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Regular version of the site

Public Economics

Academic Year
Instruction in English
ECTS credits
Course type:
Compulsory course
1 year, 1, 2 module


Course Syllabus


The course in Public Economics covers basic issues including a role of government in modern market economies, market failures and public goods, public choice, equity-efficiency trade-offs, taxation principles, public expenditure programmes, fiscal federalism. It combines theoretical models with empirical evidence. Objectives and instruments of public policies are demonstrated with examples of voting and rent-seeking, behavior of bureaucracy, models of taxation design, welfare state problems, including healthcare, pension systems and other social endowments. General principles of cost-benefit analysis are introduced. The course ends with the review of the main features of constitutional political economy, discussion of underlying roots of increasing government size and possible solutions for its reduction
Learning Objectives

Learning Objectives

  • Formation of the knowledge of basic ideas and concepts of public economics
  • Acquaintance with the main problems of modern public policy and the ways to solve them
  • Formation of the ability to discuss and defend one’s own point of view on public policy issues
Expected Learning Outcomes

Expected Learning Outcomes

  • Students are able to evaluate the role and size of the government
  • Students should be able to explain the nature and economic effects of public goods and club goods with regard to the public policies
  • Students are able to explain the nature and economic effects of externalities and formulate policy with regard to the resulting market failures.
  • Students are able to explain and assess the properties of majority voting, optimal voting rules, effects of log-rolling and logic of collective action.
  • Students are able to explain and evaluate the properties and effects of rent-seeking behavior, corruption and bureaucracy.
  • Students are able to calculate inequality, explain its consequences and formulate government policy against poverty
  • Students are able to classify taxes, to explain and calculate tax incidence and deadweight loss, to formulate the Ramsey rule and determine the problem of optimal taxation.
  • Students are able to explain social welfare functions, adverse selection and moral hazard, to classify the types of social insurance and determine their main problems.
  • Students are able to compare money and in-kind transfers, to explain targeted entitlements and incentives, to argue the problems of universal basic income, to determine sustainability of intergenerational income transfers and the peculiar properties of the market for health insurance.
  • Students are able to explain the role of tax competition, fiscal federalism and intergovernmental grants and offer appropriate policy measures.
  • Students are able to explain the concepts of the government growth and the role of constitutional constraints on the government.
Course Contents

