🗊Презентация Public Economics

Public Economics "Where I am not understood, it shall be concluded that something very useful and profound is couched underneath." J. Swift.

Requirements 4+ homeworks Project Final exam Distribution: 40-20-40 read before class no cheating

Textbooks J. Gruber "Public Finance and Public Policy," Worth Publishers, 2007 or later editions Russian translation also exists Аткинсон, Энтони Б., Стиглиц, Джозеф Э. (1995) "Лекции по экономической теории государственного сектора", Изд. Аспект Пресс, 1995.

Topics 1. Subject and methods of Public Finance. 2. Externalities. Applications to Environment and Health. 3. Public Goods. Optimal, private, and public provision. 4. Political economy. Voting. Privatization. Corruption. 5. Education. The role of government. Competition. Returns to education.

Topics (cont) 6. Social Insurance. Adverse selection and moral hazard. 7. Social security. Unemployment insurance. 8. Health Insurance. Public vs. Private. Health Care Reforms. 9. Income Distribution and Welfare programs. 10. Overview of taxation topics. 11. Local public goods. Tiebout model. 12. Fiscal federalism.

Introduction What is the proper role of government? Expenditure side: What services should the government provide? Taxation side: How should the government raise its money?

THE FOUR QUESTIONS OF PUBLIC FINANCE When should the government intervene in the economy? How might the government intervene? What is the effect of those interventions on economic outcomes? Why do governments choose to intervene in the way that they do?

When Should the Government Intervene in the Economy? Normally, private markets are competitive and efficient. Generally hard to justify government intervention in markets. But two main justifications are: Market failures Redistribution “Abnormal” situations: crises, disasters.

When Should the Government Intervene? Market failures “Problems” for markets: Externalities Private (Asymmetric) Information Small number of agents on one or both sides of the market / market (monopoly) power In the context of health insurance, some people are uninsured…

When Should the Government Intervene? Market failures In 2003, there were 45 million people without health insurance in the United States, or 15.6% of the population. Does it imply that the market does not work? Lack of insurance could cause negative externalities from contagious disease–the uninsured may not take account of their impact on others.

When Should the Government Intervene? Market failures Measles epidemic from 1989-1991, caused by low immunization rates for disadvantaged youth, was the problem. In 1960s: 3-4 m. cases, 500 deaths per year In 1963 vaccine introduced; by 1980 less than 3000 cases per year 1989-1991 a huge resurgence occurred: over 50000 cases and 123 deaths. What happened? Solution: Propaganda plus subsidy for vaccines for low-income families. Did it work? Immunization rates increased from 70% to 90% in 1995: less then 300 confirmed cases.

When Should the Government Intervene? Redistribution Government may care about both the size of the “economic pie” as well as the size of each person’s slice of that pie. For example, society may value an additional $1 of consumption by a poor person more highly than $1 of consumption by a rich person. Redistribution is the shifting of resources from some groups in society to others. Other reasons?

When Should the Government Intervene? Redistribution Of the uninsured, for example, roughly three-quarters are in families with incomes below the median income level in the United States. Society may feel that it is appropriate to redistribute from those with insurance (who tend to have higher incomes) to those without insurance (who tend to have lower incomes). Redistribution often involves efficiency losses. The act of redistribution can change a person’s behavior. Taxing the rich to distribute money to the poor could cause both groups to work less hard.

How Might the Government Intervene? If the government wants to intervene in a market, there are a number of options: Using the price mechanism with taxes or subsidies. Tax credits that lower the “effective price” of health insurance. Mandate that either individuals or firms provide the good. “Pay-or-play” mandates that require employers to provide health insurance, such as California’s Health Insurance Act. Public Provision The Medicare program for U.S. senior citizens. Public Financing of Private Provision Medicare prescription drug cards, where private companies administer the drug insurance.

