Syllabus Microeconomics 2 for EBE:

EBE:
Welfare Economics,
Economics, Fall 2010
Lecturer
Johannes Binswanger, j.binswanger@uvt.nl

Description of the course

This course provides an introduction to the field of Welfare Economics (often also called
Public Economics or Public Finance). You will learn in what instances letting markets work
will lead to the best outcomes for society and in what instances government intervention
can improve upon market outcomes. You will better understand how the government makes
decisions and why these decisions sometimes look erratic. Finally, you will learn about
various taxes.

Textbook/Readings
The textbook is

Rosen and Gayer, Public Finance, 9th international edition.

It should be available in the university bookshop Selexyz. In part of the course, we follow
the textbook quite closely. Below, I refer to the textbook simply as RG. For instance, RG
Ch. 1, 7-13 refers to pages 7-13 in Chapter 1 of the textbook.
In other parts, the course relies on academic articles. These will be provided on Blackboard.
Please print the respective articles and bring them to class.

Tutorial
The tutorial takes place on Friday 10.45 to 12.30 (in week 10 at 12.45 to 14.30, instead).
There is one tutorial (unlike initially announced on Blackboard). Participation in the tutorial
is mandatory. The tutorial consists of an active and a passive part. The active part consists
of: (1) debates where you apply your knowledge for giving a policy advice; (2) “active”
solution of end-of-chapter problems in the book and other problems. In the passive part, I
am solving some problems myself in front of you.
In the tutorial you will work in groups of two. You need to register for a group using the
group signup tool on Blackboard. To do so click on "Tools" on the left blue bar, then go to
"Group Signup" (last item in the central window frame). The rest is self-explaining. Please
sign up no later than Sept. 1!
Please note the frequent room changes for the tutorial!

Homework
There will be a written homework assignment in the form of a short essay on a policy
debate. The topic will be announced in October. The deadline is in November.

Exam
The (written) exam takes place on Dec 7 The exam is based on both the lecture and the
tutorial.

Grading
Your overall grade is determined as explained below. Let E denote the grade from the
exam, PG the participation grade from the tutorial, H the homework grade and PP
punishment points that will be assigned to members of a group that is supposed to present
in the tutorial in case that none of the members does show up (details to be explained in the
first tutorial). Your overall grade, OG, is equal to

OG = 0.7E + 0.2PG + 0.1H -PP

If PG > E and

OG = 0.9E + 0.1H -PP

if your participation grade is less than or equal to the grade from the exam. Thus, the
tutorial gives you the opportunity to improve upon your exam grade.
Lecture 1. Introduction to the course; welfare theorems (1)
Date: Aug 30,
Topics:
• Organization of the course
• Introduction to the field of Public Economics/Finance; why public economics as Micro
2; overview of the course.
• Public Finance and ideology (RG Ch. 1, 3-5),
• Size of government, expenditures, revenues (RG Ch. 1, 7-13).
• The welfare theorems - begin (RG Ch. 3).

Lecture 2. Welfare theorems (2); public goods

Date: Sept 6
Topics:
• Welfare theorems (RG Ch. 3)
− The first welfare theorem: Markets lead to efficiency (RG, 34-42)
− The second welfare theorem: A fair distribution does not require abandoning the
market mechanism. (RG, 42-46)
− Failures of the welfare theorems and the field of Public Economics (“Public
Economics is the field that deals with situations where the welfare theorems
fail”; RG, 46-48).
• Public goods (RG Ch. 4, skip Appendix))
− Definition relating to rivalry and excludability (RG 54-56).
− Efficient provision of public goods (RG 56-63)
− The free-rider problem (RG 63-64)
− Pros and cons of government provision of public goods (RG 64-68)

Lecture 3. Externalities (1)

Date: Sept 13
Topics:
• Externalities (RG Ch. 5)
− Definition of an externality (RG 74-75)
− Effects of negative externalities (RG 76-81)
− Using taxes and subsidies to address externalities (RG 84-87)
 − Emission fees and Cap- and Trade-programs (RG 87-101)
− The European ETS (slides)
− Can Catch Shares Prevent Fisheries Collapse? (Article, slides)

