In the preface to the first edition, we noted that public economics is about government and the economic effects of its policies. This book provides insight into what public economics says and what it can do.
Public Economics
Methods
Each model is intended to be a simplified description of the part of the economy that is relevant to the analysis. Policy recommendations can then be derived, but always with recognition of the limitations of the model.
Analyzing Policy
Although there are differences of opinion about the extent to which these comparisons are valid, it is still scientifically valid to investigate what they would mean if they could be made.
Preview
The focus in this chapter turns to an assessment of the success of the market offering. In addition to the theoretical analysis, the results of applying the methods to the data are also taken into account.
Scope
Method 1 is to discard some of the cake, and divide what is left equally. Specifically, if the sizes of the two sections are denoted xenig, then the size of the slices satisfies the ratio x1/2+y1/2=1. Draw a graph of the possible divisions of the pie and discuss how the balance between efficiency and fairness will affect the choice of division.
Introduction
Economic Models
Subsequently, the equilibrium of the economy is determined and the effects of government choice variables are calculated in a policy analysis. An essential consideration in choosing a model's level of detail is that its equilibrium should demonstrate dependence on policies that provide insight into the functioning of the actual economy.
Competitive Economies
On the one hand, if the model is over-specified, it may fail to capture important forms of response. What the assumption does not allow is that the directors of the firms are better informed than other shareholders about future prospects and can trade profitably on the basis of this informational advantage.
The Exchange Economy
This function should be seen as a representation of the consumer's indifference curves and does not imply any comparability of utility levels between consumers – the issue of comparability is taken up in chapter 13. This can be seen by summarizing the claims and comparing them down to the level of the donations.
Production and Exchange
The aggregate supply of each good is the sum of firms' production of it and the initial endowment of it that consumers have. The level of aggregate demand is found by summing the individual demands of consumers to give.
Efficiency of Competition
- Single Consumer
- Pareto-Efficiency
- Efficiency in an Exchange Economy
- Extension to Production
This leads to net consumption planx∗. The equilibrium for the economy is shown in figure 2.9, which places figure 2.7 on 2.8. But the value of consumption at the competitive equilibrium must equal the value of the endowment.
Lump-Sum Taxation
A transfer is defined as very general if no change in a consumer's behavior can affect the size of the transfer. From the above discussion it should be clear that the total wealth of the economy is not reduced by the application of flat taxes.
Discussion of Assumptions
The response to such problems leads to the recasting of flat-rate transfers in terms of flat-rate taxes. Flat taxes play a central role in the public economy because of their success in achieving distributional goals.
Summary
If the price of good 1 is 1, at what price for good 2 will the company break even. Display the Pareto efficient allocations if the endowment is 1 unit of good 1 and 2 units of good 2.
Introduction
First, people do not know what is best for themselves through a sheer lack of knowledge of the necessary information. We will then describe policies that can effectively help people to help themselves to do what is best for them.
Behavioral Individuals
- Simple Example: How Much to Save?
- Present Bias
- The (β, δ) Model of Self-Control
- Reference-Dependence Bias
- The Gambler’s Fallacy
- Confirmation Bias
- Confidence Bias
- Framing Bias
- Conformism Bias
- Identity and Social Norms
This is one of the many aspects of the so-called framing effect, which we will return to later. Participants in the experiment are first told the following story: “The US is preparing for an outbreak of a strange Asian disease that is expected to kill 600 people.
Behavioral Markets
Money Pump
The consumer has cyclic preferences, preferingatob, btoc, andctoa, which means the consumer is willing to trade, nextcforb, and thenbfora, so back to the initial package. That is, the cyclical consumer is always willing to pay a small amount of money to get instead of b, instead ofc, and instead of a.
Complementary Mistakes
For example, any guess above 66.67 is irrational for every player, since it cannot possibly be two-thirds of the average guess. A small but significant number of students guessed 22.2 (i.e., two-thirds of 33.3), indicating a second iteration based on an assumption that others would guess 33.3.
Rationality Tug-of-War
Behavioral Policy
- Internalities versus Externalities
- Automatic Enrollment
- The SMarT Plan
- Complementarity
Behavioral policy uses people's biases to help them by making the healthy option the default (status quo bias) and providing immediate rewards for healthy choices (current bias). A rational consumer is unaffected by the default option because the cost of giving up is small.
Behavioral Welfare
- New Welfare Criterion
- Choice-Based Welfare Analysis
- Refinement and Structural Modeling
- Application: Global Warming
We can therefore define the revealed preference relation P asxP x′ ifxis always overx′ chosen for any additional conditions. The idea behind preference refinement is to discard certain additional conditions that have become too "tainted" for welfare analysis.
