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Public Finance, 3rd Edition

Book Description

Public Finance remains the premier textbook on the normative theory of government policy, with the third edition propelling into the twenty-first century its examination of what government ought to be doing instead of what it is doing.

The welfare aspects of public economics receive extensively renewed examination in this third edition. With four new chapters and other significant revisions, it presents detailed and comprehensive coverage of theoretical literature, empirical work, environmental issues, social insurance, behavioral economics, and international tax issues. With increased emphasis on the European Union, it is rigid enough for use by PhDs while being accessible to students less well trained in math.

  • Moves skillfully from explaining normative theory to applying it in mathematically compact and precise terms
  • Adds new chapters on social insurance, medical care, social security pensions, behavioral public economics, and international public finance
  • Includes new pedagogical supplements, including end-of-chapter questions and answers
  • Emphasizes European examples

Table of Contents

  1. Cover image
  2. Title page
  3. Table of Contents
  4. Copyright
  5. Preface
  6. Part I. Introduction: The Content and Methodology of Public Sector Theory
    1. Chapter 1. Introduction to Normative Public Sector Theory
      1. The Fundamental Normative Questions
      2. Government Expenditure Theory: Philosophical Underpinnings
      3. Government Expenditure Theory and Market Failure
      4. The Government Sector in the United States
      5. The Theory of Taxation
      6. Fiscal Federalism
      7. The Theory of Public Choice
      8. Behavioral Public Finance
      9. Summary
    2. Chapter 2. A General Equilibrium Model for Public Sector Analysis
      1. A Baseline General Equilibrium Model
      2. Efficiency: The Pareto-Optimal Conditions
      3. Equity: The Social Welfare Function and the Optimal Distribution of Income
      4. Maximizing Social Welfare
      5. Policy Implications and Conclusions
    3. Chapter 3. First-Best and Second-Best Analyses and the Political Economy of Public Sector Economics
      1. Lump-Sum Redistributions and Public Sector Theory
      2. First-Best Analysis
      3. Second-Best Analysis
      4. Similarities Between First-Best and Second-Best Analyses
      5. The Political Economy of the Social Welfare Function
      6. Conclusion
  7. Part II. The Theory of Public Expenditures and Taxation: First-Best Analysis
    1. Introduction
    2. Chapter 4. The Social Welfare Function in Policy Analysis
      1. Social Welfare and the Distribution of Income: The Atkinson Framework
      2. Social Welfare and Consumption: The Jorgenson Analysis
      3. Social Welfare and Social Mobility
    3. Chapter 5. The Problem of Externalities—An Overview
      1. Policy-Relevant Externalities
      2. The Analysis of Externalities: Modeling Preliminaries
    4. Chapter 6. Consumption Externalities
      1. How Bad Can Externalities Be?
      2. The Worst of All Worlds—All Goods (Factors) Are Pure Public Goods (Factors)
      3. The Existence of At Least One Pure Private Good
      4. Nonexclusive Goods—The Samuelson Model
      5. Aggregate Externalities
    5. Chapter 7. Production Externalities
      1. The Condensed Model for Production Externalities
      2. Aggregate Production Externalities
      3. Concluding Comments: The Problem of Nonconvex Production Possibilities
    6. Chapter 8. An Application of Externality Theory: Global Warming
      1. Consumption–Production Externalities
      2. Legislating Pollution Standards
      3. Defensive Antipollution Strategies
      4. Long-Lived Externalities
    7. Chapter 9. The Theory of Decreasing Cost Production
      1. Decreasing Cost in General Equilibrium Analysis
      2. Reflections on U.S. Policy Regarding Decreasing Cost Services: The Public Interest in Equity and Efficiency
      3. Appendix: Returns to Scale, Homogeneity, and Decreasing Cost
    8. Chapter 10. The First-Best Theory of Taxation and Transfers
      1. Public Choice and Pareto-Optimal Redistribution
      2. Altruism, Free Riding, and Crowding out of Private Charity
      3. Other Motivations for Redistributive Transfers
    9. Chapter 11. Applying First-Best Principles of Taxation—What to Tax and How
      1. Designing Broad-Based Taxes: The Economic Objectives
      2. Ability to Pay: Theoretical Considerations
      3. Horizontal Equity
      4. Vertical Equity
      5. Reflections on the Haig–Simons Criterion in Practice: The Federal Personal Income Tax
      6. The Inflationary Bias against Income from Capital
      7. Taxing Realized Gains: Auerbach's Retrospective Taxation Proposal
      8. The Taxation of Human Capital
      9. Summary
  8. Part III. The Theory of Public Expenditures and Taxation: Second-Best Analysis
    1. Chapter 12. Introduction to Second-Best Analysis
      1. A Brief History of Second-Best Theory
      2. Philosophical and Methodological Underpinnings
      3. Preview of Part III
    2. Chapter 13. The Second-Best Theory of Taxation in One-Consumer Economies with Linear Production Technology
      1. General Equilibrium Price Models
      2. The Measurement of Loss from Distorting Taxes
      3. The Optimal Pattern of Commodity Taxes
      4. Substitutions Among Taxes: Implications For Welfare Loss
