EC 351 PUBLIC FINANCE
Fall 2015
Instructor:
E-mail:
Office Hours:
Fikret Adaman
adaman@boun.edu.tr
By Appointment
Graduate Assistant: tba
Undergraduate Assistants: There will be a contingency of assistants who will be responsible in
running the “reading discussion sessions”, the names of whom tba
Text Book
The below textbook is mainly for background reading:
Leach, J., A Course in Public Economics, Cambridge University Press. The textbook is now available
at the bookstore, a copy will be made ready at the Library.
Overview
Public Finance is the branch of economics that studies the role of the public sector in the economy. In
this course we will study the economic rationale of the public sector and the foundations of the
economic theory that describes what the role of the public sector should be. In addition to material that
will be covered during the semester in the class and in the problem sessions, through discussion hours
we aim to give a brief introduction to the historical trajectory of public finance. These additional
readings will help create the links between theories discussed in the class and their historical
backgrounds as well as policy implications. There will also be a documentary movie to be shown and
discussed: “The Shock Doctrine” by Naomi Klein.
Schedule of the problem and discussion sessions
The course will consist of four modules (see below), and for each module there will be one problem
session and one discussion session. Information will be sent you separately with respect to the sessions.
Course Format
Attendance is required in the sense that you will be responsible from the materials that will be covered
in the lectures as well as in the problem sessions. In addition, we are aiming at conducting four
discussion sections, the days of which will be announced after consulting your schedule. Problem sets
for the problem sessions will be put into the web site of the course a week before, and their solutions
will be made available again in the website at the end of the week. You are supposed to make an
attempt to solve these problems on your own before coming to recitations. Assigned readings for the
discussion sessions should be read prior to meetings, and students should be prepared to participate and
discuss in those sessions.
Evaluation
1st Midterm:
Final:
Quizzes:
35%
50%
15%
(To be announced)
(There will be five quizzes in total, and the highest three will be counted.)
Course Outline
MODULE 1
SUBJECTS WILL BE COVERED IN CLASS
INTRODUCTION
Rationale for Public Economics
FUNDAMENTALS OF WELFARE ECONOMICS
Market Efficiency
The beauty of the general equilibrium
Welfare Economics and Pareto Efficiency (Edgeworth and Walras)
Fundamental Theorems of Welfare Economics
Market Failure
Basic Market Failures (Public Goods and Externalities)
Redistribution and Merit Goods
The Role of Government
Efficiency and Equity
Efficiency and Distribution Trade-Offs
Utilitarianism and Rawlsianism
MODULE 2
SUBJECTS WILL BE COVERED IN CLASS
Externalities
The Problem of Externalities
Private Solutions to Externalities
Public Sector Solutions to Externalities
Public Goods
Pure and Impure Public Goods
Free-rider Problem
Publicly Provided Private Goods
Efficiency Conditions of Public Goods
Lindahl solution
Manipulation of the Lindahl solution
Introduction to Taxation
The Desirable Characteristics of Tax Systems
Taxes and Economic Efficiency
Fairness
General Framework for Choosing Among Tax Systems
Tax Incidence
Effect of Tax at the Level of a Firm
Impact on Market Equilibrium
Ad Valorem versus Specific Taxes
The Effect of Elasticity
Relationship between the Change in the Price and the Tax
Taxation and Economic Efficiency
Effect of Taxes Borne by Consumers
Deadweight Loss of a Tax
Effect of Taxes Borne by Producers
Effect of Taxes Borne Partly by Consumers, Partly by Producers
Taxation of Savings
Taxation of Labor Income
MODULE 3
SUBJECTS WILL BE COVERED IN CLASS
Project Evaluation; Policy Tools
Cost-Benefit Analysis
Information Problem
Moral hazard
Adverse selection
Misrepresentation
Two applications
Health Care
Rationale for a Role of Government in the Health Care Sector
Education
Why is Education Publicly Provided and Publicly Financed?
MODULE 4
SUBJECTS WILL BE COVERED IN CLASS
State Theory
Public Choice
The Problem of Preference Revelation
Individual Preferences for Public Goods
The Problem of Aggregating Preferences
Voting Mechanisms
Bureaucracy
Comparison of Efficiency in the Public and Private Sectors
Sources of Inefficiency in the Public Sector
Rent Seeking
The Analyses of Expenditure Policy
Income and Substitution Effects
The reading materials will be made ready at the beginning of the term.
A very successful term to all of you!