Course Contents

  • Public sector in modern economics
    What is the public sector? Government in a narrow sense. Governmental budget, special funds, institutions and organizations. How to measure the government? Public spending as a share of GDP. Public employment. Government size and growth in modern economies: empirical evidence.
  • Public Goods & Club Goods
    Types of Public Goods. Properties of public goods. Voluntary personal payments for public goods. Weakest-link and volunteer-type public goods. An efficient economy with public and private goods. Information and Public Goods. Can governments solve the information problem? The Clarke tax and truthful self-reporting. User prices. Club goods. The Tiebout locational-choice mechanism
  • Market Corrections: Externalities & Paternalism
    Externalities. Private resolution attributes of externalities Private ownership solutions. The Coase theorem. Resolution of externalities through personal behavior. Public Policies and Externalities. The case for government. The means of public policy Political decisions. Global externalities and international agreements. Paternalistic Public Policies. Cases of paternalism and hyperbolic discounting. The limits of intuition: framing and bounded rationality. Community values and locational choice. Interdependent utilities and censorship.
  • Public Choice: Voting
    The Median Voter and Majority Voting. Voting and efficient public spending. The Condorcet winner and efficient public-spending proposals.. Logrolling. Political Competition. Direct and representative democracy . Political competition with a single issue . Political competition with multiple issues. Systems of voting and the Condorcet winner. Arrow impossibility theorem. The failure of social choice. Voting on Income Redistribution. Majority voting and income redistribution. The franchise and voting on income redistribution. The decision to vote. Who benefits from income redistribution?
  • Public Choice: Rent-Seeking, Interest Groups and Bureaucracy
    Rent-seeking. Rent-seeking and non-productive behavior. Rent-seeking and social losses. Models of rent-seeking behavior. Corruption. Interest groups. Interest groups and lobbying. Free-rider problem in the interest groups. The size of the interest group and effectiveness of lobbying. Interest groups and economic development. Bureaucracy. The budget-maximizing bureaucrat: Niskanen model and extensions. The slack-maximizing bureaucrat. The government as Leviathan. Dictatorship.
  • Inequality and Poverty
    Measuring Income. Equivalence Scales. Inequality Measurement: Statistical Measures, Inequality and Welfare. Poverty: Poverty and Poverty Line, Poverty Measures.
  • Taxation
    Efficient tax-financed public spending. Tax revenue and the Laffer curve. Who pays a tax?. Tax incidence. The excess burden with substitution and income effects. Taxes on international trade. Tax Evasion and the Shadow Economy. Tax evasion as free riding. The behavior of the tax authorities. The shadow economy. Inefficiency and illegality in a shadow economy. Optimal Taxation. The Ramsey rule for efficient taxation. The equal-sacrifice principle for socially just taxation. Optimal income taxation. Political and social objectives. Capital and Other Tax Bases. Taxation of income from capital. Corporate or company taxation. An expenditure tax and other taxes.
  • Social Justice
    Social Justice and Insurance. Uncertain incomes and the demand for insurance. Social welfare functions and social insurance contracts. Choice of social insurance behind a veil of ignorance. Adverse selection and time inconsistency. Moral Hazard. Moral hazard and insurance. Behavior without moral hazard. Moral hazard and adverse selection in diverse populations. Public-policy responses to moral hazard. Social Justice without Government. Altruism and charity. Experimental evidence on norms of fairness. Intergenerational economic mobility. Global social justice
  • Entitlements
    The Attributes and Consequences of Entitlements. Money and in-kind transfers. Education and other rejected entitlements. Is equal opportunity achievable? Targeted entitlements and incentives. Universal basic income. The Entitlement to Income during Old Age. An intergenerational social contract. Sustainability of intergenerational income transfers. Personal voluntary provision for retirement. Transition from intergenerational dependence. The Entitlement to Health Care and Health Insurance. The problem of containing health costs. The market for health insurance. Socialized medicine. Health-care choices
  • Fiscal Federalism
    Efficiency, social justice, and fiscal federalism. Tax competition. Political behavior. Voting and fiscal federalism. Intergovernmental grants under federalism. The size of the government under federalism.
  • Government’s Growth and Constitutional Political Economy
    Size and growth of the government. Explanations for the state and growth of the government. Wagner law. Baumol effect. Meltzer and Richard model. Interests groups, bureaucracy and growth of the government. Government size and economic performance. Constitutional economics. Constitutional contract. Constitutional constraints. Government borrowing and constitutional restraint on government borrowing.
Assessment Elements

Assessment Elements

  • non-blocking Test 1
  • non-blocking Test
    See details of the evaluation rules in the attached file "sampleexam1"
  • non-blocking Home task
    Preparation of the report and its presentation at the seminar
  • non-blocking Test 2
    See details of the evaluation in the attached file "Testsample2"
  • non-blocking Test final
    See the details of the evaluation in the attached file "Testfinal"
Interim Assessment

Interim Assessment

  • Interim assessment (1 module)
    0.4 * Test + 0.6 * Test 1
  • Interim assessment (2 module)
    0.3 * Home task + 0.2 * Test 2 + 0.5 * Test final


Recommended Core Bibliography

  • Hindriks, J., & Myles, G. D. (2013). Intermediate Public Economics (Vol. Second edition). Cambridge, Massachusetts: The MIT Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=564828

Recommended Additional Bibliography

  • Araral, E. (2013). Routledge Handbook of Public Policy. New York: Routledge. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=513571
  • Goodin, R., Moran, M., & Rein, M. (2015). The Oxford handbook of public policy. Australia, Australia/Oceania: Oxford University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.3A27B9A0