lecture 1: introduction to public economics · theories of state growth ... welfare economics roles...

Lecture 1:Introduction to

Public Economics

Antoine Bozio

Introduction

Public economics

Why choose PublicEcon ?

History of the field

Course outline

I. Public spendingand taxation

Early history

Growth of the State

Theories of Stategrowth

Facts on spending

Facts on taxation

II. Normativetheories of socialjustice

Normative approach

Theories of socialjustice

Social welfarefunctions

III. Rationales forGov. Intervention

Welfare economics

Roles of Government

References

Lecture 1: Introduction to

Public Economics

Antoine Bozio

Paris School of Economics (PSE)

Ecole des hautes etudes en sciences sociales (EHESS)

Master APE and PPDParis – September 2017

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Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Practical Informations

• One course, three professors• Antoine Bozio• Julien Grenet• Thomas Piketty

• Related courses at PSE• Economic History (Thomas Piketty)• Optimal Taxation (Stephane Gauthier)• Ageing and Public Policy (Antoine Bozio)

• How to reach me ?• E-mail : [email protected]• Office Hours : Tuesday, 9.30-10.30am, Campus

Jourdan, Office R3-15• Please send an email to make sure I’m there

2 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Practical Informations

• Reading list in the syllabus• Articles with * are mandatory reading• Feed your intellectual curiosity• Do read !

• Ideas for master thesis• Plenty of interesting subjects• Come early to discuss

• Evaluation• Sit-down exam at the end of term• Material : slides and articles with *• Example of past exams on the web site

3 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

What is Public Economics ?

• What’s in a name ?• “Political economy” (18th c.)• “Public finance” (19th c.)• “Public economics” (1960s)

• Public finance vs public economics• In the U.S., still “public finance”, but very different

from finances publiques• Public economics is about the economics of the

public sector (cf. German Staatswirtschaft)

• Aiming to answer two types of questions :

(i) How do government policies affect the economy ?(positive approach)

(ii) How should government policies be designed toattain certain objectives ? (normative approach)

4 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Why choose Public Economics ?

“I admit to more than only a scientific motivation ;intelligent and civilized conduct of government and thedelineation of its responsibilities are at the heart ofdemocracy. (...) [It] requires an understanding of theeconomic relations involved ; and the economist, byaiding in this understanding, may hope to contribute toa better society.”

Richard Musgrave, preface to The Theory of PublicFinance. A Study in Public Economy (1959)

5 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Why choose Public Economics ?

1 Relevance• Public economics is about improving economic

welfare• Public economics is about good government• Public policies affect millions of people

2 A dynamic academic field• At the frontier in applied microeconomics :

cf. “credibility revolution” (Angrist and Pischke,2010)

• Tight integration of theory and data• Large use of big data• Strong interactions with other fields : labour,

behavioural economics, I.O., macro, etc.

6 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Empirical methods in public economics1 Quasi-experimental methods

• Variety of methods : DiD, event-studies, RDD, RKD,bunching, etc.

• Emphasis on non-parametric graphical techniques :“show me the graph !”

• Public economics is a good way to learn practicallessons in applied econometrics

2 Sufficient statistics approach• Structural vs reduced-form debate (Rosenzweig and

Wolpin, 2000)• Sufficient statistics : theory is used to derived

formulas based on empirical estimates (Chetty, 2009)

3 Big data• Large datasets have transformed empirical research

– Scanner data on consumer purchases– Administrative tax data– Administrative social security data

7 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 1: Use of Survey Data in top Journals, 1980–2010

Source : Chetty and Bruich (2012), Public Economics Lectures.Notes : “Survey” datasets refer to micro surveys such as the CPS or SIPP and do not include sur-veys designed by researchers for their study. Sample excludes studies whose primary data source is fromdeveloping countries.

8 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 2: Use of Admin Data in top Journals, 1980–2010

Source : Chetty and Bruich (2012), Public Economics Lectures.Notes : “Administrative” datasets refer to any dataset that was collected without directly surveying indi-viduals (e.g., scanner data, stock prices, school district records, social security records). Sample excludesstudies whose primary data source is from developing countries.

9 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

A broad set of skills required

• Moral philosophy• What is justice ? What is fair ?

• Institutional knowledge• Government policies are complex• Details matter

• Economic theory• Welfare economics : micro, macro, IO, etc.• Optimal tax theory

• Empirical methods• Reduced form vs structural approaches• Ex-ante vs ex-post policy evaluations

10 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Historic overview of the field

• Political Economy in the 18th c.• Adam Smith, John Stuart Mill, David Ricardo, Karl

Marx, etc. (see Musgrave, 1985)• Tariffs policy (international trade)• Public goods (A. Smith)• Taxation (Physiocrats, Mill)

• Adam Smith in The Wealth of nations (1776)

• “Canons of taxation”

1 Equality2 Certainty3 Convenience of

payment4 Economy of

collection

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Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

National traditions of public finance• German school

• Dual economy Staatswirtschaft vs Privatwirtschaft• Economists more favorable to public sector, so-called

pulpit socialists (Kathedersozialismus)e.g., Werner Sombart, Adolph Wagner

• French school• Engineers working in public utilities (Ponts, Mines,

EDF, etc.)• Marginal calculus, public sector pricing, optimal

taxatione.g., Jules Dupuit, Rene Roy, Maurice Allais, MarcelBoiteux (See Kolm, 2010)

• Italian school• Marginal utility• Panteleoni, de Viti de Marco (See Fossati, 2010)

• Swedish school• Wicksell, Lindahl

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Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Historic overview of the field

• Welfare economics• See overview by Dreze (1995)• Development of public economics with Musgrave and

Samuelson in the 1950s• Theoretical progress with mathematical analysis

• Three “branches” of government (Musgrave1959)