Lecture 4. Externalities (2), Political economy (1)

Date: Sept 20
Topic:
• Externalities: Leftover from Lecture 3
• Political Economy (RG Ch. 6)
− A primer on forms of governance (slides)
− Majority voting and the voting paradox (RG 110-113)
− The median voter (RG 113-114)
− Logrolling (RG 114-116)
− The Arrow impossibility theorem (RG 116-117)
− Representative democracy (RG 117-126, skip “Rent Seeking”)
− Comparing direct and representative democracy (slides)
− What non-economic factors determine votes (article, slides)
− Government growth (RG 127-132)

Lecture 5. Political economy (2), Cost-benefit analysis (1)

Date: Sept 27
Topics:
• Political economy: leftover from Lecture 4
• Cost-Benefit Analysis (RG Ch. 8, skip Appendix)
− Dealing with future costs and benefits: opportunity costs and discounting (RG 152-
162)
− Valuing public benefits and costs (RG 162-168)
− The biggest show of Cost Benefit Analysis: Climate Change and the Stern report
(slides)
− Contingent valuation methods (slides, articles)

Lecture 6. Cost-benefit analysis (2)

Date: Oct 4
Topics
 • Leftover from Lecture 5

Lecture 7. Income redistribution

Date: Oct 11
Topics:
• Income distribution: Conceptual issues
− Measuring income inequality and poverty (RG 257-261, slides).
− Rationales for income redistribution: (RG 261-268, slides, article).
− What makes people willing to support redistribution? (slides, article)
− Expenditure incidence (RG 268-272)

Lecture 8. The welfare state and measures against poverty

Date: Oct 25
Topics:
• Expenditures Programs for the poor and incentive problems(RG Ch. 13)
• Other elements of the welfare state (slides)
• The welfare state in the Netherlands (slides)

Lecture 9. Taxes and tax incidence

Date: Nov 1
Topics:
• Basics about taxes:
− Statutory vs. economic incidence, progressiveness (RG 303-306, slides)
• Tax incidence (RG Ch. 14)
− Tax incidence in partial equilibrium under perfect competition (RG 307-312)
− The Payroll Tax (RG 312-313)
− Capital taxation in a global economy (RG 313-314)
− Commodity taxation without competition (RG 314-317)
− Profit taxes (RG 317-319)
− Tax incidence in general equilibrium (slides)
• Taxation and efficiency (RG Ch. 15)
− Excess burden measurement with demand curves (RG, 337-338, 340-343, skip
formula 15.3)
• Practical issues of designing a tax system (RG Ch. 16)
 − Costs of running the tax system (RG 368-369)
− Tax avoidance and tax evasion (RG 369-375)
• Income taxation and labor supply (RG Ch. 18)
− How does labor supply react to an increase in taxes (RG 415-419, slides)
− The “Laffer curve” (RG 422-424, slides)

Lecture 10. The personal income tax (1)

Date: Nov 8
• Leftover from lecture 9
• The income tax in practice (RG Ch. 17, skip “Interest on State and Local Bonds”, 385-
386, also “Employer Contributions to Benefit Plans” up to “Gifts and Inheritances”,
389-390, “The Alternative Minimum Tax” and “Choice of Unit and the Marriage Tax”,
404-409. “State Income Taxes”, 410-411)
− Basic structure of an income tax (RG 380-382)
− Difficulties of defining income (RG 382-385)
− Capital gains (RG 386-388)
− Exemptions, deductions, tax expenditures (RG 390-398)
− Structure of tax rates (RG 398-401)
− Taxes and inflation (RG 402-404)
− Treatment of international income (RG 409-410)

Lecture 11. The personal income tax (2), Tax reform

Date: Nov 15
• Leftover from lecture 10
• Tax reform: cases, ideas, political aspects, e.g. negative income tax etc. Readings tba.

Lecture 12. Reserve. If time available then: Psychology, Biology and …

Politics”
Date: Nov 22
• Why do people disagree so much about politics? Are political attitudes hardwired?
(Articles, slides)
Lecture 13. Reserve
Date: Nov 29