Other-Regarding Preferences
Ultimatum Game
Proposals are also rejected in some experiments, with the probability of rejection increasing as the respondent's share of the surplus decreases. The subgame perfect (Nash) equilibrium involves the responder receiving almost all of the surplus mets∗ ⋍ 1 .
Social Preferences
Consider a variation of the ultimatum game with a unique responder but >1 submitters (i.e., competition among nin-submitters). Fairness Utility is increasing or decreasing the income of the other, if the other is poorer or richer respectively.
Market Impact
If one's own consumption choices are independent of the consumption choices and budgets of others, then consumers are said to behave as if they were selfish. If the agent's decision does not affect the market price or volume of trade, then he has no opportunity to change the material consumption of others in the economy.
Conclusions
This is the case in many settings that aim to foster cooperation between selfish agents (eg, think of the Kyoto Protocol on climate change). Since the subject is often something that stirs people's emotions such as eating disorders, illegal drug use, excessive alcohol consumption, smoking, gambling, compulsive consumption and excessive debt, the result seems to be an imbalance with conclusions and theory that is passionately attacked or passionately defended.
Introduction
Historical Development
In 1996, the United States had the lowest public spending of the five countries at 32.4 percent, but even this is a third of gross domestic product. Even in the United States, which has a primarily private health care system, public sector spending on health was 6.3 percent of gross domestic product in 1994.
Composition of Expenditure
The central spending in the United Kingdom (73 percent) is then by definition equal to the central plus state ratio in the United States. This is even the case in the United States, where, at 19 percent, it is significantly smaller than Germany and the United Kingdom (44 and 35 percent, respectively).
Revenue
Despite this difference, Germany and the United States have in common that property taxes are more important to local government than to central government. Local government in the UK has no income from income and profit taxes.
Government Debt
The level was stable at around 70 percent of gross domestic product until the 2008 financial crisis; then it increased sharply to 90 percent in 2011. Greece has the highest debt ratio in 2010 at 152.6 percent of gross domestic product, followed by Italy at 119.5 percent of gross domestic product.
Measuring the Government
The first issue revolves around the fact that the figures have expressed the size of the public sector in relation to the size of the economy as a whole. Where it can make a critical difference is the impression it gives of the size of the public sector.
Conclusions
In this case there are compelling reasons to include the firm's activities in the government's measure. 4.12 (Malcolmson 1986) It is natural to wonder whether there is a limit to the size of the public sector.
Introduction
Justification for the Public Sector
- The Minimal State
- Market versus Government
- Equity
- Efficiency and Equity
Since there are good reasons to believe that this is the case, coordinating revenue collection and service delivery to ensure the efficient operation of economic activity provides a natural role for the public sector. All governments take care of the organization of economic activity in such a way that economic resources are used to the best advantage.
Public Sector Growth
- Development Models
- Wagner’s Law
- Baumol’s Law
- A Political Model
- Ratchet Effect
Rather than working from observed data, Baumol's law derives from an observation about the nature of production technology in the public sector. The underlying hypothesis is that public sector technology is labor intensive relative to private sector technology.
Excessive Government
- Bureaucracy
- Budget-Setting
- Monopoly Power
- Corruption
- Government Agency
- Cost Diffusion
The quantity of the public good chosen will depend on the unit cost of government. The government's benefit from providing the public good is the difference between the tax and the cost.
Conclusions
Show that in this case the share of the budget spent on the public good increases with the increase in the (relative) price of the public good. Does this mean that rising inequality increases the relative size of the public sector (as measured by the tax rate).
Introduction
Definitions
A simple diagram summarizing the different types of things and the names given to them is shown in figure 6.1. The problem with the commons is the tendency to overuse them, and the usual solution is to establish property rights to control access.
Private Provision
Starting at equilibrium, these points can be reached by both consumers simultaneously increasing their purchase of the public good. Once the point is reached where the indifference curves are tangential, no further Pareto improvements can be made.
Efficient Provision
Consequently, compared to Pareto-preference allocations, the total level of the public good consumed is too low. To interpret this rule, the marginal rate of substitution must be considered as a measure of the marginal benefit of another unit of the public good.
Voting
We label the median consumer as male indicating their chosen amount of the public good by Gm. This is because the voting result does not take into account preferences other than those of the median voter: to change all.
Personalized Prices
The fact that the consumers pay only part of the cost reduces the perceived unit price of the public good. The indifference curves reflect preferences over levels of the public good and shares in the costs.
Mechanism Design
Examples of Preference Revelation
The reason is that the proportional cost-sharing rule provides an incentive to underreport preferences for public goods. It is assumed that the gross payoffs when the public good is provided are v1=0< v2= 3.
Clarke–Groves Mechanism
