public finance and law, Summaries of Public finance

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Introduction

EC 351 Public Finance

Yeliz Ka¸camak

Bo˘gazi¸ci University

People

Instructor: Yeliz Ka¸camak

• email: yeliz.kacamak@boun.edu.tr
• OH: Mondays 15:00-15:50 and by appointment Graduate TA: Islam Tarlaci
• email: ibahadirtarlaci@gmail.com
• By appointment Undegraduate TAs:
• Ilayda Nazlican Tas (ilaydanazlicantas@gmail.com)

Course Logistics

Class: Mondays 11:00-11:50 NH 302 Wednesdays 10:00-11:50 NH 303

Grading

• Quizzes (15%): There will be 4 announced quizzes/assignments. Only the highest 3 quiz/assignment grades will be used to calculate your overall grade. No makeup quiz will be given.
• Short Response Papers (15%): I will assign 3 light reading exercises or light research topics (potentially based on current policy debates). You will be asked to write a 1-2 page re- sponse paper referring to the material discussed in class. No collaboration is allowed for short response papers.
• Midterm (35%)The midterm exam will be on November 9th, Wednesday, 17:00-19:00, room TBA.
• Final (35%): TBA

Class and Supplementary Materials

Lecture Slides will be available on Moodle site in advance of the class. Practice Problem Sets: These problem sets will NOT be collected and will NOT be graded. They are designed to help you study and understand how to apply the concepts further. They will be solved in problem sessions, and the solutions will be made online. Quizzes from previous years: Quizzes from previous years are uploaded on Moodle. Useful links: Links to some data sources, policy analysis and a podcast.

Discussion/Problem Sessions

Undergraduate and your Graduate TAs will lead these sessions. Attendance is not mandatory but strongly encouraged and might be used towards the participation credit.

• Discussion Sessions: Might be conducted before the due date of SR
• Problem Sessions: Will be conducted whenever there is a PS assigned

Outline

• What is public economics/finance?
• Four questions
• Key facts and popular debates.

Public Economics Definition

Public Economics (or public finance) = study of the Role of the Government in the Economy Government is instrumental in most aspects of economic life:

1. Government in charge of huge regulatory structure
2. Taxes: governments in advanced economies collect 35-50% of National Income in taxes
3. Expenditures: taxes fund public goods (infrastructure, public order and safety, defense) and welfare state (Education, Retirement benefits, Health care, Income support)
4. Macro-economic stabilization through central bank (interest rate, inflation control), fiscal stimulus, bailout policies ⇒ We pool a large share of our incomes through government

Four questions in public economics

1. When should the government intervene in the economy?
2. How might the government intervene?
3. What is the effect of those interventions on economic outcomes?
4. Why do governments choose to intervene in the way that they do?

When should the government intervene in the economy?

Economics generally presumes that markets deliver efficient outcomes.

• Supply=Demand
• All trades that all parties value are made.

1. Market Failures: Market economy sometimes fails to deliver an efficient outcome ⇒ Government intervention may improve the situation

Main Market Failures

1. Externalities: (example: greenhouse carbon emissions) ⇒ require govt interventions (such as corrective taxation)
2. Imperfect competition: (example: monopoly) ⇒ requires regulation (typically studied in Industrial Organization)
3. Imperfect or Asymmetric Information: (example: health insurance markets are subject to death spirals)
4. Individual failures: People do not behave as “fully rational individuals”. This is analyzed in behavioral economics, a field in huge expansion (example: myopic people may not save enough for retirement)

Inequality and Redistribution

Even if the market outcome is efficient, society might not be happy with the market outcome because market equilibrium might generate very high economic disparity across individuals Governments use taxes and transfers to redistribute from rich to poor and reduce inequality Redistribution through taxes and transfers might reduce incentives to work (efficiency costs) ⇒ Redistribution creates an equity-efficiency trade-off Income inequality has increased in the developed world, especially in the United States, in recent decades and has moved to the forefront of the public debate. Our World in Data -Income Inequality