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Public Finance Instructor: John Hartman


Public Finance Instructor: John Hartman Today: An introduction to Econ 130 A review of microeconomics Introduction to public finance – PowerPoint PPT presentation

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Title: Public Finance Instructor: John Hartman

Public Finance Instructor John Hartman
  • Today An introduction to Econ 130 A review
    of microeconomics Introduction to
    public finance

Before we begin
  • Remember that this is a small class ? Ask
    questions if things are not clear
  • The syllabus is posted online ? See
  • For most of you, attendance is important if you
    want to get a good grade

Before we begin
  • I expect you to know the following tools
  • Calculus
  • Derivatives, integrals, partial derivatives
  • Microeconomics
  • Econ 1, Econ 100A or 104A, Econ 100B or 104B
  • Macroeconomics (although not as important for
    public finance)
  • 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
  • Expected time to spend on this class
  • 3 hours per unit per week
  • 12 hours per week total
  • Format of learning
  • Read first
  • Lecture
  • Do problems on your own
  • Solve problems in class and review sessions

Textbook for this class
  • Rosen/Gayer
  • Public Finance, 8th edition
  • Published by McGraw-Hill/Irwin

Office hours and review sessions
  • Office NH 2028
  • Office hours
  • Mondays 1030-1130 am
  • Wednesdays 930-1030 am
  • I plan on conducting one review session before
    each test
  • Time and location to be announced

  • Three tests, as of now scheduled for
  • Monday, April 28 (in lecture)
  • Monday, May 19 (in lecture)
  • Monday, June 8 (final, 4-630 pm)
  • 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

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

  • 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

  • Typical upper division Econ field class curve
  • 20-25 A, A, or A-
  • 30-35 B, B, or B-
  • 25-30 C, C, or C-
  • Remaining 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 55-60
    minutes, followed by problem solving
  • Some classes will be devoted to a single topic
  • Some classes will consist of two to four

  • Each week, I will post a few problems
  • The following week, I will solve some of the
    problems at the end of each lecture, as time
  • I will also solve some problems at each review

  • An introduction to Econ 130
  • What will we cover over the next 10 weeks?
  • A brief review of Microeconomics (read Appendix)
  • Supply, demand, and equilibrium
  • Utility
  • Budget constraints
  • Substitution and income effects
  • Consumer and producer surplus
  • Introduction to public finance Begin Chapter 1

An introduction to Econ 130
  • This class covers four units, each with three
    to five lectures
  • Unit 1 Introduction and Microeconomic tools
  • Unit 2 Public goods, externalities, and
  • Unit 3 Health care and income redistribution
  • Includes guest lecture by Ted Bergstrom
  • Tentative topic Bone marrow as a public good
  • Unit 4 Primary and secondary effects of taxes

Unit 1 (begins today)
  • Introduction and Microeconomic tools
  • Appendix Microeconomics review and marginal
  • Chapter 1 Introduction to public finance and
  • Chapter 2 Empirical tools
  • Chapter 3 Economic theory tools
  • Chapter 8 Cost-benefit tools

Unit 2
  • Public goods, externalities, and government
  • Chapter 4 Public goods
  • Chapter 5 Externalities
  • Chapter 6 Government and political economy
  • Chapter 7 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
  • Chapter 11 The structure of Social Security
    stresses caused by the baby boom generation
  • Chapter 12 Conceptual issues of income
  • Chapter 13 Programs for the poor

Unit 4
  • Primary and secondary effects of taxes
  • Chapters 14 and 15, and parts of Chapter 16
    Taxation, income distribution, and efficiency
  • Parts of Chapters 17-21 Taxation on the
    national level
  • Personal taxes
  • Corporate taxes
  • Deficit finance
  • Tax reform
  • Chapter 22 Taxation on a state and local level

Microeconomics review
  • Some topics you should already know
  • We will assume standard cases
  • If you need review on these topics, look in the
    Rosen/Gayer (R/G) appendix, or books that you
    used in introductory or intermediate
    microeconomics classes