What Are the Effects of Alternative Interventions? Much of the focus of empirical public finance is assessing the “direct” and “indirect” effects of government actions. Direct effects of government actions assume “no behavioral responses” and examine the intended consequences of those actions. Indirect effects arise because some people change their behavior in response to an intervention. This is sometimes called the “law of unintended consequences.”

What Are the Effects of Alternative Interventions? Expanding health insurance Direct effect of government provision of health insurance for the uninsured: Roughly 44 million Americans could be covered at cost of $88 billion. This would be the intent of the law. Indirect effect of such a policy: Some “crowd-out” of other sources of health insurance for the “free” government health insurance. Potentially large, because nearly 200 million Americans had private insurance in 2003. If 90 million people dropped private insurance, this would triple the cost to $268 billion. If only 10% of people (20 million) dropped insurance, the costs would rise to only $124 billion. Key question: How many of these people would respond? The theory does not provide guidance on magnitudes.

The Congressional Budget Office Congressional Budget Office (CBO) provides nonpartisan analyses needed for economic decisions of the government. Plays role as “scorekeeper” by estimating costs. Played a role in the defeat of the Clinton 1994 health care plan because of its estimate of the cost.

Why Do Governments Do What They Do? Governments do not simply behave as benign actors who intervene only because of market failure and redistribution. Tools of political economy helps us understand how governments make public policy decisions. Just as market failures can lead to market inefficiency, there are a host of government failures that lead to inappropriate government intervention.

Why Do Governments Do What They Do? For example, substantial variation across developed countries in health care delivery suggests efficiency and redistribution are not the only considerations. U.S.: Private health insurance Canada: National public health insurance Germany: Mandates private health coverage U.K.: Free national health care

FACTS ON GOVERNMENT The size and growth of government The “size” of the government is often measured relative to some benchmark, the most common one being GDP. It adjusts the size of government for inflation and population growth. 1930s: U.S. government spending 5% of GDP. 1970s onward: About 20% of GDP (Figure 1). Trend is similar in other countries until 1960s; U.S. government grew more slowly thereafter (Figure 2).

FACTS ON GOVERNMENT Decentralization and budgeting Other features Decentralization: In the United States., local, state and federal governments all spend substantial amounts of money (Figure 3). Spending, taxes, deficits, and debts: Federal government was close to a balanced budget until the mid-1970s (Figure 4).

FACTS ON GOVERNMENT Distribution of spending Other features Distribution of spending (Figure 7). In 1960: over half of federal government spending on defense (a classic “public good”). In 2001: Less than 20% of budget for defense, much more devoted to social insurance programs. Distribution in state and local spending has not changed as dramatically; education makes up the single largest component of spending.

FACTS ON GOVERNMENT Distribution of revenue sources Other features Distribution of revenue (Figure 8a and 8b). The individual income tax provides somewhat less than half of federal revenue and has remained roughly constant over time. Big decline in revenue from corporate income tax, now less than 10% of federal tax revenue. Reduction in excise taxes. Large growth in payroll taxes; now one-third of revenue.

FACTS ON GOVERNMENT Distribution of revenue sources Other features Distribution of revenue different at state/local level. Sales taxes Grants-in-aid (from federal government) Income taxes Property taxes Roughly equal in importance.

FACTS ON GOVERNMENT Regulatory role of the government Other features Regulatory role–does not usually show up as a government “cost” but does increase the reach of government. FDA regulates nearly 25% of consumer expenditures. OSHA regulates workplace safety at 7 million job sites. FCC, EPA.

Recap Four key questions in public finance When should the government intervene in the economy? How might the government intervene? What is the effect of those interventions on economic outcomes? Why do governments choose to intervene in the way that they do? How should the government intervene? What is the optimal size of the government?

Theoretical tools (recap): Income and substitution effects. Equivalent and compensating variations. Consumer surplus. What are the social objectives? Asymmetric information modeling: adverse selection and moral hazard. Mechanism design: auctions/procurement/voting schemes/optimal taxation. Dynamic optimization.

