessons?", Journal of Economic Perspectives, Volume 27, Number 1, Pages 87–102

Koning, Pierre, and Maarten Lindeboom (2015): “The Rise and Fall of Disability Insurance Enrollment in the Netherlands,” Journal of Economic Perspectives, vol. 29(2), pp. 151-72.

Nicholson, Walter, and Karen Needels (2006): "Unemployment Insurance: Strengthening the Relationship between Theory and Policy." Journal of Economic Perspectives, 20(3): 47-70.

Manning, Willard G., Joseph P. Newhouse, Naihua Duan, Emmett B. Keeler, Arleen Leibowitz, and M.

Susan Marquis (1987): “Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment.” American Economic Review 77(3): 251–77

Newhouse, Joseph P (1992): “Medical Care Costs: How Much Welfare Loss?” Journal of Economic Perspectives 6(3): 3 –21.

4 Preliminary Program (Details Bound to Change)

week Topic Date/day/Time Type Subject Teacher Remarks

1 Introduction: Public Economics and the Role of the State

W 3 Feb 9-11

L Government in a market economy;

efficiency and distributional concerns

Hochguertel RG ch 1,3 Note: lecture spot

swapped with Micro II

W 3 Feb 11-13

L Size of the public sector: A historical and international perspective

Godard Madrian

(2014)

F 5 Feb 9-11

W Exercises / Hands on session with CBS data.

Godard

2 Taxation and Benefits

M 8 Feb 11-13

L Taxation of commodities and labor income. Social benefits and labor supply choice.

Hochguertel RG pp. 264- 7, 273-8, 280-1, 301- 8, 349-51, 360-5, 407- 11, 414-6 W 10 Feb