PUBLIC ECONOMICS
AND ECONOMIC
HISTORY
Manuela Samek Lodovici – LIUC (msamek@irsonline.it)
Daniele Pozzi –LIUC (dpozzi@liuc.it)
James Wickham – Trinity College Dublin
Aim of the course
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The course’s focus is on the role of government in
market economies.
The aim of the course is to make you able to:
understand the role of the government in modern
economies
assess the rationale for public intervention in different
policy fields;
understand the equity and efficiency effects of public
intervention and the response of private agents to the
governments’ actions;
discuss the design of public programmes
understand differences in government intervention
across countries.
Course outline
The course is organised into three interdisciplinary modules:
•
PUBLIC ECONOMICS (Prof. Samek)
•
EUROPEAN
Wickham)
•
THE DEVELOPMENT OF MODERN
MARKET ECONOMIES: AN HISTORICAL
PERSPECTIVE (Prof. Pozzi)
WELFARE
STATES
(Prof.
Timetable
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Economic History (Prof. Pozzi): from
February 26 to March 22.
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Public Economics (Prof. Samek): from April
1 to May 27

European Welfare States (Prof. Wickham):
April 18-20
Exams and grading system
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The grade for each module will be based on an
obligatory written examination and an optional
part.
The final grade for the course will be the
weighted average of the grades of each module
with the following weights:
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Public Economics 57%
Economic History 30%
Welfare States: 13%
The intermediate exam on April 15 will relate to
the Economic History Module.
Public Economics module (Prof.
Samek): outline
1 - An introduction to public economics:
 the economic role of government,
 the rationale and shortcomings of public intervention according to
economic theory,
 the efficiency and equity effects of government intervention
2 - Public expenditures:
 basic theory,
 application to some expenditure programmes: welfare policies,
education policies, employment policies
3 - Taxation:
 microeconomic and redistributive effects of fiscal policy and of the
structure of taxation.
4- Application on Climate change and public policy
 Two seminars to be held during Prof. Samek module by Dr. A.
Goria.
Public Economics Module: references
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Lecture Slides
Public Economics textbooks available in the library
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J. Gruber, Public Finance and Public Policy, 2007. Chapters
2, 5, 6, 7, 11, 12,13, 14,17, 18,19, 20
E. Stiglitz, Economics of the public sector, W.W. Norton &
Company, 3rd edition, 2000, chapters 3,4,5, 6,7,8,9, 10,14,
15,16,17,19,20,26; or
other textbooks in the library, such as H.S. Rosen, Public
Finance. Irwin, 1992.
Optional readings
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Salverda et al. (2009), The Oxford handbook of economic
inequality, Oxford University Press ch.3, ch.4,ch.25, ch.26
Other readings handed out during the course
EC (2012), Employment and Social Development, ch.3 and 4
http://ec.europa.eu/social/main.jsp?catId=738&langId=en&p
ubId=7315&type=2&furtherPubs=no
Public Economics Module:
examination
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Written examination at the end of the course.
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Optional: short review paper (4-5 pages)
and oral presentation on one/two articles (+
0/2 points on the grade of the written exam).
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The list of articles will be made available by
mid April, review papers to be handed in
before the written exam.
Welfare States Module (Prof.
Wickham): outline
The European social model
Varieties of welfare states and blocked
societies
 Inequality and economic growth: Europe
2020
Welfare States Module:Readings and
examination
•
Suggested readings (the instructor will indicate the optional ones)
 Anthony Giddens, Europe in the Global Age, Cambridge: Polity Press, 2007,
Chapters 1, 2, 3.
 James Wickham, ‘Potential and weaknesses of the European Social Model’,
Employment Research Centre, Trinity College Dublin. Briefing paper for
Infowork Project. Available at http://www.tcd.ie/ERC/symposiainfowork.php
 T.R. Reid, ‘The European Social Model’, Chapter 6 of The United States of
Europe (2004).
 André Sapir (2005). Globalisation and the Reform of European Social Models,
Brussels: Brugel Institute, Policy Briefs. Available at http://www.breugel.org
 Palier, Bruno and Kathleen Thelen (2010). 'Institutionalising dualism:
Complementarities and Change in France and Germany Politics and Soicety
38.1: 119-148.
