AØKA08035U Public Economics (p)

The course introduces students to the main topics, concepts, theories, empirical methods and results in Public Finance. Public Finance deals with the role of government in the economy. It focuses on the relationship between the government and the market and tries to answer such questions as when should the government intervene, and what problems can arise due to government policy when governments operate under imperfect information and other imperfections. The course covers both positive and normative aspects of government policy regarding the expenditure side and, in particular, the financing side of the public sector.

A key aspect of Public Finance is the use of theoretical models to derive conditions for optimal policy that only depend on parameters that we can estimate using real data. During the course the students will see examples of this close link between theory and data at the lectures and in hands on exercises. They will learn to apply the achieved knowledge by analyzing and structuring academic discussions to the effects and optimality of policy initiatives. The students will also learn how to acquire additional knowledge about public policy issues through reading of scientific journal articles.

Topics and questions covered in the course include:

• Deadweight loss and excess burden: How do we measure the efficiency cost of taxation and why is the size of the behavioral responses to taxation important?
   
• Labor supply and taxes: In what way is the labor market special in terms of outcomes and public policies? How do this affect behavioral responses to taxation, efficiency and government revenue?
   
• Measurement of behavioral responses: How can empirical methods be used to identify behavioral responses to government policy? What are the key assumptions and how can we validate them? 
   
• Tax evasion: How is tax evasion defined? What is the level of tax evasion and what are the likely causes for it?
   
• Tax incidence: What determines who bears the “true cost” of a tax? How it the distribution of the burden affected by imperfect competition (as oppose to perfect competition).
   
• Taxation of firms: In what way is taxation of firms special? How does this affect who bears the burden of taxation and efficiency in the short and long run?
   
• Inequality and intergenerational mobility: How is inequality measured? How has it evolved over time and how is it transmitted between generations?
   
• Social welfare: What are the main arguments for government intervention? How do we compare and choose between different possible outcomes in society?
   
• Optimal income taxation: How big is the trade-off between equality and efficiency? How high should the tax on high incomes be?
   

• Social insurance: What is the difference between redistribution and social insurance? What is the optimal degree of social insurance (e.g. unemployment insurance) in society?