economics of the public sector

Efficient Provision of a Public Good

Sum(MRSi) = MRT 1. Pareto-optimal provision of a public good (good x) occurs where the sum across all consumers of the Marginal Rate of Substitution between good x and other goods is equal to the Marginal Rate of Transformation in production. 2. The sum of the marginal rates of substitution between the public and private goods over all n individuals is equal to the marginal rate of transformation in production between the public and private good. 3. The marginal benefit of an extra unit of a public good is the benefit that person 1 receives plus the benefit that person 2 receives (since benefits are non-rival)

Sameuleson Condition

Sum(i=0 to n) MRSi = MRT 1. To implement the Samuelson Condition, the government needs a way of revealing individual preferences. 2. Strong incentive to free-ride

regressive tax

a household's tax payments decrease as a percentage of income as income rises

progressive tax

a household's tax payments increase as a percentage of income as income rises

Definitions of poverty

issue is whether, and by how much, people fall below the "poverty line" -poverty line can be defined using an absolute or relative standard

Risk Premium

maximum the individual would be willing to pay to avoid the uncertain outcome

Marginal Abatement Cost schedule

shows the cost of each successive unit of pollution abatement

Area under MAC schedule over a particular range

shows the total abatement cost incurred by reducing emissions by that amount

Marginal Damage Cost schedule

shows the value of each successive unit of pollution abatement, in terms of the external benefits of reduced pollution

proportional tax

a household's tax payments are a constant percentage of income

Pigouvian Tax

"emissions tax" to cut emissions Command-and-control (C&C) regulation instructs the polluter to take actions to reduce the emissions to Q. 1. The emissions tax is set at T per tonne of emissions 2. Polluter responds by doing all abatement which costs less than T --a cost-minimizing polluter would respond to the tax T by cutting emissions to Q --polluter would incur total abatement costs of A, and pay tax of TQ on remaining emissions

What are the main arguments to justify government intervention from the normative perspective?

Efficiency and equity

Taxes and trading under certainty

**under conditions of certainty, and with an efficient permit market, Pigouvian taxes and auctioned tradeable permits have equivalent outcomes. 1. under conditions of certainty, the economic properties of emissions taxes and tradeable emissions permits are very similar 2. tax rate and permit price will be the same for equivalent emissions outcome

Moral hazard in insurance markets

-after taking out insurance, the insured individual's behavior may change in ways that the insurer cannot observe, affecting probability or size of losses -ex: if you are fully insured against burglary, why spend money on locks, alarms, etc?

full information and non-strategic bargaining

-assymetric information between buyer and seller may make agreement less likely -parties may try to act strategically to grab more of the gains for themselves, and this may undermine potential deals

quantity based regulations

-eg: direct emissions regulation and emissions trading 1. the regulator sets a quantity, eg of emissions or abatement, and polluters incur abatement costs to meet this fixed requirement 2. abatement outcome is guaranteed, but costs of achieving outcome are uncertain

Price-based regulation

-eg: emissions tax 1. the regulator sets a price for emissions, and polluters respond by choosing appropriate abatement level. 2. price guarantees a maximum MAC, but quantity of abatement is uncertain.

zero transaction costs

-if there are substantial costs of negotiation and enforcement these may exceed the potential gains to Coasean bargaining -transaction costs will depend on the number of participants. Where many people are involved, a deal may be much less likely. eg if there are many victims, each may try to free ride

use of a "deductible"

-if there's a fixed cost of any claim -to avoid paying premium to cover small losses, which the individual would prefer to bear, rather than insure at actuarially "unfair" rates -deductibles will be chosen by less-risk averse individuals, better-off individuals, or low-risk individuals -insurer can infer low-risk individuals from high-risk individuals from the self-selection by low-risk individuals to high-deduction contracts

Efficient allocation of abatement between 2 firms

1. 2 firms with different costs of abatement (MACA and MACB) 2. efficient (least-cost) division of abatement where MACA = MACB 3. efficiency loss with uniform abatement requirement (shaded area) - firm with lower abatement costs should be abating more, not split equally. --with many polluters with different abatement, costs, emissions tax can achieve abatement at lower total cost than uniform C&C regulation --non-uniform C&C regulation could achieve least-cost outcome, but would have high informational costs

Buchanan's Club Model

1. 2 good model with a private good and a club good which suffers from congestion 2. "congestible" good is to be provided by clubs which charge cost-sharing membership fees (same membership fee per person) 3. assume there are a sufficient number of clubs that each club has members who are identical in terms of their preference for a public good.