 Albert Alesina and Edward Glaeser (2004). Fighting Poverty in the US and
Europe: A world of difference, Oxford UP, chapter 2.
 European Commission (2010), Europe 2020: A European strategy for smart,
sustainable and inclusive growth. European Commission
•
Written examination
Economic History Module (Prof.
Pozzi): outline
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The origins of market economy
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A historical perspective on:
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Development in historical perspective
Evolution of the relationship market / State
Market and natural environment
Market and political freedom
National cases of development
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UK, US, Germany, China
Economic History Module:
examination and references
Students attending classes: written final exam
based on the readings indicated in the syllabus and on
the notes taken during classes. The instructor could
indicate suggested readings for the students who would
require it. The books from where the readings come from
are available at the Library.
All other students: not-attending students
or students failing the test: could take a written
exam on the book: K.G. Persson, An Economic History
of Europe, Cambridge: CUP 2010. Chapters 1, 2, 8, 9
and 11 are not required for the exam.
1. Introduction: public intervention
in the economy
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Public intervention is widespread and largely influence our daily
life:
 The government provides goods and services (health,
social assistance, education, defence, environment,
infrastructures, etc.),
 it defines the rules for socio economic behaviour (legal
structure and property rights, environmental regulation and
protection of natural resources, safety regulations,
employment regulations, etc.)
 it ensures a stable socio-economic environment
(macroeconomic policies,..)
 it finances its activities with taxation and this affects
income distribution, and production, consumption and
saving decisions.
The extent of public intervention
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The public intervention in the economy is very different
across countries:
 In extent as shown for example by its incidence on
GDP
 In the composition of spending
 In the structure and incidence of taxation
The variance among countries is mainly explained by
different choices concerning the distributive role of
government.
Evolution of total general government
expenditure, EU-27, 2002-2012, % of GDP and
% of total expenditure
Evolution of total general government expenditure,
EU-27, 2002-2012, cumulated % of GDP
Total general government expenditure by
function, 2012 (% of GDP)EU
Total tax revenue by Member States and
EFTA countries, 2013 and 2014, % of
GDP
Main components of government
revenue, 2014 (% of total revenue)
Public Deficit and Public Debt
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In most countries public expenditures are higher than
revenues
The public deficit is the difference between government
spending and tax revenues during a particular year.
The public debt is the total amount of money owed by
the government to creditors due to the accumulation of
past deficits.
The crisis has increased the public deficit and debt in all
OECD countries. Austerity policies (cuts in public
expenditures and increased in taxes) have been
implemented to reduce public deficits and public debt,
but these policies have made it more difficult to get out of
the recession.
The ratio public Deficit/GDP in the EU
= (TOTAL REVENUES – TOTAL EXPENDITURES)/GDP
Source: EC and Eurostat
2000
2007
2010
Austria
-1.7
-0.9
-4.4
Belgium
0.0
-0.3
-4.1
Finland
6.9
5.3
-2.5
France
-1.5
-2.7
-7.1
Germany
1,1
0.2
-4.3
Greece
-3.7
-6.5
-10.6
Ireland
4.7
0.1
-31.3
Italy
-0.8
-1.6
-4.6
Netherlands
2.0
0.2
-5.1
Portugal
-2.9
-3.1
-9.8
1.9
-9.3
Spain
-0.9
United Kingdom
3.6
.2.7
.10.3
EU27
0.6
-0.9
-6.6
United States
1.6
-1.1
-8.9
2) Ratio Public Debt/GDP
2000
2007
2010
Austria
67.0
63.4
78.2
Belgium
107.8
84.1
96.2
Denmark
52.4
27.5
43.7
Finland
43.8
35.2
48.3
France
57.3
64.2
82.3
Germany
60.2
65.2
83.2
Greece
103.4
107,4
144.9
Ireland
37.5
24.8
92.5
Italy
108.5
103.1
118.4
Netherlands
53.8
45.3
62.9
Portugal
48.5
68.3
93.3
Spain
59.4
36.2
61
United Kingdom
41
44.4
79.9
EU27
61.9
59
80.1
United States
58.2
62.1
97.9
General Government Debt as a
percentage of GDP, 2013 and 2014
Fundamentals of Public Economics
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Public economics: considers the role of the
government in market economies, the rationale of its
intervention and the economic and social effects in
terms of the efficiency and equity trade offs.
