Public Finance

Instructor: John
Hartman
Today: An introduction to Econ 130
Introduction to public finance
The role of government

First issue: Crashers

Current cap: 60 students

Crash list

Possibly over 60 students enrolled, due to extra enrollment

that occurred in early registration
You must be on the department wait list to be considered
for this class if you are not registered
I will hand out a crash list for you to fill out also

No add codes distributed until next week

Enrolled students get priority for seating
Later option for Econ 130

This class is scheduled to be offered in the fall

Before we begin

Remember that this is a small class Ask

questions if things are not clear
The syllabus is posted online See
http://econ.ucsb.edu/~hartman/
For most of you, attendance is important if
you want to get a good grade
If reading this size font is difficult, I urge you to sit near the front

Before we begin

I expect you to know the following tools

Calculus

Microeconomics

Econ 1, Econ 100A or 104A, Econ 100B or 104B

Macroeconomics (although not as important for public

finance)

Derivatives, integrals, partial derivatives

Econ 2, Econ 101 or 105

If you are lacking on any of these skills, please

make sure you are comfortable with these skills by
next week

Structure of learning

Read first
Lectures & problem solving in class
Do more problems on your own
Prepare for test

Some time in class to review

Come to office hours if needed

Additional office hours will likely be offered close to tests

Textbook for this class

Rosen/Gayer
Public Finance, 8th edition
Published by McGraw-Hill/Irwin

Reading the textbook

Main text and appendix is 560 pages

Too much for a 30-hour class

Look at syllabus for reading assignments

Maximum of 50 pages per week

Less than 300 pages overall

Office hours and review

sessions

Office: NH 2028
Office hours:

Mondays 10:45-11:45 am
Wednesdays 9:45-10:45 am

Additional office hours before test will be in a

larger classroom if demand warrants it

Tests

Three tests, as of now scheduled for:

Monday, April 27 (in lecture); 65 minutes

Wednesday, May 20 (in lecture); 65 minutes
Monday, June 8 (final, 4-6:30 pm); 140 minutes

Some problems on tests will be similar to

what we cover in practice problems
Some questions will require you to learn
material and think your way through

Extra credit

To encourage dialogue and discussion in

class, each student that makes at least one
intelligent question or comment during the
quarter in lecture will receive one percentage
point added to her or his final grade
In order to receive your extra credit, you will
need to include your name when you state
your question or comment

Lecture slides

I will post a subset of lecture slides on-line

Usually posted 2 days to a week before lecture

Tables and figures from your textbook will often
not be posted

On-line slides are not meant to be a

replacement to lecture

Grading

If you do not miss a test:

Two best tests count 40% each

Lowest test counts 20%
Exception: If your best test is the final, the final
will count 60% and the other two tests count 20%
each

If you do miss a test, check the syllabus for

details

Grading

I try to write tests so that the average score is

between 65-75%

Typical upper division Econ field class curve

In other words, dont worry if everything is not correct

20-25% A+, A, or A30-35% B+, B, or B35-40% C+, C, or CRemaining students: D+, D, D-, or F

However, I will reward the class if you score well as

a group

More on this class

Early on, I will lecture the entire time

Later on many lectures will be about 50-60
minutes, followed by problem solving
Most lectures will be devoted to a single topic

Some topics will require more than one lecture

A few lectures will cover multiple topics

Problems

Problems have been posted on the class

website for you to practice on
I will also do some problems at the end of
many lectures
As we get closer to each test, I will devote
some time to solving problems on the class
website

Today

An introduction to Econ 130

What will we cover over the next 10 weeks?

Introduction to public finance

The role of government

Organic and mechanistic views of government

Size of government
Tiebouts model

An introduction to Econ
130

This class covers four units, each with two

to five lectures

Unit 1: Introduction and Microeconomic tools

Unit 2: Public goods, externalities, and
government
Unit 3: Health care and income redistribution
Unit 4: An introduction to taxation

Unit 1 (begins today)

Introduction and Microeconomic tools

Chapter 1: Introduction to public finance and

government
Most of Chapter 2: Empirical tools
Part of Chapter 3: Economic theory tools
Most of Chapter 8: Cost-benefit tools
Part of Chapter 22: The Tiebout model

Unit 2

Public goods, externalities, and government

Chapter 4: Public goods

Chapter 5: Externalities
Chapter 6: Government and political economy
Chapter 7 & the end of Chapter 8: Government
spending on education

Unit 3

Health care and income redistribution

Chapter 9: Problems of insurance in the health

care market
Chapter 10: Governments role in health care
Most of Chapter 11: The structure of Social
Security; stresses caused by the baby boom
generation
Most of Chapter 12: Conceptual issues of income
redistribution
Most of Chapter 13: Programs for the poor

Unit 4

Primary and secondary effects of taxes

Most of Chapter 14: Taxation and partial

equilibrium
Part of Chapter 15: Excess burden
Other taxation topics from Chapters 17 and 18

Basic structure of the United States personal income tax

Rate structure of the United States personal income tax
Marriage neutrality of taxes

Before moving on

If you think that you are weak on your

Microeconomics skills, you should read the
Appendix at the end of the book or look at an
intermediate Microeconomics textbook

Introduction to public
finance

This class is meant to cover public finance to

students that have no direct background in the topic

Three topics will be covered today

Some knowledge on public goods and externalities is

useful, but not required
What is studied in a public finance class?
What kinds of views do people have about public finance?
Tiebouts model

Government will be addressed more in later lectures

Size of government will be covered in the next lecture

Growth of government will be covered in week 4

Public finance

Public finance, as defined by R/G (p. 2)

The field of economics that analyzes government

taxation and spending policies

Public finance, as described by Former

Czech Prime Minister Vaclav Klaus (From
R/G, p. 2)

Public finance is nothing else than a

sophisticated discussion of the relationship
between the individual and the state

Public finance

We will study topics in which many argue that

government intervention is justified

Public goods and markets with externalities

Subsidized education
Health care, Social Security, and income
redistribution

Public _____

There are at least two other terms that mean

the same thing as public finance

Public sector economics

Public economics

Although I may use the three terms

interchangeably to mean the same thing, I
will usually use the term public finance

What views do people have?

