Public Economics

URL study guide

https://studiegids.vu.nl/en/courses/2024-2025/E_EBE2_PE

Course Objective

The government is by far the most important actor in modern economies. Typically, the share of government varies between 25-50 percent of GDP. The government provides important public goods like education, health care and police. The government aims to reduce inequality by redistributing income from rich to poor via progressive taxes on income and wealth. The government insures risks of unemployment, sickness, disability and old age. The government provides infrastructure such as roads, trains and dykes. The government corrects market failures and aims to internalize externalities, such as with the environment. And the government uses spending, taxes and debt to stabilize the business cycle. Understanding the effects of government intervention and the role that the government should play in the economy is therefore of critical economic importance. The objective of this course is to understand the effects of government policies and the optimal design of government policies, such as, taxes and transfers, regulations, social insurance, public goods, public investments, and public debt. This course provides problem sets and assignments to increase and deepen the understanding of the role of government policy. After successfully completing this course, you:understand the fundamental economic roles of the government and the economic effects of actual government policy (Bridging Theory and Practice
- Knowledge). are able to analyze the welfare effects of policy measures using formal economic modeling (Academic and Research Skills). are able to think about the desirability of economic policy from a welfare-economic perspective (Academic and Research Skills; Bridging Theory and Practice
- Application).

Course Content

Public economics studies the economic role of the government from a positive perspective (what are the effects of government policies?) and a normative perspective (which policies should the government implement?). Public economics is thus a branch of applied welfare economics. This course covers a number of topics out of the following list:Economic role of the state. A description of the most important roles governments play in modern economics and their empirical importance.Welfare analysis. A discussion of the economic foundations of government intervention and the theorems of welfare economics. Tax incidence. Who ultimately bears a tax after all maket responses played out?Income taxation. Analyzing income taxes and the optimal design of tax and transfer system.Participation and taxation. Analyzing subsidies on participation and the joint design of income taxes and participation policies.Capital taxation. Analyzing taxes on capital income and wealth and the role they play in the tax-transfer system.Commodity taxation. Analyzing indirect taxes and the role they play in the tax-transfer system.Education. Analyzing education policy, higher education finance, and the optimal design of education subsidies.Environment. Analyzing corrective taxes, designing green and fair environmental policies.Corporate taxes. Analyzing corporate taxes, tax avoidance of multinationals, and tax competition.Analysis of second best. The second-best nature of government policy and desirability of production efficiency.Stabilization policy. Analyzing the role of the government to stabilize the business cycleDebt sustainability. Analyzing under which conditions public debt is sustainable and theories of optimal debt management.Social cost-benefit analysis. Analyzing when government projects should be implemented.Political economy and public choice. Analyzing the role of the political system in shaping economic outcomes.

Teaching Methods

Lectures and tutorials.

Method of Assessment

Written exams (midterm and final)Assignments.

Literature

Textbooks and additional reading (articles) will be announced on Canvas and in the course manual. In addition, journal and book-chapter articles or additional notes could be included in the reading list. The internet links or PDFs are always posted on Canvas.

Target Audience

Students BSc Economics and Business Economics (Economics track), as well as students BSc IBA and Business Administration (Economics track). The course design allows for students from other tracks and backgrounds to join, but those might need to do additional preparation in terms of self-study. See Recommended Background Knowledge.

Additional Information

The course has important intersections with an array of economics courses in, for instance, microeconomics, macroeconomics, development economics, environmental economics, and labor economics.

Recommended background knowledge

This is an advanced course and requires adequate preparation, irrespective of academic background (major). This course relies on standard concepts from mathematics and microeconomics. Command of the following materials from first-year Bachelor courses is required to successfully complete this course:differentiation of functions: partial and total differentiation,the envelope theorem and the implicit function theorem,maximization of functions with more than one variable, including the Lagrangian method of constrained optimization,neoclassical models of consumer choice and factor supply (consumption of various goods, labor supply, and saving).If necessary, students should refresh their background knowledge from the following courses in the BSc EBE: Microeconomics I and Quantitative Research Methods I. The following material is considered known to all students:Goolsbee, Austan, Steven Levitt, and Chad Syverson (2020). Microeconomics, Third Edition, MacMillan/Worth Publishers, Chapters, 2 – 8, 13 – 17.Sydsaeter, Knut, and Peter Hammond (2008), Essential Mathematics for Economics Analysis, Third edition, Prentice Hall, Chapters 1 – 2, 4 – 8, 11 – 14.