MAIN QUESTIONS:
When should the government intervene in the
economy (should the government intervene more or
less than it does?)
How might the government intervene (should it
intervene differently?)
What are the effects of public intervention?
How social choices are made?
When should the government intervene
in the economy? Roles and tools of
Government intervention
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Behind public intervention in modern market economies
is the need to correct actual or perceived market
failures (efficiency goal) and to ensure an equitable
distribution of resources (equity goal)
The public sector has different roles in market
economies:
 Allocation of resources (efficiency goal)
 Income (re)distribution (equity goal)
 Stabilisation of the economic cycle
These roles interact with each other.
When and how to intervene?
Allocation role (growth and efficiency)
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ALLOCATION ROLE: provide in an efficient way
(increasing the size of the pie) goods and services when
the market is not able to produce them efficiently
(market failures) through:
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The production of public goods or the public financing of
private provision: i.e. all those goods and services which are
under (or not) produced by the market, due to market failures;
The regulation of market activities to support market competition
(property rights, legal system, restrictions )
Taxes and subsidies which change the market price of goods or
services and affect the production and consumption decisions of
economic agents.
When and how to intervene?
Redistributive role (poverty reduction)
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The aim is to foster equity correcting the distribution
of resources (how the pie is distributed) resulting
from market mechanisms, by shifting resources from
some groups in society to others and/or by changing
initial endowments through:
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Monetary transfers (such as welfare benefits to
support the income of the poor or the unemployed)
Transfers in kind (provisions of public services
such as education, health services, social services)
Taxes/subsidies (for example with progressive
taxation or exemptions or subsidies)
When and how to intervene?
Cycle Stabilisation role
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Smoothing over the business cycle and
external shocks, supporting full employment
and controlling inflation through:
 Fiscal policy (transfers and taxation,
automatic stabilizers, public
expenditures)
 Support to productive activities
What are the effects of government
intervention?: Government failures
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Behind public intervention in modern market economies
is the need to correct actual or perceived market
failures (efficiency goal) and to ensure an equitable
distribution of resources (equity goal)
However government intervention may also produce
negative direct and/or indirect effects (government
failures) due to:
 Limited information
 Limited control on private markets responses to
public intervention
 Limited control over the public bureaucracy
 Limitations imposed by the political process
What are the effects of public
intervention?
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Have to consider the timing (short vs long term effects)
and direct and indirect effects of public intervention on
individuals and markets:
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Direct effects : effects expected assuming that the behaviour of
economic agents do not change as a consequence of
government intervention
Indirect effects: effects arising because economic agents
change their behaviour in response of the intervention (for
example increasing taxation may reduce labour supply)
It is very difficult to measure effects (especially indirect
and long term effects) and to establish causation: i.e.
whether the effects we observe are due to the
government intervention under analysis or not: impact
evaluation and cost-benefits analysis (see Gruber ch.3)
How decisions are taken?The analysis
of social choices
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Political economy studies how the political decision
making process produces decisions that affect
individuals and the economy.
This part of public economics analyses how socially
desirable goals are chosen
Socially desirable goals relate to:
- the capacity to support socio-economic growth,
- the capacity to guarantee adequate living
conditions to citizens,
- the capacity to guarantee equality in opportunities
for all.
Key economic issues in public
economics
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Efficiency:
What is produced, how it is produced and how much it is
produced (public vs private goods/services): given
available resources make the pie as large as possible
Equity
For whom it should be produced and who should pay for it:
distribute the pie in the most equitable way
How are decisions taken?
Trade offs:
an efficient outcome could be not equitable
an equitable outcome could be inefficient
Theoretical tools at the basis of Public
Economics
(Stiglitz ch.3 and 5; Gruber ch.1, 2; Rosen ch. 1,2, 3 and 4)
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Consumer theory (constrained utility
maximization)
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Production theory
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Equilibrium and social welfare theory