Lindahl Procedure

1. A publicly provided good will require taxes to pay for it. 2. The distribution of the additional tax burden between individuals could be used as a form of price, to determine the optimal level or provision corresponding to the Samuelson Condition. 3. The share of the additional tax burden required to provide the public good functions as a "Lindahl price" 4. Tax shares are announced, and each individual is asked if they would want more or less of the public good supplied if they faced that tax share. 5. An individual who wants more is given a higher tax share in the next round and the individual who wants less is given a lower tax share in the next round. 5. The adjustment continues until shares are reached at which both wish to have the same quantity (The Lindahl Equilibrium) 6. The Lindahl Equilibrium occurs when everyone demands the same level of the public good. Individuals will face different tax shares reflecting their different demands of the public good.

Non-single-peaked preferences

1. All-or-nothing preferences 2. Multi-dimensional choices 3. Voters facing opt-out alternatives

Gini Coefficient

1. Area between the Lorenz curve and the diagonal as a proportion of the total area underneath the diagonal 2. A/A+B 3. Bounded between [0,1] 0 = perfect equality, (curve is the same as 45 degree line) 1 = perfect inequality (one person owns all of the wealth.

Majority Voting Equilibrium with Public Goods

1. Assume public goods to be provided to population with different preferences for level of public good provision 2. Assume cost of provision to be shared equally between voters 3. Assume voters have single-peaked preferences for public goods 4. Consumer with the median preference for the public good will be decisive in majority vote over the level of provision (Majority Voter Theorem) 5. No incentive for any voter to misrepresent preferences 6. Voting income is inefficient --except when MV's preferences between public and private goods coincide with mean preferences of the population as a whole. --MV outcome takes no account of the strength of preferences of anyone part from the MV

Baumol's Law (tutorial 1)

1. Baumol's law states that the public sector is more labour-intensive than the private sector, and can not easily substitute capital for labour. As the private sector becomes relatively more capital-intensive as technology improves, production will increase and wage of private sector will increase. 2. to keep public sector wages consistent with private sector wages, there must be in increase in the salary (wages) of public sector employees. 3. Implies that per capita spending (per capita tax revenue) will need to increase overtime in order to keep the level of public sector services constant. 4. public sector must increase wage so people will still want to work in the public sector and not move to the private sector

Effects of Taxes and Benefits on Household Income

1. Before taxes and benefits the richest fifth of households in the UK had an average income almost 15x greater than the poorest fifth of households. 2. overall, taxes and benefits lead to income being shared more equally between households. After all taxes and benefits are taken into account the ratio between the average incomes of the top and the bottom fifth of households is reduced to 4 to 1. 3. in recent years, the trend in inequality has been broadly flat

Alternatives to Majority Voting

1. Borda Voting 2. Plurality Voting 3. Approval Voting 4. Run-off Voting

"state over citizen" theories

1. Bureaucracy Model (Niskanen) 2. Fiscal Illusion 3. Monopoly Government and Leviathan

Types of public spending and distributional analysis

1. Cash transfers/benefits 2. Benefits-in-kind provided through public provision of private goods 3. Provision of public goods

impact of uncertainty about marginal abatement costs

1. trading ("quantity" instrument) guarantees emissions level, but at an uncertain MAC 2. Taxes ("price" instrument) place upper bound on MAC, but have uncertain impact on pollution

Plurality Voting

1. Each voter selects one option, and the option chosen is the one with the highest number of votes. 2. Discards all information except for first preference. 3. Encourages tactical voting - voters trying to forecast which options are likely to have a realistic chance of winning, and casting their votes for one of those 4. Votes cast then may not reflect real preferences, and will also reflect forecasts (which may be wrong) on how others are likely to vote 5. Can fail to select a Condorcet winner even when one exists.

3 Major Issues in choosing between taxes and emissions trading

1. Efficiency of the permit market 2. issues concerning the initial distribution of permits 3. impact of uncertainty about Marginal Abatement Costs

Examples of problems arising with principle: agent relationships

1. Employee can shrink (slack-off) 2. Financial adviser can recommend investments in which they have an interest 3. Dentist can recommend unnecessary treatments 4. Managers can expose firms to excessive risks for career reasons

Logrolling

1. Exchanging favors or "vote-trading" by reciprocal voting for each other's proposed legislation. 2.Arises where voter preference intensities are unevenly distributed. 3. Can increase community welfare, but imposes costs on non-traders. 4. If two voters agree to support each other, both X and Y can be passed to their mutual benefit.

