Fatih University
Faculty of Economics
Department of Economics and Administrative Sciences
Course Information for Public finance I.
I. COURSE DESCRIPTION
Multimedia
Presentation
Course Code: ECON 321. Course Name: Public Finance I.
The course includes discussions on the basic practical implications of welfare theory in public finance as
well as of the theory of government transfers and taxation. During the semester we analyze the basic
principles of Welfare theory including theory of public goods, externalities, social choice, etc. The trade-off
between efficiency and equity is in the core of the practical implementation of the theory. Concerning the
government transfers and taxation the course includes such topics as distribution of income, poverty, social
security, tax incidence, etc. The benefit of this course for the students is that it presents comprehensive
knowledge on the theory of public finance with accent on the basic practical implications. It includes a lot of
discussions on concrete cases and its presentation with modern multimedia techniques makes it very
attractive and easy to understand despite the high theoretical level and difficulty of the discussed problems.
Course Objectives: 1. To provide theoretical understanding of the main principles and theories relevant to
the study of public finance.
2.
To present the latest achievements in the basic public finance theories and to outline the principal
directions of their development within the requirements of the bachelor degree in Economics.
LEARNING OUTCOMES
On successful completion of the unit students should be able to:
1. Apply in creative manner the modern public finance theories to solve some practical tasks.
2. Critically evaluate some of the basic public finance theories.
3. Create own outlook on the existing problems related to the government policy in public finance.
Prerequisites:
Mathematical Level: This course would probably be regarded by most students as being of ‘low to medium’
mathematical difficulty. Most of the analysis is either diagrammatic or uses simple algebra and calculus.
Joint degree students have taken this course in the past without having encountered undue difficulty with the
mathematics.
Special Requirements: During the lectures normally there are short cases which will be discussed in class at
the appropriate times. Students are expected to orally participate in these cases.
Teaching Method:
This course has been prepared for the second-year students in the Faculty of Economics and Administrative
Sciences of Fatih University. It includes 42 academic hours divided into 12 discussion lectures plus two
summary discussions (consultations for the exams) and mid-term and final exam. Every lecture includes 3
academic hours 50 minutes each. All teaching materials – syllabus, lecture summary and tests are provided
in my Fatih homepage in Internet.
The students may find the corresponding test on the discussed topics in the Section “Test your knowledge” in
Internet after every lecture. It is presented in the same form as the exams. In such a way the students are
trained how to pass exams since the very beginning of our discussions. All students may consult me by Email or appointment on the questions of concern.
Remember that the best training you receive within the discussions during the lectures. Regular attendance
thus is the best way to reach high results on the exam.
To be successful in the courses I teach I recommend you the following rules:
1. Attend regularly the lectures and try to make detailed notes. If for some reasons you could not
attend a lecture, try to get the notes of your friends. Before the final exam you have to show me
your notes. They are part of evaluation of your participation (see the grading policy). Their
quality may be important in border cases.
2. If you do not understand some parts of the lecture, please contact me during the office hours
(see below). For students with poor English I provide detailed explanations by request in forms
of handouts on disk. Come to me always with disk. You may have some interesting materials to
help you in your study.
3. If you have problems with understanding my written explanations, we could discuss the
problems during my office hours.
Instructor: Prof. Dr. Alexi Danchev, Ph.D.
Office: Room F-605, E-mail: adanchev@fatih.edu.tr
Office Hours: Tuesday: 15:00-17:00, Wednesday: 15:00-17:00
Teaching Assistant: Goksel Acar, Office: F, E-mail: gokselacar@fatih.edu.tr
Office Hours: Monday: 12:00-13:00, Wednesday: 13:00-14:00
II. COURSE CONTENT
The lectures will introduce the key concepts and issues from a theoretical perspective, and then
proceed to set out the proposed solutions in the context of policy making.
First semester
1
MODULE ONE. THEORETICAL BACKGROUND.
Lecture 1. 1. Introduction.
What is public finance? Studying public finance. Organic and mechanistic view of
government. The legal framework of government. The size of government. Hidden costs of
government. Government budget: expenditures and revenues.