1 Resource allocation to address market failures2 Income redistribution3 Macroeconomic stabilization

• Recent developments• Split with macroeconomics• Focus on empirical approaches

13 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Course outline

1 Introduction to public economics [A. Bozio]

2 Tools of welfare analysis [J. Grenet]

3 Externalities [J. Grenet]

4 Public good [J. Grenet]

5 Commodity taxation [A. Bozio]

6 Labour income taxation [A. Bozio]


8 Preferences aggregation and intertemporal justice [T.Piketty]

9 Wealth and property taxation [T. Piketty]

10 Optimal taxation of capital [T. Piketty]

11 Social insurance [J. Grenet]

12 Corporate taxation [A. Bozio]

14 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

What we do not cover

• Economics of property rights

• International aspects of taxation

• Local public goods

• Local taxation

• Public sector pricing and production

• Taxation/subsidies of housing

• Tax administration issues

• Cost-benefit analysis

• Political economy of taxation/spending

15 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Lecture outline

I. Public spending and taxation

II. Normative theories of social justice

III. Rationales of government interventions

16 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

I. Public spending and taxation

1 Early history

2 Growth of the State

3 Theories aiming at explaining growth of the State

4 Background facts on public spending

5 Background facts on public taxation

17 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Early history

• Funding the army• Most public spending before 19th c. is military

spending• To fund the army : plundering, forced labor,

enslavement, etc.

• The invention of taxes• Taxes are a “liberal invention” (Ardant, 1971)• Emergence of legal practices to state what is due to

the ruler

• The discovery of Genghis KhanGenghis Khan (1162-1227),Kansu campaignWhether to exterminateor to tax ?The advices of Yelu Chucai.

18 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

The first taxes

• As old as writing• Mesopotamia : Sumerian tablets (2500 BC)• Egypt : in-kind taxes on farm production ; tax

complaints ; tax shelters etc.

Scribes registering in-kind taxes in Egypt. Tomb of Menna (2000 BC).

• Tax what you can see• Production taxes• Import duties• Property taxes

19 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

The consent to taxes• England’s magna carta (1215)

• King John of England agreed to his barons : no newtaxes without the consent of Parliament

• Boston tea party (1773)• Taxes on tea from the British Crown led to American

independence war

Boston tea party, “no taxation without representation”, US 1773.Source : John Gilmary Shea, The Story of a Great Nation (1886) ; credits from FCIT

http ://etc.usf.edu/clipart

• The French Revolution (1789)• Louis XVI of France gathered an assembly to raise

tax which led to the French Revolution20 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Growth of the State

• Minimal state in the 19th c.• Public spending ≈ 10% of GDP• Almost no social spending

• Huge growth in the 20th c.• Public spending today ≈ 40% of GDP• In some European countries (e.g. France, Sweden)

over 50% GDP• Huge growth of size of government during the 20th

century, with a strong acceleration during the period1960-1980

• See Lindert Growing Public (2004) for detaileddocumentation about this expansion

21 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 3: Public Spending (% of GDP), 1870-2014

0%

10%

20%

30%

40%

50%

60%

70%

80%

1860 1880 1900 1920 1940 1960 1980 2000 2020

Sweden

France

Germany

United Kingdom

United States

Japan

Source : Bozio and Grenet (2010), figure 1.Tanzi and Schuknecht (2000) for period 1870-1960 ; OECD Historical Statistics (2001) for period 1968-1988 ; OECD.Stat for period 1989-2014.

22 / 93

http://assets.cambridge.org/052166/2915/sample/0521662915wsn01.pdf

http://www.oecd-ilibrary.org/economics/oecd-historical-statistics_19962061

http://stats.oecd.org/


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Wars as driving force ?

• Wars lead to large increases in public spending• WWI : enormous spending for European countries• WWII : U.S. federal spending 9.6% GDP in 1940, to

42.7% in 1944• Often funded with mixed of public debt and taxes

• Higher taxes during war times• Napoleonic wars led to the creation of income taxes

in the UK (1802)• WWI : taxes are increased (the top marginal income

tax rate 77% in 1918)• After WWII : UK top marginal tax rate 97.5% (on

unearned income), US 94%

• Post-war needs• Reconstructions, public investment, etc.• But war does not explain well the 1960s growth

23 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 4: Social Spending (% of GDP), 1880-1930

0%

1%

2%

3%

4%

5%

1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930

France

Germany

Japan

Sweden

United Kingdom

United States

Denmark

Source : Lindert (2004), table 1.2, p. 12.Notes : Social spending includes welfare, unemployment, pensions, health and housing subsidies.

24 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 5: Social Spending (% of GDP), 1880-2016

0%

5%

10%

15%

20%

25%

30%

35%

1880 1900 1920 1940 1960 1980 2000 2020

France

Germany

Japan

Sweden

United Kingdom

United States

Denmark

Source : Lindert (2004) for period 1880-1970 ; OECD Social Expenditures for period 1980-2016.

25 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

The rise of the social State

• Emergence of welfare states• Bismarck’s social insurances in Germany (1883)• Beveridge National insurance plan (1941) in the UK• Securite sociale in France (1945)

• Variations in welfare states• Different models of welfare states (Esping-Andersen,

1990)• Social insurance vs means-tested benefits• Public social insurance spending explains a large part

of overall differences in public spending (notablypension spending)

26 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Retreat or stabilization ?

• The Thatcherite revolution (1980s)• Cut in income taxes• Followed in the US by Reagan, and later in Europe• Slight reversal with Clinton and Blair, but not

much : new consensus ?

• Globalization• Higher mobility of capital and labour• Tax competition

• Financial crisis (2008-9)• Increased public debt• Increased taxation and reduction in public spending ?

• Population ageing• Increased life expectancy• Increased health spending

27 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Larger view of public interventions

• Narrow focus of public economics• Public spending and taxation

• Overlooked aspects of Government• Political rights, civil rights, political regimes• Property regimes, Workers’ rights, Labour law• Monetary regimes

• Where is the State biggest ? China vs Denmark• Public spending : 27% GDP vs 57% GDP• Large public ownership of firms vs little

28 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Theories of State growth

• A political process• Taxes reflect the evolution of states• Taxes reflect the political process• Taxes are influenced by moral values

• Technical constraints• Ability to tax depends on the development of the

economy• Technical innovations (money, IT...)