Single-Peaked Preferences

1. For each voter there is an "optimum" amount of the public good. 2. Voter utility declines with distance from that optimum. -voting cycles arise when voter's preferences are not single-peaked -majority rule produces an equilibrium outcome when voter preferences are single-peaked

"Citizen over state theories"

1. Government as a Provider of Goods and reducer of externalities 2. Government as a redistributor of wealth and income 3. Interest Groups

Niskanean Model of Bureaucracy

1. Government bureaucrats are able to influence spending (due to principal: agent failure) and have an interest in maximizing their agency's budget for a higher salary, prestige, and power 2. Bureaucrats' preferences push public spending above the level warranted by voters' preferences 3. Due to monitoring failure in the principal:agent problem -voters, politicians, and senior public sector managers cannot measure output accurately, and therefore cannot judge efficiency -bureaucrats know their costs of producing output, but the people involved in the budget allocation process do not -absence of competitive pressures for the bureaucracy (which would drive agencies out if business if they operated like this)

Current Income

1. Households' incomes fluctuate over time. Low income in one period may be only temporary. 2. In a longer term perspective, a household with low current income may not be poor. 3. By borrowing or dis-saving it may be able to maintain its standard of living over the temporary drop in income

Households as the unit of distributional analysis

1. Households/families are normally the unit of analysis for measuring distributional impact of taxes and public spending 2. This is done because.. --families often share resources, thus it easier to assess the standard of living of a family as a whole than to assess the standard of living of individual family members --some taxes are paid on spending, but we wouldn't way to say these taxes only affected family members who did the shopping. Issues: 1. families have different #s of members. How can we compare the living standards of households of different sizes? 2. can someone be poor in a rich household? 3. need to know how resources are shared in the household - process of intra-household decision making

Problem with principal: agent relationships

1. If the principal cannot observe whether the agent's actions are in pursuit of the principal's goals or are self-interested behavior, this leaves scope for the agent to act in ways that are self-interested

Agenda-Setting

1. In situations where is no stable ambiguous public decision from majority voting (no condorcet winner) 2. The order in which choices are made will affect the final outcome 3. The person who decides the sequence of votes (the "agenda-setter") has real power 4. Any outcome can be reached by choosing which should be the first pair to be voted on. -i.e - a voter who wants X to win will want the first vote to be between Y and Z. 5. Individuals may respond to agenda setting by misrepresenting their preferences. -i.e - voting for X in order to have the second vote between X and Y

Lindahl Procedure

1. Individual's demand a quantity of public goods on the basis of a specified distribution of the tax burden (a specified share of the cost) 2. These tax shares function as personalized prices ("Lindahl prices") 3. Tax shares are announced, and if individuals demand different quantities the tax share of the individual with the higher demand is increased. 4. An equilibrium is a set of Lindahl prices such that everyone demands the same amount of the public good 5. Issue - people have a strong incentive to lie about their preferences so as to get nearly as much of the public good with a lower share of the tax

Economic issues with the benefits policy

1. Information asymmetries 2. Equity-efficiency tradeoff

Run-Off Voting

1. Initially only first-preference votes are counted. 2. If there is no option with more than 50% of the votes, a second run-off election decides between the two candidates with the highest number of first-preference votes. 3. Can again fail to select Condorcet winner.

Variable fees

1. different fees for existing members and "new joiners" 2. members of the efficient-scale large club could be enticed to move to an inefficient small club by low fees, yet also the large club could entice new joiners from the inefficient small club by charging sufficently-high fees to offset the additional congestion.

Issues with measuring lifetime income

1. Lifetime income is an expected value, and cannot be measured objectively. --current consumption smoothing may be a good proxy for lifetime income if households consumption smooth their consumption over income fluctuations 2. What about households who cannot borrow enough to smooth their consumption over periods of low income? --we may still want to have some within-lifetime redistribution, for reasons of efficiency --moral hazard: would we really let the improvident elderly starve?

Clarke-Groves

1. Mechanism to induce correct/honest statement of individual valuation placed on a public good. 2. Voters state preference value (value they place on a proposal) 3. Values are added up, and the policy option with the highest aggregate value is chosen. 4. Tax charge is as follows; --if the voter's vote was decisive, tax=net gain to the rest of society if the individual had not voted --if voter's vote was not indecisive, they pay no tax. 5. Voter pays tax only when decisive 6. Tax paid is only the amount needed to "swing" the decision, not the voter's own valuation 7. Tax never exceeds benefits received 8. No incentive to misrepresent preferences --they would run the risk of paying a tax that exceeds their true value/benefit from the good, or miss out on a chance to swing the public decision.

Government as a provider of public goods and reducer of externalities

1. Median voter theorem - median voter determines the demand for public goods 2. median voter demand function for government is f(income, relative price of public goods to private goods, tastes) 3. price elasticity of demand for government (how responsive voters are to a change in the price of government) and the price of government determines the size and growth of government and whether the government grows or contracts. --If the demand for government is price inelastic and price of government increases, government will grow.

why might the flypaper effect arise?

1. Niskanean model of bureaucratic behavior implies a higher propensity to spend out of grants than marginal taxpayer income. 2. Oates: fiscal illusion on the part of voters. They do not realize that a central government grant is equivalent to an increase in their income. 3. King: local government decisions reflect median voter's preferences, and median voter chooses preferred local spending and tax, subject to the constraint that the income of poor taxpayers should not fall below some minimum acceptable level F. if this constraint binds,(because the available local tax would bear heavily on the poor) median voter may choose to increase spending when grant increases.