Spectrum auctions: Governments sell licenses to use a certain range of frequencies (electromagnetic spectrum). Many auctions. 3G are of particular interest. “All” European countries “at the same time’’ conducted such auctions. (2000-01) What are your expectations about the price per capita? Findings: UK 650 Euro/pc Total: 39 Bln Euros, 2.5% of GDP (!) Switzerland : Expectations 1000 Epc after UK auction; 400-600 Epc a week before. Result: 20 Euro/pc Problems: Low Reserve, “allowed collusion.”

Dynamic Optimal taxation. (Acemoglu, Golosov, Tsyvinski)

PUTTING THE TOOLS TO WORK TANF and labor supply among single mothers TANF is “Temporary Assistance for Needy Families.” Cash welfare for poor families, mainly single mothers. For example, in New Mexico, family of three receives $389 per month. Assume the two “goods” in utility maximization problem are leisure and food consumption. Whatever time is not devoted to leisure is spent working and earning money.

PUTTING THE TOOLS TO WORK Identifying the budget constraint What does the budget constraint look like? Assume the person can work up to 2000 hours per year, at a wage rate of $10 per hour, and that TANF is not yet in place. Price of food is $1 per unit.

PUTTING THE TOOLS TO WORK Identifying the budget constraint The “price” of one hour of leisure is the hourly wage rate. Creates a direct tradeoff between leisure and food: each hour of work brings her 10 units of food. Figure 12 illustrates this.

PUTTING THE TOOLS TO WORK The effect of TANF on the budget constraint Now, let’s introduce TANF into the framework. TANF has two key features: Benefit guarantee, G – amount that a recipient with $0 earnings gets. Benefit reduction rate,  – rate at which benefit guarantee falls as earnings increases.

PUTTING THE TOOLS TO WORK The effect of TANF on the budget constraint Assume that benefit guarantee, G, is $5,000 per year. Assume the benefit reduction rate, , is 50%. Figure 13 illustrates this.

PUTTING THE TOOLS TO WORK The effect of changes in the benefit guarantee One possible “policy experiment” is reducing the benefit guarantee level G. What happens when G falls from $5,000 to $3,000, holding all other parameters constant? Figure 14 illustrates this.

PUTTING THE TOOLS TO WORK How large will the labor supply response be? What is the expected labor supply response to such a policy change? It depends on where the single mother initially was on the budget constraint. If she initially earned less than $6,000 per year, the policy change involves only an income effect, not a substitution effect. Figure 15 illustrates this.

PUTTING THE TOOLS TO WORK How large will the labor supply response be? If she initially earned between $6,000 and $10,000 per year, the policy change involves both an income and substitution effect. The substitution and income effects go in the same direction. Figure 16 illustrates this.

PUTTING THE TOOLS TO WORK How large will the labor supply response be? Economic theory clearly suggests that such a benefit reduction will increase labor supply, but does not speak to the magnitude of the response. For example, some welfare recipients who were not initially working continue to choose not to work. Figure 17 illustrates this.

PUTTING THE TOOLS TO WORK How large will the labor supply response be? The actual magnitude of the labor supply response therefore depends on the preferences of various welfare recipients. To the extent the preferences are more like the first two cases, the larger the labor supply response. Thus, theory alone cannot say whether this policy change will increase labor supply, or by how much. Must analyze available data on single mothers to figure out the magnitude.

WELFARE IMPLICATIONS OF BENEFIT REDUCTIONS: TANF continued Efficiency and equity considerations in introducing or cutting TANF benefits. In a typical labor supply/labor demand framework, these changes shift the labor supply curve for single parents. Figure 27 illustrates this.

WELFARE IMPLICATIONS OF BENEFIT REDUCTIONS: TANF continued Different policies involve different deadweight loss triangles, but also different levels of redistribution for the poor. SWF helps determine the right policy for society. Is SWF the right objective? Why its maximization might lead to an outcome that is not efficient (why redistribution necessary)? How to do it in practice?