• External constraints• Wars• Macroeconomic shocks• Globalization

29 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Growth of the State literature

1 Wagner’s law (Adolph Wagner (1835-1917))• Demand for public goods grows with income

(elasticity > 1)

2 Baumol’s cost disease (Baumol 1967)• Public services are labour intensive• Cost to provide them will increase faster than prices

3 “Ratchet effect theory” (Peacock and Wiseman1961)

• Wars increase government spending and taxation• Government’s intervention is not reversed

4 Leviathan theory (Brennan and Buchanan 1980)

• Governments are controlled by self-interestedpolitician-bureaucrats

30 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Growth of the State literature

5 Political economy• Democratization, increased political power of the

poor• Increased demand for public goods, redistribution

etc.• Public spending changes matches changes in those

with voice (Lindert, 2004)

6 Technology and enforcement (Kleven, Kreinerand Saez 2009)

• Development of firm accountancy, computerization• Third party reporting (banks, employers, VAT)• Case of Nordic countries (Kleven, 2014)

31 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 6: Evasion by Fraction of Income Self-Reported inDenmark

Source : Kleven (2014), Fig. 1, from work based on Kleven, Knudsen, Kreiner, Pedersen, and Saez(2011).

32 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Background Facts : Distribution of

Spending

• United Nations’ Classification of the functions ofgovernment (COFOC) :

• Defence• Public order and safety• General public services• Economic affairs• Social Protection• Health• Education• Housing and communities amenities• Recreation and culture• Environment protection

33 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 7: Government Spending by Function in the U.S. :2010 vs. 1960

Defence

34.7%

Public order

and Safety

3.6%

General Public Services

14.1%

Economic

Affairs

9.7%

Social protection

19.2%

Health

4.5%

Education

13.1%

Housing and Community

Amenities

0.7%

Recreation and Culture

0.5%

(a) 1960

Defence

13.3%

Public order

and Safety

6.2%


12.9%

Economic

Affairs

6.0%Social protection

24.8%

Health

20.7%

Education

14.5%


Amenities

0.8%


0.6%

(b) 2010

Source : Bureau of Economic Analysis, NIPA Table 3.16

34 / 93

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=119&Freq=Year&FirstYear=1960&LastYear=2010


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 8: Government Spending by Function : France,U.S., South Korea (2010)

Defence

3.7%

Public order

and Safety

3.0%

General

Public Services

12.1%

Economic

Affairs

6.1%

Social protection

42.7%

Health

14.1%

Education

10.6%

Housing and

Community

Amenities

3.3%


2.6%

Environment Protection

1.8%

(a) France

Defence

13.3%

Public order

and Safety

6.2%


12.9%

Economic

Affairs


24.8%

Health

20.7%

Education

14.5%


Amenities

0.8%


0.6%

(b) U.S.

Defence

8.5%

Public order

and Safety

4.1%


14.1%

Economic

Affairs


12.4%

Health

13.1%

Education

15.8%

Housing and

Community

Amenities

4.2%


2.5%Environment Protection

4.2%

(c) South Korea

Sources : Bureau of Economic Analysis (NIPA Table 3.16) ; Eurostat

(COFOG) ; OECD.Stat (COFOG)

35 / 93

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=119&Freq=Year&FirstYear=1960&LastYear=2010

http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_a_exp

http://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE11


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Background Facts on Taxation

• Growing share of government revenue• From less than 10% in 1880 to 25-30% in 1960• Between 1965 and 2010 in the OECD area as a

whole, the tax burden has risen from 25.5% to33.8% of GDP

• But large dispersion in 1970s-80s• Stabilization of low tax countries around 25% GDP

(US, Japan)• Mid-level for UK, Germany around 35%• Higher level for Nordic and France, around 45%

36 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 9: Tax Revenue (as % of GDP), 1870-2014

0%

10%

20%

30%

40%

50%

1860 1880 1900 1920 1940 1960 1980 2000 2020

Sweden

France

United Kingdom

United States

Source : Piketty (2013) for France ; Kleven, Kreiner and Saez (2014), Fig. 2 for UK, US and Sweden,based on Flora (1983) ; OECD Revenues Statistics since 1965.

37 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Tax burden as a share of GDP

30%

40%

50%

60%

European Union (EU15)

United‐States

0%

10%

20%

1955 1965 1975 1985 1995 2005

Japan

Sources : OECD Tax Revenues (2008)

38 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References


30%

40%

50%

60%

Sweden


Denmark Finland

0%

10%

20%

1955 1965 1975 1985 1995 2005


39 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References


30%

40%

50%

60%

Italy

France


0%

10%

20%

1955 1965 1975 1985 1995 2005


40 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References


30%

40%

50%

60%

European Union (EU15)Spain

GreecePortugal

0%

10%

20%

1955 1965 1975 1985 1995 2005

Portugal


41 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References


30%

40%

50%

60%

UK

GermanyEuropean Union (EU15)

Netherlands

0%

10%

20%

1955 1965 1975 1985 1995 2005


42 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Issues around the measure of tax burden

1 Not a measure of governments’ intervention• High tax countries can have low borrowing• Low tax countries can have high regulation

2 Not a measure of individual’s tax burden• Compulsory pension systems (private or public)• Progressivity of the tax system

3 Other measurement issues• Use of tax expenditures• Taxes paid by Government to itself• Taxes paid on transfer payments• See Adema et al. (2011) for details assessment of

OECD data

43 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

What constitutes a tax ?

• OECD definition : “Compulsory unrequitedpayments to general government”

• A tax or a user fee ?• User fee : a fee to use a service

e.g. road fees, passport/ID fee...• TV licence : tax or user fee ?

• Pension contributions : tax or mandatorysavings ?

