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Economics Public Economics


									                     Economics 205: Public Economics
                                Fall 2009

Professor Sara LaLumia                                            Office Hours: Mondays, 6-8 pm
Office: 206 Schapiro Hall                                                 Wednesdays, 2-3:30 pm
Phone: 597-4886                                                              and by appointment

Class: Tuesdays and Fridays, 2:35 – 3:50, 141 Schapiro Hall

Course Description

This course is concerned with the role of government in the economy. There are three major
motivating questions for the course:
     Under what circumstances should the government intervene in the economy?
     How should government interventions be designed?
     What are the effects of government interventions on consumer behavior?
We will begin with the rationale for government intervention in the market, discussing
externalities and public goods. We will next analyze particular types of government spending,
discussing details of education, welfare, and social insurance programs. Finally we will study
how the government raises revenue through taxation, and discuss how individuals respond to


Textbook: Public Finance and Public Policy, Second Edition. Jonathan Gruber. Available at
Water Street Books.

Readings packet: Available in the Makepeace Room of Greylock Hall, open between 9 and 4.

Blackboard website: I will post problem sets, solutions, additional readings, etc. on the course

Teaching assistant: Sarah Ginsberg ( is the teaching assistant
for this course. She will run review sessions and grade problem sets.

Office hours: My regular office hours are 6 to 8 on Monday evenings and 2 to 3:30 on
Wednesday afternoons. If these times aren’t convenient for you, I am happy to meet at another
time. Please email me to set up an appointment.
Assignments and Grading
Your grade in the course will be based on the following:
    Problem sets (20%)
       You will complete four problem sets. Some will require you to use Excel. You may work
       on problem sets in groups, but each person must turn in his or her own assignment.

      Policy memos (15%)
       You will write three persuasive policy memos, in each case arguing for or against a
       particular proposal. You will choose three out of the following four topics:
           o Sept 22: Choice between carbon tax and cap-and-trade
           o Oct 27: Vouchers for elementary education
           o Nov 6: Private accounts in Social Security
           o November 17: Extending the Massachusetts health reform to other states (I may
               modify this topic based on what Congress does with health reform this fall.)
       On the day you submit your memos, we will have an in-class discussion/debate of the
       policy. You should come prepared to actively discuss and answer questions about what
       you have written.

      In-class exercises (5%)
       In six class meetings I will give you a short (approximately 10-15 minute) assignment.
       These may consist of a mathematical problem, short written response, or graphical
       analysis. These will be graded on a check plus, check, check minus basis. Your lowest
       score will be dropped. If you are not in class on the day of the exercise, you do not get
       credit for it.

      Comparison of academic and popular press writing (5%)
       In a group of 2-3 students, you will give a 5-minute presentation describing in greater
       detail an academic paper summarized in the popular press. Everyone in class will have
       read the popular press account. Your group must meet with me ahead of time to practice
       your presentation. A list of possible papers will be posted on Blackboard.

      Policy analysis paper (15%)
       You will analyze a particular government expenditure program that we have not
       discussed in class. This can be a U.S. program or a program from another country, and it
       can be at the federal, state, or local level. You will outline the problem or issue that the
       program addresses, and evaluate the case for government intervention in this issue. You
       will describe how the program works. You will analyze the effects of the program on
       consumer behavior, considering both the effects predicted by economic theory and
       empirical evidence on how consumers have actually responded. You will submit a draft,
       receive feedback from me and peer reviewers, give feedback to other students, and
       incorporate the feedback into your final draft. Feedback will be in the form of a referee
       report. Due dates for the three components are:
           o Nov 13: First draft
           o Nov 24: Referee reports
           o Dec 4: Final paper
       I will provide a more detailed description of this assignment later in the semester.
      Midterm (15%)
       An exam consisting of mathematical problems and short essay questions will be given
       during class time on Tuesday, October 20.

      Final (25%)
       A cumulative final will be held during the normal final exam period. The date and time
       will be announced a few weeks into the course.

Schedule and Due Dates
                 Tuesday                                             Friday
                                                Sept 11: Intro

Sept 15: Externalities                          Sept 18: Externalities, Part II

Sept 22: Public Goods                           Sept 25: Public Goods, Part II
       Policy Memo 1 Due                               Problem Set 1 Due
Sept 29: Cost-Benefit Analysis                  Oct 2: Voting Mechanisms

Oct 6: Fiscal Federalism and Tiebout            Oct 9: Grants
        Problem Set 2 Due
Oct 13: No Class (Reading Period)               Oct 16: Kept Open for Mountain Day

Oct 20: Midterm                                 Oct 23: Education, Part I

Oct 27: Education, Part II                      Oct 30: Modeling Social Insurance
       Policy Memo 2 Due
Nov 3: Social Security, Part I                  Nov 6: Social Security, Part II
                                                       Policy Memo 3 Due
Nov 10: Medicare and Medicaid                   Nov 13: No Class (in exchange for film session
                                                Dec 9 or 10) Draft of Policy Analysis Due
Nov 17: Health Reform                           Nov 20: Welfare
       Policy Memo 4 Due                               Problem Set 3 Due
Nov 24: Tax Incidence                           Nov 27: No Class (Thanksgiving)
       Referee Reports Due
Dec 1: Deadweight Loss and Optimal Taxation     Dec 4: Structure of the Individual Income Tax
                                                       Final Policy Analysis Due
Dec 8: Taxation and Savings      Dec 9 or 10: Watch        Dec 11: Deficit Finance
                                 I.O.U.S.A.                        Problem Set 4 Due
Course Policies
    Problem sets and writing assignments must be turned in at the beginning of class on the
      day they are due. Late assignments will only be accepted with my prior approval.