Different people have different views about

public finance

Organic view of government

Mechanistic view of government

Organic view of government

Government treats an entire society as a

natural organism

Each individual is part of the organism

The government is the heart

Although individual goals differ, some goals

are naturally needed for the societal
organism

Mechanistic view of
government

Government is needed for individuals to

pursue their individual goals

Invisible hand (Adam Smith)

Efficient markets under certain sets of conditions

Property rights and lack of violence needed to have
efficient markets

How much government beyond this is

debatable

Libertarian: Small government

Social democrats: Larger government needed

What this class does

Some analysis is done on a society-wide

scale

Social costs and benefits

Cost-benefit analysis on a nationwide scale

Other topics talk about individual analysis

Voting theory
Individual income taxes

Determining what is good

What is good to one person may be viewed

as bad as others
Lets do an activity to illustrate this

Everyone starts by standing up

I will show a statement
Stay standing if you agree with the statement
Sit down if you disagree with the statement

There is no right answer to any question

Time to stand up

Statement 1

I believe that reckless driving should be

stopped through government actions (such
as the use of police)

Remember: Stay standing if you agree, sit down

if you disagree

Statement 2

I think that government should build and

maintain roads and highways

Statement 3

I believe that each baby needs to be securely

buckled into a car seat while riding in a car, to
be enforced by the government

Statement 4

I believe that each person in a moving car

needs a seat belt on, to be enforced by the
government

Statement 5

I believe each driver needs liability insurance,

to be enforced by the government

Statement 6

I believe the government has a right to

regulate when each person can use the
roads, and the route they take, in order to
control traffic patterns

Statement 7

I believe that the government has a right to

prevent pilots of commercial aircraft from
using a cell phone while actively flying

Statement 8

I believe that the government has a right to

prevent train drivers from sending text
messages while driving the train

Statement 9

I believe that the government has a right to

prevent car drivers from sending text
messages while driving the train

Statement 10

I believe that the government has a right to

prevent car drivers from making calls on a
cell phone while driving

Statement 11

I believe that the government should charge

a 70% tax rate on all income I earn in my
lifetime

Does everyone agree?

No

Different people have different opinions about

what the government should do

Experts often disagree about what

government should do
We will often assume that the experts in other
disciplines have gotten costs and benefits
right

What other reasons should

there be govt?

Many communities form in order to provide a

wide array of benefits to the community
members

Sometimes these communities are in the form of

private clubs
Other communities incorporate into cities

Charles Tiebout, in 1956 published a paper arguing that

people shop for the city to meet their tastes for cityoffered amenities

The Tiebout model

People rarely leave the US due to

government policy
Mobility in the US due to government policy is
substantial
Tiebout makes many assumptions in his
model

Not a perfect description of the real world

Gives a good idea of how people decide what
community to live in

Tiebouts assumptions

Government activities generate no externalities

Individuals are completely mobile
People have perfect information with respect to each
communitys public services and taxes
There are enough different communities so that each
individual can find one with public services meeting her
demands
The cost per unit of public services is constant so that if the
quantity of public services doubles, the total cost also doubles
Public services are financed by a proportional property tax
Communities can enact exclusionary zoning lawsstatutes
that prohibit certain uses of land

Advantages with the Tiebout

model

Tailoring outputs to local taxes

Each person or family lives in a community they

like

One size does not fit all

Tastes and preferences differ from person to person

Fostering intergovernmental competition

People in government generally want people to

live in their community

Advantages with the Tiebout

model

Experimentation and innovation in locally

provided goods and services

States and cities can try new programs

These studies often result in statistical studies by
economists
The analyzed results lead to good information for
governments throughout the nation

Main disadvantage of the

Tiebout model

Not an exact description of the real world

Moving costs
No one city is a perfect match for someones most
desired preference
Some parents send their kids to private school,
despite the availability of public schools

Other issues with the Tiebout

model

Externalities

Scale economies in provision of public goods

Per-person cost often decreases as the number of

users increases

Inefficient tax systems

Both negative and positive

Many public goods are not at the local level

Different states and cities often compete to get

large businesses to locate in their area

Scale economies in tax collection

Summary: Introduction to
public finance

Many topics studied in public finance

Topics related to government intervention

Tax-related topics

Different viewpoints about government

Organic view

Mechanistic view

Society is an organism
Government used to reach individual goals

Tiebout model: Find a community that is a

good fit for the amenities that you want

The rest of this week

For Wednesday

Read the syllabus, Chapter 1, and pages 17-28

and 508-514

Wednesdays lecture

Expected value
Marginal analysis
Empirical tools in microeconomics

Some ground rules at the end of

lecture

I will always try to be done by 3:15 pm

In return, I expect your attention until the final
slide
If you must leave early:

Please do so no later than 3:05 pm

Sit near an exit
Leave quickly and quietly

Example of final slide

Some ground rules at the end of

lecture

After many of the lectures

Problem solving
Your questions (especially near test time)
Review of old test questions

You are welcome to leave after lecture is

finished if I do problems

Please do so quickly and quietly

With the remaining time

today

Issues with crashers

Any administrative issues
Other questions

Have a good day