• UK’s National Insurance Contribution• Sweden’s notional accounts• Singapore’s Central Provient Fund (CPF)

44 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Taxonomy of taxes

Indirect taxes

• General consumption taxes• Custom duties• Sales tax• VAT : Value-Added Tax

• Specific goods• Excise tax• Taxes on transactions

• Environmental taxes• Carbon taxes• Taxes on vehicle fuel• Taxes on flights

45 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Taxonomy of taxes

Direct taxes

• Individual income• Payroll tax• Income tax• Capital gains tax (CGT)

• Corporate income• Corporation tax

• Wealth/property• Wealth taxes• Property taxes• Inheritance tax• Transfer tax

46 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Background Facts : Structure of Revenue

• Five main components of government revenue :• Personal income tax• Corporate income tax• Social security contributions• Consumption taxes• Property taxes

• Since the early 1960s, declining share of consumptionand property taxes vs. growing share of social securitycontributions

• Tax structure varies widely across countries

47 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 10: Structure of Government Revenue : OECDAverage, 2010 vs. 1965

Personal Income Tax

26%

Corporate Income

Tax

9%

Social Security

Contributions

19%

Consumption Taxes

36%

Property

Taxes

8%

Other Taxes

2%

(a) 1965

Personal Income Tax

24%

Corporate Income

Tax

9%

Social Security

Contributions

27%

Consumption Taxes

31%

Property

Taxes

5%

Other Taxes

3%

(b) 2010

Source : OECD Revenue Statistics (2012), Table C

48 / 93

http://www.oecd-ilibrary.org/taxation/revenue-statistics_19963726


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 11: Structure of Government Revenue : France,Denmark, Mexico (2010)

Personal Income Tax

17.1%

Corporate Tax

4.9%

Social Security

Contributions

42.1%

Consumption Taxes

25.0%

Property

Taxes

8.6%

Other Taxes

2.3%

(a) France

Personal Income Tax

55.3%

Corporate

Tax

6.1%Social Security

Contributions

2.5%

Consumption Taxes

32.1%

Property

Taxes

4.0%

(b) Denmark

Personal Income Tax

and Corporate Tax

27.7%

Social Security

Contributions

17.0%

Consumption Taxes

52.7%

Property

Taxes

1.6%

Other Taxes

1.1%

(c) Mexico

Source : OECD Revenue Statistics (2012), Tables 6, 10 and 12

49 / 93

http://www.oecd-ilibrary.org/taxation/revenue-statistics_19963726


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

II. Normative theories of social justice

1 What is a normative approach ?

2 Theories of social justice

3 Social welfare functions

50 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

What is a normative approach ?• Normative views

• Normative views represent value judgement• Economics is agnostics on these views

• The structure of arguments• Normative analysis does not answer the question

“what ought the government do ?” but “what oughtthe government do given a particular objective ?”

It aims “to illuminate the relationship betweenobjectives and conclusions” (Atkinson and Stiglitz1980)

• Objectives/instruments• Objectives are given by moral philosophy or

democracy• Instruments are given by practical or political

feasibility

51 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

What objectives ?

• Efficiency• Pareto efficiency : reach a point where no one can be

made better off without making someone worse off.• How to trade off with equity ?

• Horizontal equity• This principle states that those who are in all

relevant senses identical should be treated identically• What are “relevant characteristics” ?

• Vertical equity• Groups with more resources should pay higher taxes

than those with fewer resources• “Ability to pay” approach• Prescription is very imprecise

52 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Theories of social justice

• Overview of different normative views

1 Libertarianism2 Utilitarianism3 Egalitarism4 Rawlsian approach5 Non-welfarist approaches

• This is not a political philosophy course !• Check main references : Rawls, Sen, Romer• Easy read : Sandel (2010, 2013) or watchjusticeharvard.org

53 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Libertarianism

• The night-watchman State• Minimal objectives : protection against force, theft,

enforcement of contracts (Nozick, 1974)• Justice is defined as the process that generate an

income distribution : no need to redistribute

• Self-ownership• Individuals own their labour, their wealth• Taxing is akin to forced labour or slavery

• By unanimous consent only• Governments can carry out only unanimously

approved activities (Buchanan and Tullock, 1962)• Only Pareto improvements are possible

54 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

UtilitarismJeremy Bentham(1748-1832),founder of UCL and utilitarism

The right policy shouldmaximise“the greatest good for thegreatest number of people”

SW (x) =n∑i

ui (x)

• Social welfare SW is a labour supply adjusted measureof GDP

• No account of income distribution

55 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

How to measure well-being ?• Criticism of utilitarism

• Income is not utility !• Other non monetary element of well-being (leisure,

environment, friendship, love etc.)

• No account of distribution of well-being

• Well-being is hard to measure• Consumption may reflect better well-being but is

much harder to measure than spending• Durable goods, housing consumption etc.

• Well-being is often measured narrowly• Utility functions either with consumption of goods xi

or with after-tax income Y and leisure L.

Utility = u(x1, ..., xn, L)

• Stiglitz-Sen-Fitoussi report on well-beingmeasurement

56 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Welfarism

• Welfarist approach• Social welfare depends only on individual’s utility or

well-being (ui (x)) and nothing else.• Bergson-Samuelson welfare function (Bergson 1938)

SW (x) = W (u1(x), ..., un(x))

• Welfarism is a form of consequentialism• Opposed to deontology (e.g., Kant)

• Utilitarianism is welfarist• Utilitarianism is just a form of welfarism• No equality objective

57 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Rawlsian Social justice

• John Ralws A Theory of Justice (1971)

• Choice under the veil of ignorance• Need to make social choice free of current status

(money, power, intelligence, etc.)• Hypothetical agreement in an initial situation of

equality

• Two principles of justice

(i) “Each person is to have an equal right to the mostextensive basic liberty compatible with a similarliberty for others”

(ii) “Social and economic inequalities are to be arrangedso that they are to be of the greatest benefit to theleast-advantaged members of society” (maximin)

58 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



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Normative approach




Welfare economics

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References


• Non-welfarist approach• Principle i) is non welfarist : basic liberty cannot be

put into question by utility maximisation• Principle ii) is welfarist with equality objectives

• Maximin and human rights• “Les hommes naissent et demeurent libres et egaux

en droits. Les distinctions sociales ne peuvent etrefondees que sur l’utilite commune” (Declaration desdroits de l’homme et du citoyen, 1789, art. 1)

• “Men are born and remain free and equal in rights.Social distinctions can only be based upon commonutility”

• Sentence 2 can be interpreted as maximin

59 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



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Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

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References


• Is Rawlsian justice meritocratic ?• Meritocracy defends a fair equality of opportunity

(not only formal equality)• Rawls rejects meritocracy as it “still permits the

distribution of wealth and income to be determinedby the natural distribution of abilities and talents”

• Difference principle• Outcomes from the natural talents should be shared

by the community• Differences in situations should be allowed only if

they benefit the least fortunate“Those who have been favored by nature, whoever,they are, may gain from their good fortune only onterms that improve the situation for those who havelost out.”