Basic textbooks: Harvey Rosen, Public Finance, 6/e, Chapter 1, pp. 3- 16.
Neil Bruce, Public Finance, 2/e, Chapter 1, pp. 3 - 24.
2
Lecture 1. 2. Basic principles of Welfare Economics.
The Role of Theory. Methods of Empirical Analysis. Interviews, experiments, econometric studies.
The nature of Welfare Economics. Pure Exchange Economy. Pareto optimality. An Economy with
Production. The Fundamental Theorems of Welfare Economics.
Basic textbook: Harvey Rosen, Public Finance, 6/e, Chapter 2, 3, pp. 19 – 47.
Neil Bruce, Public Finance, 2/e, Chapter 2, pp. 29 – 49.
3
Lecture 1. 3. Efficiency and equity.
Market and government failures. Efficiency and effectiveness. Allocative and distributive equity.
The efficiency of government. Maximizing social welfare: utilitarian and Rawlsian approaches.
Measuring inefficiency: deadweight loss. Compensation principle: compensating and equivalent
variation. The theory of second best.
Basic textbook: Harvey Rosen, Public Finance, 6/e, Chapter 3.
Neil Bruce, Public Finance, 2/e, Chapter 2.
J. Stiglitz, Economics of the public sector, 2/e, Chapter 4.
4
Lecture 1. 4. Public Goods.
Public Goods. Optimal Provision of Public Goods (Samuelson theory). Leftover curve. Public
versus Private Provision. The Free Rider Problem. Clarke taxation.
Basic textbook: Harvey Rosen, Public Finance, 6/e, Chapter 4, pp. 55 – 75.
Neil Bruce, Public Finance, 2/e, Chapter 3, pp. 56 – 82.
5
Lecture 1. 5. Externality.
Types of Market Failure. Types of externality. Private and public costs. Externality and property
rights. Coase theorem. Internalizing externality.
Basic textbook: Harvey Rosen, Public Finance, 6/e, Chapter 5, pp. 79 - 103.
2
Neil Bruce, Public Finance, 2/e, Chapter 4, pp. 88 - 114.
Mid-term exam
6.
MODULE TWO. TAXATION
Lecture 2. 1. Political Economy of public finance.
Direct Democracy. Unanimity Rules. Majority Voting Rules. The voting paradox. Logrolling.
Arrow's possibilities Theorem. Lindahl equilibrium. Representative democracy. Explaining
government growth.
Basic textbook: Harvey Rosen, Public Finance, 6/e, Chapter 6, pp. 106 – 134.
Neil Bruce, Public Finance, 2/e, Chapter 5, pp. 119 – 155.
7
Lecture 2. 2. Personal income taxation.
The personal income tax system. Defining income. Tax base and tax structure. Principles of
defining income. Haig-Simons principle. Tax credit.
Sources: Neil Bruce: Chapter 13.
8
Lecture 2. 3. Income taxes and household behavior.
Effects of tax expenditures. Effect of the income tax on the labor supply. Effects of the
income tax on personal saving.
Sources: Neil Bruce: Chapter 14.
9
Lecture 2. 4. Taxes on business income.
Business and the tax system. Determining business income. The corporation income tax structure.
The effect of taxation on business decisions. Business tax incidence.
Sources: Neil Bruce: Chapter 15.
10 Lecture 2. 5. Indirect taxation.
Alternatives of existing income tax systems. Sales tax. Consumption as a tax base. Indirect
tax on consumption: VAT. Policy issues in taxing consumption. Taxation on wealth. The
“green’ taxation. Features of tax reform.
Sources: Neil Bruce: Chapter 17.
11
Lecture 2. 6. Budget deficits and surpluses.
Surpluses, deficits and the national debt. The economic effect of budget balance. The budget
balance and fiscal policy.
Sources: Neil Bruce: Chapter 16.
12
Lecture 2.7. Taxation and the allocation of resources.