    3. Chapter 14. The Second-Best Theory of Taxation with General Production Technologies and Many Consumers
      1. A One-Consumer Economy with General Technology
      2. Many-Person Economies: Fixed Producer Prices
      3. Many-Person Economy with General Technology
      4. The Social Welfare Implications of Any Given Change in Taxes
    4. Chapter 15. Taxation under Asymmetric Information
      1. Lump-sum Redistributions and Private Information
      2. Redistribution through Commodity Taxations
      3. Optimal Taxation, Private Information, and Self-Selection Constraints
      4. Optimal Income Taxation
      5. Tax Evasion
      6. Concluding Remarks
    5. Chapter 16. The Theory and Measurement of Tax Incidence
      1. Tax Incidence: A Partial Equilibrium Analysis
      2. First-Best Theory, Second-Best Theory, and Tax Incidence
      3. Methodological Differences in the Measurement of Tax Incidence
      4. Theoretical Measures of Tax Incidence
      5. The Equivalence of General Taxes
      6. Measuring Tax Incidence: A Many-Consumer Economy
      7. The Harberger Analysis
      8. Important Modifications of the Harberger Model
    6. Chapter 17. Expenditure Incidence and Economy-Wide Incidence Studies
      1. The Incidence of Government Transfer Payments
      2. Tax and Expenditure Incidence with Decreasing-Cost Services
      3. Samuelsonian Nonexclusive Goods
      4. Economy-Wide Incidence Studies
      5. The Sources and Uses Approach
      6. Computable General Equilibrium Models of Tax Incidence
      7. Dynamic Tax Incidence
      8. Appendix
    7. Chapter 18. The Second-Best Theory of Public Expenditures: Overview
    8. Chapter 19. Transfer Payments and Private Information
      1. First-Best Insights
      2. Cash Transfers: Broad Based or Targeted?
      3. Private Information and In-Kind Transfers
    9. Chapter 20. Social Insurance: Medical Care
      1. The Demand for Insurance
      2. Without Insurance
      3. With Insurance
      4. Private or Asymmetric Information
      5. Moral Hazard
      6. The Competitive Outcome
      7. The Public Policy Response
      8. Ex Post Moral Hazard
      9. Deductibles and Co-payments
      10. The Value of Access
      11. Adverse Selection
      12. Ex Post versus Ex Ante Efficiency
      13. The Nature of Adverse Selection
      14. Advantageous Selection
      15. A Two-Policy Model
      16. Is an Equilibrium Possible?
      17. Policy Response to Adverse Selection
      18. U.S. Policies
      19. Medicare and Medicaid
      20. Patient Protection and Affordable Care Act
    10. Chapter 21. Social Insurance: Social Security
      1. The U.S. Social Security System
      2. Social Security as Social Insurance
      3. The Macroeconomic Effects of Social Security
      4. Social Security and Saving
      5. The Structure of the Economy: Consumption, Production, and Market Clearance
      6. Concluding Observations
    11. Chapter 22. Externalities in a Second-Best Environment
      1. The Second-Best Allocation of Samuelsonian Nonexclusive Goods
      2. The Coase Theorem, Bargaining, and Private Information
    12. Chapter 23. Decreasing Costs and the Theory of the Second-Best—The Boiteux Problem
      1. The Boiteux Problem: The Multiproduct Decreasing-Cost Firm
      2. Constrained Government Agencies
    13. Chapter 24. General Production Rules in a Second-Best Environment
      1. The Diamond–Mirrlees Problem: One-Consumer Economy
      2. Production Decisions with Nonoptimal Taxes
      3. Second-Best Production Rules When Equity Matters
      4. Concluding Comments
    14. Chapter 25. Behavioral Public Sector Economics
      1. The Behavioral Anomalies
      2. Prospect Theory: The Rejection of Expected Utility Maximization
      3. Present-Biased Preferences: Self-Control Issues
      4. Social Preferences
      5. Framing Effects or Context Dependence
      6. Mainstream Reactions
      7. Positive and Normative Public Sector Economics
      8. Prospect Theory
      9. Applying Prospect Theory
      10. Nudges and Standard Policy Prescriptions
      11. Standard Agents Only
      12. Behavioral Agents Only
      13. A Mixture of Standard and Behavioral Agents
      14. Can Mainstream and Behavioral Economic Theory Be Reconciled?
      15. Refinements
  9. Part IV. Fiscal Federalism
    1. Chapter 26. Optimal Federalism: Sorting the Functions of Government within the Fiscal Hierarchy
      1. The Potential for Incompatibilities and Destructive Competition
      2. Sorting the Functions of Government within the Fiscal Hierarchy
      3. Optimal Federalism and the Distribution Function
    2. Chapter 27. Optimal Federalism: The Sorting of People within the Fiscal Hierarchy
      1. The Modeling Dimensions
      2. Jurisdiction Formation in Accordance with the Theory of Clubs
      3. Fixed Communities and Housing Sites: Adding the Housing Market
      4. Anything is Possible
      5. Mobility and Redistribution
    3. Chapter 28. The Role of Grants-in-Aid in a Federalist System of Governments
      1. Optimal Federalism and Grants-in-Aid: Normative Analysis
      2. Alternative Design Criteria
      3. Estimating the Demand for State and Local Public Services
      4. The Response to Grants-in-Aid
    4. Chapter 29. International Public Finance
      1. The Taxation of Mobile Capital
      2. Summary
      3. Multinational Enterprises
      4. Concluding Observations
  10. Appendix
  11. Index