60 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

The debate around welfarism

• Issues with welfarism• Moral rules sometimes conflict with welfarism (e.g.,

lying, queues etc.).

• Non-welfarist approach• Other normative views matter even if they are not

included into individual’s well-being

SZ (x) = Z (u1(x), ..., un(x), x)

e.g., equal treatment, due process, etc.• Many prominent examples for social justice

e.g., Nozick, Rawls, Sen, etc.

• Non-welfarism violates the Pareto principle• Non-welfarism imply making sometimes everyone

worse off (Kaplow and Shavell, 2001)

61 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Debate around welfarism

• Welfare is a broad notion• Welfare is a broad notion and subjective notion• Rawls’ liberties or Sen’s capabilities should be part of

welfare

• Practical vs theoretical level• Welfare is hard to measure• Horizontal equity or due process are good guides for

well-being

62 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Critique of Maximin principle

• Harsanyi (APSR, 1975)• maximin makes no sense : it could require us to

sacrifice everything we have, just to improve slightlythe well being of a small group of handicapped ormentally retarded or incurable individuals

• utilitarianism makes more sense

• Interesting, but :

(i) Harsanyi ignores Rawls’ first principle (basic rightsand opportunities), in spite of the fact that hisexemples involve substantial rights and opportunities(handicap, health), rather than abstract monetaryredistribution

(ii) Harsanyi does not tell us how we can agree about aconcavity parameter for utilitarian social welfarefunction

63 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Social welfare functions

1 Weights to individual’s utilities in SWF• Introducing the preference for equality ε

Social welfare =1

1− ε1

n

n∑i

u1−εi with ε 6= 1

• If you have no concern for inequality ⇒ ε = 0• If you dislike inequality ⇒ ε > 0• If you are Rawlsian then ⇒ ε = +∞

64 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Preference for equality

2 Risk-aversion• Choice of redistribution “behind the veil of

ignorance”• Maximization of expected utility (Vickrey 1945 ;

Harsanyi 1953)• More risk-averse individuals will prefer more

redistribution (concavity of u)

u(c) =1

1− ρc1−ρ with ρ 6= 1

ρ is here the coefficient of relative risk aversion

65 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Standard social welfare function

• A reduced-form welfare function

Social welfare =1

n

n∑i

1

1− γcγi

With γ a measure of overall social aversion toinequality

• A range of social welfare functions (Kaplow 2008)

E R U L X

66 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



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Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

III. Rationales for Government Intervention

1 Two Fundamental Theorems of WelfareEconomics

(i) Failure of 1srt welfare theorem(ii) Fallacy of 2nd welfare theorem

2 Roles of Government

(a) Enforcement of property rights and contracts(b) Correction of market failures(c) Correction of individuals’ failures(d) Redistribution

67 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

The Basic Criteria of Welfare Analysis

• Two basic criteria by which economists measure theperformance of markets and policy makers :

1 Efficiency : how well resources are allocated (size ofthe pie)

2 Equity : how resources are distributed amongindividuals

• While efficiency can be measured in terms of economicperformance alone, measuring equity requires thespecification of norms and value judgments

• Economists can trace the implications of specific valuejudgments for social welfare, but economics does notgive guidance on which value judgments are thecorrect ones

68 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

When Should the Government Intervene ?

• A starting place : the two fundamental theorems ofWelfare Economics

• Some definitions :• An outcome is Pareto efficient if it is not possible to

make someone better off without making someoneelse worse offSometimes referred to as Pareto optimality, but isoptimal only in the sense of being efficient (nothingto say about equity)

• A competitive market is one in which participantshave full information and cannot influence prices

• Taxes and transfers are lump-sum in nature if theyare unrelated to any actions by the individualsinvolved

69 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



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Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Failure of the First Theorem of Welfare

Economics

• Theorem 1 : any competitive equilibrium is Paretoefficient under four conditions

(i) no externalities or public goods(ii) perfect information(iii) perfect competition(iv) irrational individuals

• Government interventions justified to correct thefailures of 1rst welfare theorem

70 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



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Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

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References

Fallacy of the Second Theorem of Welfare

Economics

• Theorem 2 : any efficient allocation can be achievedas a competitive equilibrium

(i) same conditions as theorem 1(ii) lump-sum taxes/transfers are feasible

• Why fallacy ?• Lump-sum tax/transfers are not available• Hence we do not live in First Best world

71 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



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Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

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References

Lump-sum taxes and transfers

• Definition• Lump-sum taxes are fixed in amount and are such

that no action can reduce their burden.e.g., poll tax (possibly by age and sex)

• Lump-sum taxes are rare because of informationconstraints

• Intrinsic characteristics are not observablee.g., ability is not observable, income is

• Possible lump-sum taxes are usually unfaire.g., poll tax

• Policy as a second-best problem• First best : use of lump-sum taxation• Second best : use of other taxes that might be

distortionary

⇒ Public Economics starts here !