Taxation system. Basic classifications. The impact of taxes on individuals’ decisions. The effect of
an excise tax on market outcomes. The cost of taxation.
Sources: Neil Bruce: Chapter 10.
13
Lecture 2. 8. Tax incidence.
Different measures of tax incidence. The effect of bearing the tax burden. The economic incidence
of an excise tax. Advanced issues in analysis of tax incidence.
Sources: Neil Bruce: Chapter 11.
14
Summary of the discussions.
Final exam
IV. EXAM DATES, GRADING POLICY AND ATTENDANCE
Exam Dates
Midterm Exam: To be announced additionally.
Final Exams:
To be announced additionally.
The final results are composed in the following way:
Kind of work
Non-exam works.
1. Analyzing professional text
2. Internet exercise
3. Analyzing economic problem
4. Quiz one
5. Quiz two
6. Participation in class discussion
% share
5%
5%
10%
5%
5%
10%
3
Total non-exam results
Exams.
Mid-term exam
Final exam
Total exam results
Total results
40%
20%
40%
60%
100%
This grading policy gives chance to all students to reach the highest results they wish, depending on their
motivations. It is composed of the following kinds of work:
1. Homeworks. Every student has an individual homework. Two kinds of homeworks are used:
1.1. Analysing professional text. It includes a case in point analysis - answering the questions formulated in
the case studies in your basic manual. It helps the students to prepare a good survey of a given economic
problem with a training of correct citation. The model of this homework can be found in the corresponding
section.
1. 2. Analysing economic problem. Based on the discussion during the semester the students are to calculate
several practical tasks. Note that for me the most important are not the correct calculations, but the
conclusions following from them.
2. Internet excise. The Internet exercise includes answering the questions indicated in the corresponding
section of your manual by means of collecting the information from Internet. Normally the homepages are
given to the students, but they are free to complete the homework with Internet corrected information from
other sources. The model of this homework can be found in the corresponding section.
Normally every student has individual homework. As both case studies and Internet exercises are limited I
can give the same homework for more than one student. Be careful! This is individual, not collective
homework. If I receive the same text in the homeworks (very easy to check) both homeworks will be
eliminated without any right for repeating.
3. Quizzes. There are two quizzes aimed at preparing you better for the exams. Normally they take place two
weeks before every exam and train you for the most difficult parts of the exam. Remember that the last week
before the exam is for consultations and summary of all discussions during the corresponding period
included in the exam. For details in preparing a good quiz presentation, please click here.
4. The participation in class discussion scores are based on the following criteria:
1. Attendance according to the official record and my private observations.
2. Making notes during the discussions. The notes are to be made in a separate notebook and the pages
numbered. Numbering is required to avoid any abuses. Every student is to present his notes after the last
lecture, but before the final exam. I sign the notes on several pages, so that any substitution effect is
excluded. Students, which do not present their notes, are losing 5% of total results.
3. Punctuality – preparing your homeworks in due time according to the schedule
4. Participation in the class discussion as explaining to the other students some problems during the lectures.
IMPORTANT! Students recorded by me to make systematically noise during the
discussions will lose the 10% given for participation.
5. Exams. There are two exams: mid-term and final.
Attendance
Classroom and laboratory attendance are mandatory.
The attendance is recorded to the administration after every lecture by Internet. Students, who are absent over 20% of
the class time, automatically fail the course. Working is not accepted as an excuse.
Honor Code: All work done on the exams will be done on your own and pledged. Students may discuss homework
concepts and approaches, but the work will be done by the individual. Group or copied solutions are not permitted.
Homework is considered pledged simply by its receipt.
Late Work and Examinations: Normally, homework is due one week from the assigned date, unless
otherwise indicated or previous arrangements are made. Late homework will be accepted due to sickness
only. Students who know that they are going to miss class should make arrangements in advance. Only
4
selected homework problems may be graded from the set turned in. The others will be checked for
completion.
Every exam includes 5 professional terminology definitions (PT), 5 complete the missing text
questions (MTQ), 5 multiple choice questions (MCQ), one compulsory theoretical question and
one case study essay-type question.
