Public Economics

COURSE OBJECTIVE
Public economics studies the role of government in a market economy, much from a microeconomic and structural perspective. The objective of this course is to identify, justify, analyze and evaluate policy options. This includes selecting suitable policy instruments, such as taxation, subsidization, regulation or nudges, and to understand theirintended and unintended consequences. Using problem sets and exercises, along with looking at economic data and empirical context will increase and deepen understanding the role of government and the scope of economic policy.

Upon completion of the course:
(i) Students understand theoretical underpinnings, mechanisms, and functioning of policy tools in public economics, and they appreciate empirical dimensions of government involvement and policy (Bridging Theory and Practice - Knowledge).
(ii) Students possess the relevant skills and master the choice and use of appropriate empirical and modeling tools to address important public economics questions in stylized and real-life cases and applications (Academic and Research Skills).
(iii) Students are able to positively assess and normatively evaluate efficacy, effectiveness, equity, and efficiency of alternative economic policy measures in light of set objectives and relative to desirable social goals (Bridging Theory and Practice - Application).

COURSE CONTENT
Public economics studies the role of government in a market economy. A public finance perspective provides the main organizing principle: what are government tasks, what expenditures do they require, and what is a good way of financing them?

This course covers an array of topics central to economic policy making, and will discuss underlying economic theory, but also embed it in the context of empirical research.

Classic topics include the correction of market failure in the presence of public goods (judicial system or national defense), as well as
distributional goals with which welfare state institutions are concerned. Associated expenditures are mainly financed through taxation.
We discuss welfare implications of taxation of incomes, consumption, or wealth, implied by adverse incentive effects on economic behavior. The central trade-off in public finance is that between the dual goals of efficiency and equity; government policy is at most second-best relative to the goal overall maximization of social welfare. The course will also reflect on behavioral public finance aspects that point to limitations of and challenges for economic policy when citizens are boundedly rational and do not react as desired to public interventions; the government may have a role as choice architect.

Problems triggered by asymmetric information constitute another central aspect of modern public finance, and accordingly tools will be applied to issues in social insurance design. In addition, the course will discuss issues of public choice and political economy when considering strategic lobbying and rent-seeking, or institutional structures that reflect the provision of local and interjurisdictional public goods (fiscal federalism). We close with important aspects that limit tax revenue generation in practice: tax evasion by individuals, tax
avoidance by multinational firms and tax competition between jurisdictions.

During the course both theoretical and empirical economic work in policy context is discussed.

TEACHING METHODS
Lectures
Tutorials

TYPE OF ASSESSMENT
Written exams (midterm and final) - individual assessment.