72 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



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Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

The Scope of Government

• The two welfare theorems provide two mainjustifications for government intervention :

1 First role of government : improve efficiency whenprivate markets are inefficient

2 Second role of government : improve distributionif private market outcomes are undesirable due toredistributional concerns

73 / 93


Public Economics

Antoine Bozio

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Public economics



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Welfare economics

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References

Figure 13: First Role for Government : Improve Efficiency

Utility ofperson B

Utility ofperson A

ParetoImprovingPolicies

74 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



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Normative approach




Welfare economics

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References

Figure 14: Second Role for Government : ImproveDistribution

Utility ofperson B

Utility ofperson A

Redistributionthrough lump-sumtaxes and transfers

75 / 93


Public Economics

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Public economics



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Welfare economics

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References

First Role for Government : Improve

Efficiency

• Three main channels through which publicintervention can improve efficiency in a marketeconomy :

1 Enforcement of property rights and contracts2 Correction of market failures3 Correction of “individual failures”

76 / 93


Public Economics

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References

Enforcement of property rights and

contracts

• Markets do not exist ex abstracto

• Markets require secured property rights : legalcode, police and justice to ensure that privatecontracts are enforceable

• Reputation mechanisms can work on small scale(Greif, 1993)

• Government intervention is critical on a larger scalewhen economic exchanges become impersonal (Dixit,2004)

• The enforcement of broad-based property rights is akey determinant of economic growth (Acemoglu,Johnson and Robinson, 2001)

77 / 93

http://www.parisschoolofeconomics.com/grenet-julien/Public_Economics/Greif_AER_1993.pdf

http://press.princeton.edu/titles/7729.html

http://press.princeton.edu/titles/7729.html

http://www.parisschoolofeconomics.com/grenet-julien/Public_Economics/Acemoglu_et_al_AER_2001.pdf



Public Economics

Antoine Bozio

Introduction

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Figure 15: OLS Relationship Between Secured PropertyRights and GDP per Capita

Source : Acemoglu, Johnson and Robinson (2001), Figure 2

78 / 93



Public Economics

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Figure 16: Settler Mortality, Protection of Property Rightsand GDP per Capita

(a) Settler Mortality and Pro-perty Rights

VOL. 91 NO. 5 ACEMOGLU ET AL.: THE COLONIAL ORIGINS OF DEVELOPMENT 1371

10 'Ivp

LO) < PANGA

tl FJ GUY AGO

Xi PAKIND SDN GMB 0a co BGD NERMD NGA

tl 6 ETH TA SI

n- 6

0

2 4 6 8 Log of Settler Mortality

FIGURE 1. REDUCED-FORM RELATIONSHIP BETWEEN INCOME AND SETTLER MORTALITY

(first-stage) relationship between settler mortality rates and current institutions, which is interesting in its own right. The regression shows that mortality rates faced by the settlers more than 100 years ago explains over 25 percent of the variation in current institutions.4 We also document that this relationship works through the channels we hypothesize: (potential) settler mortality rates were a major determinant of settlements; settlements were a major determinant of early institutions (in practice, institutions in 1900); and there is a strong correlation between early institutions and institutions today. Our two-stage least-squares estimate of the effect of institutions on performance is rela- tively precisely estimated and large. For example, it implies that improving Nigeria's

institutions to the level of Chile could, in the long run, lead to as much as a 7-fold increase in Nigeria's income (in practice Chile is over 11 times as rich as Nigeria).

The exclusion restriction implied by our instrumental variable regression is that, condi- tional on the controls included in the regression, the mortality rates of European settlers more than 100 years ago have no effect on GDP per capita today, other than their effect through institutional development. The major concern with this exclusion restriction is that the mortality rates of settlers could be correlated with the current disease environment, which may have a direct effect on economic performance. In this case, our instrumental-variables estimates may be assigning the effect of diseases on income to institutions. We believe that this is unlikely to be the case and that our exclusion restriction is plausible. The great majority of European deaths in the colonies were caused by malaria and yellow fever. Although these diseases were fatal to Europeans who had no im- munity, they had limited effect on indigenous adults who had developed various types of im- munities. These diseases are therefore unlikely to be the reason why many countries in Africa and Asia are very poor today (see the discussion in Section III, subsection A). This notion is

institutions," including constraints on government expropriation, independent judiciary, property rights enforcement, and institutions providing equal access to education and ensuring civil liberties, that are important to encourage investment and growth. Expropriation risk is related to all these institutional features. In Acemoglu et al. (2000), we reported similar results with other institutions variables.

4 Differences in mortality rates are not the only, or even the main, cause of variation in institutions. For our empirical approach to work, all we need is that they are a source of exogenous variation.

(b) Settler Mortality and GDPper Capita

Source : Acemoglu, Johnson and Robinson (2001), Figures 1 and 3

79 / 93



Public Economics

Antoine Bozio

Introduction

Public economics



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Normative approach




Welfare economics

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References

Correction of Market Failures

• Private markets provide a Pareto efficient outcomeunder three conditions :

1 No exernalities / public goods2 Perfect information3 Perfect competition

• Market failures refer to the violations of either ofthese conditions :

1 Externalities and public goods2 Asymmetric information3 Imperfect competition

80 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



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Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Market Failure 1 : Externalities and Public

Goods• Markets do not provide optimally public goods or

goods associated with externalities

• Public Goods : goods that are non-rival andnon-excludable in consumption (e.g. national defence)

⇒ Because of free riding, too little public goods areproduced

• Externalities : when the effect of production orconsumption of goods and services imposes costs orbenefits on others, which are not reflected in the pricescharged for the goods and services being provided

⇒ Too much of negative externality-generatinggoods, (e.g. pollution) ; too little of positiveexternality-generating goods (e.g. R&D)

81 / 93


Public Economics

Antoine Bozio

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Public economics



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Normative approach




Welfare economics

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References

Market Failure 2 : Asymmetric Information

• When some agents have more information thanothers, markets can fail

Ex 1 : The market for second-hand cars or “lemons”(Akerlof, 1970). Sellers have private information onthe quality of their cars, which is unknown to buyers→ sellers of high quality cars withdraw from themarket

Ex 2 : Adverse selection in health insurance markets.Healthy people drop out of the private insurancemarket → mandated coverage could make everyonebetter off

Ex 3 : Credit constraints in the education market →subsidies for education

82 / 93

http://www.parisschoolofeconomics.com/grenet-julien/Public_Economics/Akerlof_QJE_1970.pdf


