General Introduction

Public Economics
Sidartha Gordon
Paris Dauphine University

September 2015

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Why study public economics?

The four questions of public economics

Why study public economics?

Policy debates over social security, health care, and education

Practical details about the course

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1. The four questions of public economics

Public economics: The study of the role of the government in the

economy.
Four questions of public economics:
Q1. When should the government intervene in the economy?
Q2. How might the government intervene?
Q3. What is the eect of those interventions on economic outcomes?
Q4. Why do governments choose to intervene in the way they do?

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Q1. When should the government intervene in the

economy?

Presumption that markets deliver e cient outcomes.

Why should government do anything?
Primary motive for government intervention is market failure.
Market failure: conditions under which the market economy delivers
ine cient outcome.

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APPLICATION: The measles epidemic USA 1989-1991

Measles vaccine introduced in 1963.

Measles rare in the USA ib the 1980s.
1989-1991: Huge resurgence in measles.
Low immunization rates among poor inner-city children.
Immunization of one child has a positive externality on other
children.

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APPLICATION: The measles epidemic USA 1989-1991

US federal government responded to health crisis early 1990s:

Encouraged parents to immunize children.
Paid for the vaccines for low-income families.

Impressive results:
Immunization rates below 70% prior to outbreak.
Rose to 90% by 1995.
Government intervention reduced the market failure.

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Q1. When should the government intervene in the

economy?

Even when the market is e cient, an e cient outcome is not always

socially desirable.
Redistribution is a second reason for government intervention.
Redistribution: The shifting of resources from some groups in
society to others.

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Q2. How might governments intervene?

Tax or subsidize private sale or purchase

Use price mechanism to encourage / discourage use of a good.

Taxes raise price of goods that are overproduced.

Subsidies lower the price of goods that are under-produced.

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Q2. How might governments intervene?

Restrict or Mandate Private Sale or Purchase

Quotas restrict private purchase of goods that are overproduced.
Mandates require private purchase of goods that are under-produced.

Public Provision
The government can provide the good directly.

Public Financing of Private Provision

Governments pays, private companies produce.

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Q3. What are the eects of altermative interventions?

Direct and indirect eects.

Direct eects: The eects that would be predicted if individuals did
not change their behavior in response to the interventions.
With 49 million uninsured, providing universal health insurance covers
49 million people.

Indirect eects: The eects that arise because individuals change

their behavior in response to the interventions.
If people drop private coverage, many more people may end up covered
by the public plan.

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Q4. Why do governments do what they do?

Do governments always choose e cient or socially desirable

outcomes?

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Q4. Why do governments do what they do?

Do governments always choose e cient or socially desirable

outcomes?
Political economy: The theory of how the political process produces
decisions that aect individuals and the economy.

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2. Why study public nance?

Government spending represents a large sector of the economy,

around the world.
Spending is nanced with taxes or with debt, and these aect every
facet of the economy.
Many sectors also directly aected by regulation.

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Total government spending across OECD nations,

1960-2013 (Gruber, 2013)

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USA federal spending as a percent of GDP, 1930-2011

(G2013)

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Decentralization

A key feature of governments is the degree of centralization across

local and national government units.
Centralization: The extent to which spending is concentrated at
higher (federal) levels or lower (state and local) levels.
In the USA, state and local spending is about 1/4th of total
government spending.

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US federal revenues and expenditures, 1930-2011 (G2013)

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US Federal surplus / decit, 1930-2011 (G2013)

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US federal debt, 1930-2011 (G2013)

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Debt level of OECD nations in 2011 (G2013)

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US state and local government receipts, expenditures and

surplus, 1947-2008 (G2013)

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Distribution of spending

Public goods: Goods for which the investment of any one individual
benets everyone in a larger group.
Example: Defense spending

Social insurance programs: Government provision of insurance

against adverse events to address failures in the private insurance
market.
Example: Health insurance

Over time, spending has shifted dramatically toward social insurance,

especially health insurance.

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Distribution of US federal spending, 1960 and 2012

(G2013)

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Distribution of US state / local spending, 1960 and 2012

(G2013)

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Distribution of US federal revenue sources, 1960 and 2011

(G2013)

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Distribution of US state / local revenue sources, 1960 and

2011 (G2013)

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Regulatory role of the government

The government regulates a wide range of economic and social activities:

European Council and Euroepan Commission in the EU.
The Food and Drug Administration (FDA): food, cosmetics, drugs,
and medical devices.
The Occupational Safety and Health Administration (OSHA):
workplace safety.
The Federal Communications Commission (FCC): radio, television,
wire, satellite, and cable.
The Environmental Protection Agency (EPA): pollution of air, water,
and food supplies.

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3. Policy debates: Pensions

Social Security is the single largest US government expenditure program.

The nancing structure of this program: todays young workers pay
the retirement benets of todays old.
As the population ages, it is increasingly di cult to fund.
Liberals argue that we should raise necessary resources through higher
payroll taxes.
Conservatives argue that, rather than transfer from young to old, we
should encourage people to save.

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3. Policy debates: Health Care

49 million people lack any health insurance, about 18% of the

non-elderly US population.
The Aordable Care Act (ACA) covers 32 million, using mandates
and subsidies.
Supporters argue that the ACA corrects serious market in the insurance
market.
Opponents charge that it represents an enormous, expensive,
unwarranted expansion of government power.

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3. Policy debates: Education

There is an enormous dissatisfaction in the USA with current

educational system.
In 2009, USA ranked 17th in reading, 23rd in science, and 35th in
math skills in a study of 65 countries.
Will more spending improve educational outcomes?
Or might competition among schools help?

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4. Practical details: outline of the eight lectures

Introduction,

Theoretical and empirical tools

Taxation

Externalities

Public goods

Pensions

Social insurance

Political Economy

Final exam

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4. Evaluation

Final. 50%
Group presentation, 3 or 4 students, 5-10 minutes per student. 40%
Class participation, problem sets 10%.

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4. References

Gruber, J. (2013), Public Finance and Public Policy.

Leach, J. (2004), A Course in Public Economics.

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