The PTs include some basic concepts you have to define briefly. They are to identify your basic
knowledge of the course.
The MTQs include 5 questions, in which part of the text is missing. You have to complete the
missing text.
The 5 MCQ are composed from the discussions during the semester.
The theoretical question is aimed at presenting your understanding of the theory discussed during
the course.
The case study essay-type questions reproduce examples from the real life. You have to identify the
theoretical problem hidden behind the question and to outline the theoretical and practical aspects
in it.
Please, indicate explicitly which answer from which section you have chosen to answer. Answering
only by graphs is not accepted. Graphic illustrations are appreciated when they are supported by the
proper verbal explanation. A model of the exam paper you can find the section "Test your
knowledge" in Internet. Note that in the theoretical and case study essay questions you have two
questions of every kind and you have to choose only one out of two. Answering all questions does
not increase your results; I take the result only of one question from every section.
The distribution of the scores from the exams is as follows:
Maximum scores total
Maximum scores
Part
Number of
questions
(Mid-term exam)
total (Final exam)
I. PT
5
5%
10%
II. MTQ
5
5%
5%
III. MCQ
5
5%
5%
IV. Theoretical questions 1 out of 2
2.5%
10%
V. Practical questions
1 out of 2
2.5%
10%
Total
20%
40%
According to the University grading rules your final results are estimated by means of a curve
distribution. It means that your grades reflect not your own absolute results, but relative to the results
of the other students in the group. Usually I apply a curve in which students collecting less than 50%
fail and students collecting more than 90% receive A grade.
To see a model of an exam paper please, click here.
Basic reading:
Harvey Rosen, PUBLIC FINANCE, 6/e, Copyright 2002, Published by McGraw-Hill, ISBN 0-07-237405-5
Neil Bruce. Public Finance and the American Economy, 2/E, Addison Wesley/ 0-321-07815-2/ © 2001.
5
Alternative books.
Stiglitz, J.E. Economics of the Public Sector,(W.W. Norton and Company). Good on basic theory
and quite lively. Empirical material relates to USA.
Preliminary Reading:
A full reading list will be distributed when the course commences. However if you wish to get some idea of
the subject you could read a few chapters of:
AW. Alan Griffiths and Stuart Wall (editors), Applied Economics, An introductory course, Fifth Edition,
Longman, London and New York.
EB. Edgar K., Browning, Jacqueline M. Browning. Public Finance and the Price System, Macmillan
Publishing Company, 1987.
AM. D.A. L. Auld and F.C. Miller. Principles of Public Finance. A Canadian Text, Methuen, 1984
BF. Buchanan and Flowers, The Public Finance. An Introductory Text book, 1975, Irwin Series in
Economics
Additional reading:
KK Kay, J.A. and King, M.A. The British Tax System 5th Edition, 1988, (Oxford
University Press). Not much theory, but best analysis of UK tax system.
AA Atkinson, A.B. The Economics of Inequality 2nd Edition, 1983. Mainly relates to
material covered in second term.
Many of the course topics are also covered in:
AF A.J. Auerbach and M. Feldstein Handbook of Public Economics (2 Vols), 1985. Contains
thorough and rigorous surveys of the main areas of Public Economics, but much of the material is
too difficult for all but the most technically minded undergraduates.
AS Atkinson and Stiglitz Public Economics Some sections of this book will be too mathematical for
some on this course, although it does contain more straightforward sections which are worth
reading.
BJ Brown, C.V. and Jackson, P.M. Public Sector Economics 4th Edition, 1990.
CJ Cullis, J and Jones, P. Public Finance and Public Choice 1992, McGraw-Hill
GM Gareth Myles. Public Economics, 1995. Cambridge University Press,
MD Michael Devereux (ed.) The Economics of Tax Policy. 1996. Oxford University Press. MM
R.A. Musgrave and P.B. Musgrave Public Finance in Theory and Practice (4th ed.). Not as up-todate as the other references but still worth consulting. The coverage is comprehensive.