Public Economics

Antoine Bozio

Introduction

Public economics



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Early history

Growth of the State


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Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Market Failure 3 : Imperfect Competition

• When markets are not competitive, there is rolefor public intervention

Ex 1 : natural monopolies such as electricity orrailways

Ex 2 : anticompetitive practices such as collusionbetween firms or abuse of dominant position (e.g.predatory pricing)

• This topic is traditionally left to courses on industrialorganization and is not covered in this course

• M1 PPD : Competition and Regulation (D. Spector)• M2 APE : Industrial Organization and Applications

to Antitrust and Regulation (D. Spector)

83 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



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Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Correction of “Individual Failures”• A recent addition to the list of potential failures that

motivate public intervention : people are not fullyrational

• Examples of bounded rationality have been identifiedby behavioral economics (cf. Kahneman andTversky, 1979) :

• Hyperbolic discounting (Laibson, 1997)• Overconfidence (Della Vigna and Malmendier, 2006)• Default options (Madrian and Shea, 2001)• Inattention (Lacetera, Pope and Sydnor, 2012)

• These are individual failures rather than traditionalmarket failures

• Public intervention (e.g. by forcing saving via socialsecurity, enforcing the use of seatbelts for drivers) maybe desirable

• Conceptual challenge : how to avoid the paternalismcritique ? 84 / 93

http://www.parisschoolofeconomics.com/grenet-julien/Public_Economics/Kahneman_Tversky_ECMA_1979.pdf

http://www.parisschoolofeconomics.com/grenet-julien/Public_Economics/Kahneman_Tversky_ECMA_1979.pdf

http://www.parisschoolofeconomics.com/grenet-julien/Public_Economics/Laibson_QJE_1997.pdf

http://www.parisschoolofeconomics.com/grenet-julien/Public_Economics/DellaVigna_Malmendier_AER_2006.pdf

http://www.parisschoolofeconomics.com/grenet-julien/Public_Economics/Madiran_Shea_QJE_2001.pdf

http://www.parisschoolofeconomics.com/grenet-julien/Public_Economics/Lacetera_et_al_AER_2012.pdf


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 17: Raw Average Sale Price of Used Cars byOdometer MileageFigure 2 - Raw Price. This figure plots the raw average sales price within 500-mile bins for the more than 22 million auctioned cars in our

dataset.

3000

5000

7000

9000

11000

13000

15000

17000

0 20000 40000 60000 80000 100000 120000

Ave

rage

Sal

es P

rice

Miles on Car (Rounded Down to Nearest 500)

Source : Lacetera, Pope and Snydor (2012), Figure 4

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http://www.parisschoolofeconomics.com/grenet-julien/Public_Economics/Lacetera_et_al_AER_2012.pdf


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Limitations of Government Intervention• Problem : optimal policies to address market failures

are not always implementable• Collective choice problems : governments face the

difficult problem of aggregating the preferences ofmillions of citizens into a coherent set of policydecisions

• Commitment problems : some policies may not beperceived as credible by economic agents (e.g.announced government policy of never negotiatingwith terrorists over the release of hostages)

• Because of information constraints, first-bestpolicies can be difficult or impossible to implement,and governments often have to rely of instrumentswhich distort incentives (behavioral responses in theprivate sector)→ Second-best policies

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Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Second Role for Government : Improve

Distribution

• Even when the private market outcome is efficient, itmay not have good distributional properties :markets generally seem to deliver very large rewards toa small number of people

• The choice between different efficient outcomes raisesthe tricky issue of making interpersonal comparisons,which involve value judgements

• A common way of representing such value judgementsis the social welfare function, a function that mapsthe set of individual utilities in society into an overallsocial utility function

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Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 18: Utilitarian Social Welfare Function

Utility ofperson B

Utility ofperson A

Utilitarian socialindifference curve

Utilitarian SWF = UA+UB

45o

88 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 19: Rawlsian Social Welfare Function

Utility ofperson B

Utility ofperson A

Rawlsian SWF = min(UA,UB)

45o

Rawlsian socialindifference curve

88 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Figure 20: General Social Welfare Function

Utility ofperson B

Utility ofperson A

General socialindifference curve

General SWF = V(UA)+V(UB)

88 / 93


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Course outline

1 Introduction to public economics [A. Bozio]

2 Tools of welfare analysis [J. Grenet]

3 Externalities [J. Grenet]

4 Public good [J. Grenet]

5 Commodity taxation [A. Bozio]



8 Preferences aggregation and intertemporal justice [T.Piketty]

9 Wealth and property taxation [T. Piketty]

10 Optimal taxation of capital [T. Piketty]

11 Social insurance [J. Grenet]

12 Corporate taxation [A. Bozio]

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Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

References– Acemoglu, D., Johnson, S. and Robinson, J. (2001) “The Colonial Origins of Comparative

Development : An Empirical Investigation”, American Economic Review, 91(5), pp. 1369-1401.

– Angrist, J. and Krueger, A. (1999) “Empirical Strategies in Labor Economics” in Handbook ofLabor Economics, edited by O. Ashenfelter and D. Card, 3, Part A :1277–1366. Elsevier.

– Angrist, J. and Pischke, J.-S. (2010) “The Credibility Revolution in Empirical Economics : HowBetter Research Design Is Taking the Con out of Econometrics”, Journal of Economic Perspectives24 (2) : 3–30.

– Ardant, G. (1971) Histoire de l’impot (2 volumes), Fayard.

– Delalande, N. (2011), Les batailles de l’impot : consentement et resistance de 1789 a nos jours, LeSeuil.

– Delalande, N. and Spire, A. (2010), Histoire sociale de l’impot, Reperes, La Decouverte.

– Dowell, S. (1965), A History of Taxation and Taxes in England. From the Earliest Times to thePresent Day, (6 volumes) Franck Cass & Co.

– Akerlof, G. (1970), “The Market for ‘Lemons’ : Quality Uncertainty and the Market Mechanism”,Quarterly Journal of Economics, 84(3), pp. 488–500.

– Baumol, W.J. (1967), “Macroeconomics of Unbalanced Growth : The Anatomy of Urban Crisis,”American Economic Review 57(3), 415-426.