      I am experimenting with accepting electronic copies of written assignments on
       Blackboard this semester. You may upload your policy memos and policy analysis paper
       using the digital dropbox feature. If you choose this option, you must upload assignments
       before the start of class on the due date. If you prefer you may instead turn in a hard
       copy. You must turn in a hard copy of problem set solutions.

      I expect all writing assignments to be your own original work, with appropriate citations
       of any sources you have consulted. If you have any questions about how the Honor Code
       applies to particular assignments in this course, please talk to me.

      I encourage you to take advantage of the Writing Workshop for assistance with policy
       memos or the longer policy analysis paper. You can stop by their centers in Sawyer or
       Schow on Sunday through Thursday evenings.

      Please turn off cell phones before class.

Reading List

Sept 15: Externalities, Part I
    Gruber, 5.1-5.3 (pages 120-138)
    Gruber, chapter 6 (especially section 6.3)

Sept 18: Externalities, Part II
    Gruber, 5.4-5.5
    Metcalf, Gilbert E. 2009. “Market-Based Policy Options to Control U.S. Greenhouse Gas
       Emissions.” Journal of Economic Perspectives 23(2): 5-27.

Sept 22: Optimal Provision of Public Goods
    Gruber, 7.1 (pages 177 – 183)
    Gruber, 9.1 (pages 225 – 228)

Sept 25: Free-Riding and the Nash Equilibrium Level of Public Goods
    Gruber, 7.2 – 7.4 (pages 183 – 195)
    Porter, Eduardo. “The Divisions that Tighten the Purse Strings.” New York Times, April
       29, 2007.

Sept 29: Cost-Benefit Analysis
    Gruber, chapter 8
    Viscusi, W. Kip. 2008. “How to Value a Life.” Journal of Economics and Finance.
       32(4): 311-323.
Oct 2: Models of Voting
    Gruber, chapter 9.2-9.3
    Leonhardt, David and Catherine Rampell. 2009. “Race, Gender, and Decision Making.”
       New York Times. May 27.

Oct 6: Fiscal Federalism and the Tiebout Model
    Gruber, 10.1-10.2

Oct 9: Fiscal Federalism and Grants
    Gruber, 10.3-10.4

Oct 20: Midterm

Oct 23: Education, Part I
    Gruber, 11.1 – 11.3
    Barrow, Lisa and Cecilia Elena Rouse. 2008. “School Vouchers: Recent Findings and
       Unanswered Questions.” 32(3): Economic Perspectives 2-16.
    Neal, Derek. 2002. “How Vouchers Could Change the Market for Education.” Journal of
       Economic Perspectives 16(4): 25-44.

Oct 27: Education, Part II
    Gruber, 11.5
    Cornwell, Christopher and David B. Mustard. 2006. “Evaluating HOPE-Style Merit
       Scholarships.” In Innovation in Education, Federal Reserve Bank of Cleveland
       Conference Proceedings.
    Maag, Elaine et al. 2007. “Subsidizing Higher Education Through Tax and Spending
       Programs.” Tax Policy Issues and Options, No. 18.

Oct 30: Theory of Social Insurance
    Gruber, Chapter 12
    Francis, David R. 2003. “Auto Insurance and Traffic Fatalities.” NBER Digest.

Nov 3: Social Security, Program Overview and Funding
    Gruber, 13.1, 13.4
    Clark, Robert L. 2004. “Social Security Financing: Facts, Fantasies, Foibles, and Follies.”
       American Economic Review, Papers and Proceedings 94(2): 182-186.

Nov 6: Social Security, Private Accounts and Effects on Behavior
    Gruber, 13.2-13.3
    Cogan, John F. and Olivia S. Mitchell. 2003. “Perspectives from the President’s
       Commission on Social Security Reform.” Journal of Economic Perspectives 17(2): 149-
    Lazear, Edward P. 2005. “The Virtues of Personal Accounts for Social Security.”
       Economists’ Voice 2(1): Article 4.
    Stiglitz, Joseph. 2005. “Securing Social Security for the Future.” Economists’ Voice 2(1):
       Article 5.
Nov 10: No Class (in exchange for film watching on Dec 9 or 10)

Nov 13: Medicare and Medicaid
    Gruber, chapter 15 (you can skip 429-435), 16.1-16.4

Nov 17: Health Reform
Note: Readings subject to revision based on what Congress does in fall 2009
    Gruber, 16.6
    Gruber, Jonathan. 2008. “Incremental Universalism for the United States: The States
       Move First?” Journal of Economic Perspectives 22(4): 51-68.

Nov 20: Welfare
    Gruber, Chapter 17

Nov 24: Tax Incidence
    Gruber, 19.1-19.2
    “Study: Toll Transponders Hide Cost of Tolling.”

Dec 1: Deadweight Loss and Optimal Taxation
    Gruber, chapter 20 and 21.1-21.2

Dec 4: Structure of the Individual Income Tax
    Gruber, chapter 18
    Foser, Jamison. 2009. “Does ABC News Understand How Income Tax Works?” Media
       Matters. March 3.

Dec 8: Taxation and Savings
    Gruber, chapter 22 and 25.3
    Gray, Tim. 2005. “Making Good Choices.” Trust Magazine Winter: 11-16.

Evening of Dec 9 or 10 (Times TBA): Watch parts of “I.O.U.S.A.” Reuters describes this film
on the national debt as “to the U.S. economy what ‘An Inconvenient Truth’ was to the

Dec 11: Deficit Finance
    Rosen, Harvey. 2008 “Deficit Finance.” Chapter 20 from Public Finance.

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