Economics 205: Public Economics
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
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 (Sarah.E.Ginsberg@williams.edu) 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.
An exam consisting of mathematical problems and short essay questions will be given
during class time on Tuesday, October 20.
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
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
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.
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
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
Sept 29: Cost-Benefit Analysis
Gruber, chapter 8
Viscusi, W. Kip. 2008. “How to Value a Life.” Journal of Economics and Finance.
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
Oct 9: Fiscal Federalism and Grants
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
Cornwell, Christopher and David B. Mustard. 2006. “Evaluating HOPE-Style Merit
Scholarships.” In Innovation in Education, Federal Reserve Bank of Cleveland
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
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):
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, 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
“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.