6
Students are strongly advised to read the following materials:
Baumol, W.J. (1967) "The Macroeconomics of Unbalanced Growth", American
Economic Review, June.
Roubini, N and Sachs, J. (1989) "Government Spending and Budget Deficits in the Industrial
Countries." Economic Policy, April.
Pearson, M., Smith, S. and White, S. (1989) "Demographic Influences on Public Spending" Fiscal
Studies, May.
Stiglitz, J.E. et al (1 989) The Economic Role of the State Oxford, Basil Blackwell.
Coase, Ronald (1 960) "The Problem of Social Cost" Journal of Law and
Economics 1960, 1.
Paul Samuelson, "Diagrammatic Exposition of a Theory of Public Expenditure."
Review of economics and Statistics Vol. 37, 1955 pp. 350-56. Reprinted in
R.W. Houghton Public Finance, Part 3.
Creedy, John (1993) "Financing Higher Education: Public Choice and Social
Welfare." Fiscal Studies vol 15, no. 3. pp 87-108
Millward, R. (ed) Public Sector Economics (Longman, 1983) Chapter 2 (Summer)
Browning, E.K. (1985) "A Critical Appraisal of Hauseman's Welfare Cost Estimates." Journal of
Political Economy.
John Kay (1990) "TaxPolicy--A Survey "Economic Joumal" Vol 100(March) pp 18-75.
Two Historical references still worth reading are:
Ramsey, F. (1927) "A Contribution to the Theory of Taxation." Economic Journal.
Corlett, W.J. and Hague, D.C. (1953). "Complementarity and the Excess Burden of Taxation."
Review of Economic Studies.
Harberger, A.C. (1962) "The Incidence or "the Corporation IncomeTax."
Journal of Political Economy, June.
McClure, C.E. (1975) "General Equilibrium Incidence Analysis; The Harberger
Model After Ten Years." Journal of Public Economics.
Pearce, D. W. Cost-Benefit Analysis 2nd ed. (1986).
Gramlich, E.M. A Guide to Cost-Benefit Analysis (Second Edition, 1990)
Kay, J., Manning, A., and Szymanski, S. (1989) The Economic Benefits of the
Charmel Tunnel. Economic Papers. April.
R.Boadway and D.Wildasin. "Taxation and savings: a survey", Fiscal Studies, August, 1994
Meade Committee The Structure and Reform of Direct Taxation, Institute for Fiscal Studies
Pechman ed. What Should be Taxed: Income or Expenditure, Brookings Institution pp 49-125
Saunders and Webb "Fiscal Privilege and Financial Assets", Fiscal Studies, November 1988
Banks and Blundell . "Taxation and Personal Saving Incentives in the United Kingdom" in Poterba
(ed), Public Policies and Household Savings
Johnson and Webb "Explaining the Growth in UK Income Inequality", Economic Journal 1993,
Supplement
Goodman and Webb "For richer, for poorer: the changing distribution of income in the
UK, 1961-91 ", Fiscal Studies, November 1994
Giles and Johnson "Tax Reform in the UK and changes in the progressivity of the tax
system 1985-1995 ", Fiscal Studies, August 1994
Blundell and Preston "Income, Expenditure and the Living Standards of UK Households", Fiscal
Studies, August 1995
Evandrou Falkingham Hills and Le Grand "Welfare benefits in kind and income distribution", Fiscal
Studies, February 1993
Dilnot and Webb
"A Practical Framework for the Analysis of Social Security Reform", Fiscal Studies,
November 1991
Johnson and Webb
"Low Income Families 1979-87", Fiscal Studies, November 1990
Heady "Optimal Taxation as a Guide to Tax Policy", Fiscal Studies, February 1993
7
Helm and Smith
"Decentralisation and the Economics of Local Govemment", Oxford Review of
Economic Policy, Summer 1987
It is also worth perusing current and past issues Fiscal Studies, the journal of the Institute of Fiscal
Studies (published quarterly in the UK). Articles relevant to course topics crop up regularly.
8