– Bergson, A. (1938) “A reformulation of certain aspects of welfare economics”, Quarterly Journal ofEconomics, Vol. 68.

– Brennan, G. and J.M. Buchanan (1980) The Power to Tax : Analytical Foundations of a FiscalConstitution, Cambridge University Press, Cambridge.

– Bozio, A. and Grenet, J. (2010), Economie des politiques publiques, La Decouverte, Reperes.

– Buchanan, J.M. and Tullock, G. (1962) The Calculus of Consent, University of Michigan Press, AnnArbor, Michigan.

– Castles, F., Leibfried, S., Lewis, J., Obinger, H. and Pierson, C. (eds.) (2010) The OxfordHandbook of the Welfare State. Oxford University Press.

– Chetty, R. (2009) “Sufficient Statistics for Welfare Analysis : A Bridge Between Structural andReduced-Form Methods”, Annual Review of Economics 1 (1) : 451-88.

– DellaVigna, S. and Malmendier, U. (2006) “Paying Not to Go to the Gym”, American EconomicReview, 96(3), pp. 694–719.

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Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

References– Dreze, J. (1995) “Forty Years of Public Economics : A Personal Perspective”, Journal of Economic

Perspectives 9 (2), pp. 111–30.

– Esping-Andersen, G. (1990) The Three Worlds of Welfare Capitalism, Princeton University Press.

– Fossati, A. (2010) “The Idea of State in the Italian Tradition of Public Finance” European Journalof the History of Economic Thought 17 (4) : 881-907.

– Greif, A. (1993) “Contract Enforceability and Economic Institutions in Early Trade : The MaghribiTraders’ Coalition”, American Economic Review, 83(3), pp. 525-548.

– Harsanyi, J. (1953) “Cardinal Utility in Welfare Economics and in the Theory of Risk-taking,”Journal of Political Economy, University of Chicago Press, vol. 61.

– Harsanyi, J. (1975) “Can the Maximin Principle Serve as a Basis for Morality ? A Critique of JohnRawls’s Theory”, American Political Science Review, 69(2), pp. 594–606.

– Kaplow, L. and Shavell, S. (2001), “Any Non-welfarist Method of Policy Assessment Violates thePareto Principle”, Journal of Political Economy, 2001, Vol. 109, No. 2.

– Kahneman, D. and Tversky, A. (1979) “Prospect Theory : An Analysis of Decision under Risk”,Econometrica, 47(2), pp. 263–292.

– Kleven, H. (2014) “How Can Scandinavians Tax So Much ?”, Journal of Economic Perspectives 28(4) : p. 77–98.

– Kleven, H., Kreiner, C. and Saez, E. (2016) “Why Can Modern Governments Tax So Much ? AnAgency Model of Firms as Fiscal Intermediaries”, Economica 83 (330) : 219-46.

– Kolm, S.-C. (2010) “History of Public Economics : The Historical French School”, The EuropeanJournal of the History of Economic Thought 17 (4) : 687-718.

– Lacetera, N., Pope, D. and Sydnor, J. (2012) “Heuristic Thinking and Limited Attention in the CarMarket”, American Economic Review, 102(5), pp. 2206–36.

– Laibson, D. (1997) “Golden Eggs and Hyperbolic Discounting”, Quarterly Journal of Economics,112(2), pp. 443–447.

– Lindert, P. (2004) Growing Public : Social Spending and Economic Growth since the EighteenthCentury, Cambridge University Press.

– Madrian, B. and Shea, D. (2001), “The Power of Suggestion : Inertia in 401(k) Participation andSavings Behavior”, Quarterly Journal of Economics, 116(4), pp. 1149–1187.

– Martin, I., Merhotra, A. and Pasad, M. (2009) The New Fiscal Sociology : Taxation in Comparativeand Historical Perspective, Cambridge University Press.

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Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

References

– Musgrave, R. (1959) The Theory of Public Finance, McGraw Hill.

– Musgrave, R. (1966) Fiscal Systems, Yale University Press : New Haven.

– Musgrave, R. (1985) “A Brief History of Fiscal Doctrine”. Handbook of Public Economics 1 : 1-59.

– Nozick, R. (1974), Anarchy, State and Utopia, Basil Blackwell, Oxford.

– Peacock, Alan and Jack Wiseman (1961), The Growth of Public Expenditure in the UnitedKingdom, NBER : New York.

– Rawls, J. (1971), A Theory of Justice, Harvard University Press.

– Rosenzweig, M. and Wolpin, K. (2000) “Natural “Natural Experiments” in Economics”, Journal ofEconomic Literature 38 (4) : 827-74.

– Sandel, M. (2010) Justice : What’s the Right Thing to Do ?, Farrar, Straus and Giroux [link].

– Sandel, M. (2013) What Money Can’t buy : The Moral Limits of Markets, Farrar, Straus and Giroux.

– Sen, A. (1987) Commodities and capabilities, Oxford University Press.

– Sen, A. (1999) Development as Freedom, Anchor.

– Sen, A. (2006) “Development as Freedom : an Indian Perspective”, Indian Journal of IndustrialRelations, 42(2), pp. 157–169.

– Smith, A. (1776), “On Taxes”, V, ii, b in Wealth of Nations.

– Thaler, R. and Sunstein, C. (2003) “Libertarian Paternalism”, The American Economic Review 93(2) : 175–179.

– Vickrey, W. (1945), “Measuring Marginal Utility by Reaction to Risk”, Econometrica, Vol. 13.

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http://www.justiceharvard.org/


Public Economics

Antoine Bozio

Introduction

Public economics



Course outline


Early history

Growth of the State


Facts on spending

Facts on taxation


Normative approach




Welfare economics

Roles of Government

References

Lecture 1: Introduction to

Public Economics

Antoine Bozio

Paris School of Economics (PSE)

Ecole des hautes etudes en sciences sociales (EHESS)

Master APE and PPDParis – September 2017

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lecture 1: introduction to public economics · theories of state growth ... welfare economics roles...

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