Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxvii

CHAPTER 1 Why Study Public Finance? . . . . . . . . . . . . . . . . 1 PART I

1.1 The Four Questions of Public Finance . . . . . . . . . . . . . . . . 3 Introduction
When Should the Government Intervene in the Economy? 3 and
Application: The Measles Epidemic of 19891991 5
How Might the Government Intervene? 6
Background
What Are the Effects of Alternative Interventions? 7
Application: The Congressional Budget Office: Government Scorekeepers 8
Why Do Governments Do What They Do? 9

1.2 Why Study Public Finance? Facts on Government in the United

States and Around the World . . . . . . . . . . . . . . . . . . . . . . . 10
The Size and Growth of Government 10
Decentralization 12
Spending, Taxes, Deficits, and Debts 12
Distribution of Spending 13
Distribution of Revenue Sources 17
Regulatory Role of the Government 19

1.3 Why Study Public Finance Now? Policy Debates over Social
Security, Health Care, and Education . . . . . . . . . . . . . . . . . . . 20
Social Security 20
Health Care 21
Education 21

1.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

CHAPTER 2 Theoretical Tools of Public Finance . . . . . . . . . . 25

2.1 Constrained Utility Maximization . . . . . . . . . . . . . . . . . . 26
Preferences and Indifference Curves 27
Utility Mapping of Preferences 29
Budget Constraints 31
Putting It All Together: Constrained Choice 33
The Effects of Price Changes: Substitution and Income Effects 35

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