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Regular version of the site
Bachelor 2019/2020

Public Economics

Type: Elective course (Economics)
Area of studies: Economics
When: 3 year, 1, 2 module
Mode of studies: offline
Instructors: Natalya Rakuta
Language: English
ECTS credits: 5
Contact hours: 60

Course Syllabus


This course provides a basis for the economic analysis of public policy issues. It provides the analysis of the role of public sector in the economic system, its functions, management techniques, taxation, and the efficiency estimation of resources usage. The focus of the course is on the main parts of public finance: taxation and spending. It also examines issues related to the role of the state, public choice, management of public assets and liabilities, and fiscal federalism. It develops an analytical framework that facilitates the evaluation of public policy.
Learning Objectives

Learning Objectives

  • To develop analytical tools and their application to key policy issues relating to the spending, taxation and financial activities of the government.
  • To introduce students to the main models and analytical tools of Public Economics
  • To develop student’s ability to apply theoretical knowledge to the actual economic cases
Expected Learning Outcomes

Expected Learning Outcomes

  • Explain main functions of the government
  • Analyse market failures.
  • Know different approaches to social welfare
  • Know main theorem and theories of Public Choice
  • Explain the behavior of economic agents in political process
  • Analyse tax incidence and welfare loss
  • Analyse effects of taxation on labour supply
  • Explain the tendencies in government expenditures
  • Explain the role of social insurance and its types
  • Conduct cost-benefit analysis for government programmes
  • Know main ways to increase efficiency in Public Sector
  • Analyse functions of the government at different levels
Course Contents

Course Contents

  • Introduction to Public Economics
    Introduction. Public Economics. Subject and methods. Government. Historical development. Measurements. Revenues and expenditures. Functions of the Public sector. The minimal state. Market failure. Redistribution.
  • Market Failures
    The first and the second fundamental theorems of welfare economics. Pareto efficiency. Source of market failure: competition failure, incomplete markets, information failure, externalities, public goods. The theory of externalities. Coase theorem. Pigouvian taxation. The theory of public goods. Club goods and local public goods. Efficiency conditions for public goods. Mechanism design. Private provision of public goods. Second-best principle. Imperfect competition and government regulation. Welfare loss. Asymmetric information and government solutions.
  • Income, inequality and poverty
    Pareto efficiency versus alternative criteria. Equity and efficiency. Social welfare functions. Alternative theories of the role of the state. Redistribution and its effects. Inequality and poverty.
  • Voting
    Public mechanisms for allocating resources: problems of eliciting preferences and reconciling differing views. Voting. Majority voting: the median voter theory and the voting paradox. Arrow’s Impossibility Theorem.
  • Rent-seeking
    Special interest groups. Rent-seeking behaviour. Controlling rent-seeking. Theory of bureaucracy. “Principal - agent” problem. Government failure.
  • Commodity taxation
    Types of taxes. The five desirable characteristics of a tax system. Tax incidence in competitive and monopolised markets. DWL and price elasticity. Equivalent taxes. Achieving tax neutrality. Effects of globalisation. Optimal commodity taxation: the Ramsey rule.
  • Income taxation
    Taxes and labour supply: taxes and the individual budget constraint; income and substitution effects; non-linearities due to progressive taxation. Taxation of capital. Taxes and savings. Distributional considerations. Modelling tax evasion. Policies to reduce tax evasion.
  • Theories of the public sector
    The size of public expenditures. Wagner’s law, Baumol’s law, a political model, budget-setting, etc. Public provision versus public procurement. Efficiency of public expenditures. Cost-benefit analysis.
  • Social Insurance and Welfare Programs
    Information problems and the market for insurance. The role of social insurance. The case of unemployment insurance. Health care. Retirement pensions: funded and "pay-as-you-go" state pensions. Efficiency: effects on savings and retirement decisions. Approaches to income support. Welfare programs, targeting and incentives .Means-testing. The contributory principle. Integrating taxes and benefits.
  • Cost-Benefit Analysis
    Private cost-benefit analysis. NPV and IRR methods. Social cost-benefit analysis. Measuring non-monetized costs and benefits. Shadow prices and market prices. Discount rate for social cost-benefit analysis. The evaluation of risk.
  • Managing the Public Sector's Assets and Liabilities
    Privatisation: efficiency and equity arguments about state intervention. Forms of intervention. Public versus private ownership. Competition and quasi-markets. Regulation. Managing public sector liabilities: issues in domestic and external debt management.
  • Multiple Jurisdictions
    Fiscal federalism. Arguments for multi-level government. The division of responsibilities. Principles of fiscal federalism: club theory and local public goods, Tiebout hypothesis. Production versus finance. The incidence applied to local public finance. Fiscal competition: problems of multi-jurisdictional taxation; income distribution; inter-governmental transfers.
Assessment Elements

Assessment Elements

  • non-blocking Midterm 1
  • non-blocking Midterm 2
  • non-blocking Final exam
  • non-blocking Group presentation 1
  • non-blocking Group presentation 2
  • non-blocking Essay 1
  • non-blocking Essay 2
  • non-blocking Class participation
Interim Assessment

Interim Assessment

  • Interim assessment (2 module)
    0.09 * Class participation + 0.045 * Essay 1 + 0.045 * Essay 2 + 0.4 * Final exam + 0.03 * Group presentation 1 + 0.03 * Group presentation 2 + 0.18 * Midterm 1 + 0.18 * Midterm 2


Recommended Core Bibliography

  • Hindriks, J., & Myles, G. D. (2013). Intermediate Public Economics (Vol. Second edition). Cambridge, Massachusetts: The MIT Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=564828

Recommended Additional Bibliography

  • Arrow, K. J., & Lind, R. C. (1970). Uncertainty and the Evaluation of Public Investment Decisions. American Economic Review, 60(3), 364–378. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=bsu&AN=4510669
  • Economics of the welfare state, Barr, N., 2012