Supply, demand, and equilibrium
  • In equilibrium, the supply and demand curves
  • When quantity supplied is higher than quantity
    demanded, there is a push for prices to go down
  • Excess supply
  • When quantity supplied is lower than quantity
    demanded, there is a push for prices to go up
  • Excess demand

Supply and Demand
Equilibrium Q 4, P 6
Example of excess demand
Factors of demand
  • Price Higher price ? lower quantity demanded
  • Income Most goods are normal
  • Normal goods Higher income means higher demand
  • Price of related goods (complements, substitutes)
  • Tastes and preferences

Factors of supply
  • Price Higher price ? higher quantity demanded
  • Price of inputs
  • Technology
  • Weather

Shift in demand movement along supply curve
  • Utility is used by economists to note a level of
  • The higher the utility, the higher the

Bananas and utility
  • Notice this example, where the utility level is a
    function of the number of bananas consumed
  • Common unit of utility is called a util
  • Typically assume non-satiation

Banana quantity (bananas) Total utility (utils)
0 0
1 70
2 120
3 150
4 160
5 165
Two goods and utility
  • An indifference curve that is further from the
    origin has higher utility
  • U2 gt U1 gt U0

Increasing utility
Budget constraints
  • We assume each person has wants that are above
    the resources available to her/him
  • Consumption must be made from resources available

Budget constraints with no money
  • Becky has a given number of hours per day
  • Feasible bundles t, v, w, x, y, z
  • Point t does not use up her time allotment
  • Point u is infeasible

Budget constraints with no trade
  • If there is no trade
  • Becky chooses production to maximize her utility
  • This occurs where budget constraint is tangent to
    an indifference curve
  • Point E1


Substitution and income effects
  • When the price of a good changes, two things
  • Income effect How much does quantity change due
    to lower income?
  • Substitution effect How much does quantity
    change due to change in relative prices?

Substitution and income effects
  • Income effect
  • E1 to Ec
  • Substitution effect
  • Ec to E2
  • Note that budget lines to calculate income effect
    are parallel

Consumer surplus
  • Height of triangle is (6 3), or 3.
  • Length of triangle is (6 0), or 6
  • Area of triangle is one-half times length times
  • CS 9

The area of this triangle is a good approximation
of CS
Producer surplus
  • When P 25 per unit, shaded area is approximate
    producer surplus
  • Area is a triangle, one-half times length times
  • 0.5 ? 10 ? 25 125

Summary Microeconomics review
  • Many microeconomic tools are needed to do public
  • Some of the tools that we will use are based on
    supply, demand, utility, and budget constraints

Introduction to public finance
  • This class is meant to cover public finance to
    students that have no direct background in the
  • Some knowledge on public goods and externalities
    is useful, but not required
  • Two topics will be covered in this mini-lecture
  • What is studied in a public finance class?
  • What kinds of views do people have about public
  • Government will be addressed more in later
  • Size of government will be covered in the next
  • 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

Public finance and taxes
  • Many programs require tax money to operate
  • We will study how the governments on the local,
    state, and national level operate
  • Personal income tax
  • Reaction to labor/leisure choices
  • Corporate taxes
  • Deficit financing
  • Potential reforms to the current tax structure

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
  • 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
  • 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 reaction to taxes and credits on labor

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

Statements 1-3
  • I believe that reckless driving should be stopped
    through government actions (such as the use of
  • I think that government should build and maintain
    roads and highways
  • 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

Statements 4-6
  • I believe that each person in a moving car needs
    a seat belt on, to be enforced by the government
  • I believe each driver needs liability insurance,
    to be enforced by the government
  • 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

Statements 7-9
  • I believe that the government has a right to
    prevent pilots of commercial aircraft from using
    a cell phone while actively flying
  • I believe that the government has a right to
    prevent drivers of cars from using a cell phone
    while driving
  • I believe that the government should charge a 90
    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

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
  • Society is an organism
  • Mechanistic view
  • Government used to reach individual goals

Some ground rules at the end of lecture
  • I will always try to be done by 315 pm
  • In return, I expect your attention until the
    final slide
  • If you must leave early
  • Please do so no later than 305 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 test questions
  • You are welcome to leave after lecture is
  • Please do so quickly and quietly