Lorenz Curve (Measuring Inequality)

1. Plot of the cumulative percent of the population against the cumulative percent of total income 2. Difference/gap between Lorenz Curve and diagonal indicates extent of inequality

Uncertainty and Instrument Choice

1. Policy-makers face considerable uncertainty when regulating pollution, both about marginal abatement costs and damage costs 2. Different instruments "fix" different outcomes --quantity-based regulations --price-based regulations

Tradeable Permits (Emissions trading)

1. Quantity constraint on emissions 2. Trading in emissions permits

Vickrey Auction (second-price auction)

1. Sealed-bid auction for a sale of a private good 2. Highest bidder wins, but pays second highest bid 3. Pareto-optimal outcome (good goes to highest value use) 4. No gain from strategic bidding, so honest revelation of preferences 5. Payment made is the opportunity cost of the winning bid (the value of the good in the next-highest application)

Universal Benefits vs. Means-tested benefits

1. Universal benefits have a higher public expenditure cost than means-tested benefits --benefit payments to non-poor 2. Costs of administration compared with means-tested benefits --avoids costs of "means-test" --higher number of recipients increases admin costs 3. Avoids the "low take-up" of certain means-tested benefits --possible stigma of claiming low-income benefits, which may deter some poor households from claiming benefits (not wanting to use food stamps, children receiving free meals at school may be targeted) --"hassle" with claiming means-tested benefits (time and effort involved in claiming may deter some potential claimants) 4. avoids risk of means-testing error, and that of means-test fraud

Incentive-Compatible Mechanisms to fix Samuelson Condition

1. Vickrey Auction 2. Clarke-Groves Mechanism

Approval Voting

1. Voters may vote for as many of the options as they wish, rather than just one. 2. Does better than plurality voting but still risks failing to pick the Condorcet winner.

Borda Voting

1. Voting system in which voters rank options in order of preference 2. Each option is assigned a number of points corresponding to the number of options that the voter ranked lower. 3. The option with the highest points total is selected as the social choice. -tends to favor outcomes with a broad measure of support, rather than just the preference of the majority -however, it is possible for an option to be chosen that differs from the first choice of the majority of voters -violates Arrow's Impossibility requirement of the independence of irrelevant alternatives

Problem with Clarke Groves

1. What do we do with the revenue generated? --waste of resources and increases the costs of the system --not practical --even if the revenue was spent on the public good, it would serve as a subsidy to the "yes" vote and would incentivize individuals to overstate their preferences for additional public spending. --waste from throwing away the revenue may outweigh the benefits from actually implementing this policy --the problem of unwanted revenues diminishes as the number of individuals in the mechanism increases

The Median Voter Theorem

1. Where voter preferences are single-peaked the outcome of majority voting (amount of the public good) is the option most preferred by the median voter. Assuming the choice is made from a set of alternatives that differ in only one dimension (such as a left to right spectrum). 2. If all voters have single-peaked preferences then the alternative that is the most preferred by the median voter will defeat any other alternative in a pairwise majority vote. 3. If voters' preferences are single-peaked then the median of the distribution of voters' preferred options will be the Condorcet winner.

Should the government allow insurance companies to use genetic testing to better assess the health status of their applicants? Would this genetic testing help or hurt those who are in bad health? Would genetic testing mitigate the problem of adverse selection? Would it decrease the number of people without health insurance?

1. With a separating equilibrium there is underprovision of insurance to the low-risk individuals due to the possibility of high-risk individuals to imitate the low-risk. 2. Low-risk individuals are those in good health and cannot obtain as much insurance as they would like. 3. High-risk individuals are those in bad health and they can buy fair insurance that provides full coverage. 4. To signal their health status, those in good health have to incur the cost of partial coverage. 5. The genetic test would remove such signaling costs to the benefit of those in good health and without cost for those in bad health. 6. Genetic testing would mitigate and possibly remove the issue of adverse selection in insurance markets. 1. Under a pooling equilibrium, those with good health pay more than the fair price and those with bad health pay less than the fair price. 2. Genetic testing would increase the price of insurance for high-risk individuals and decrease the price of insurance for low-risk individuals. 3. Those with bad health may find the price of insurance too high and drop out of the insurance market. 4. As a result, in the presence of pooling insurance, genetic testing would increase the number of people without insurance, whereas separating insurance would have no effect on participation rates.

Universal Credit

1. a single integrated means-tested benefit to replace 6 existing benefits paid to working-age households: --working tax credit, child tax credit, housing benefit, income support, income-based Jobseeker's Allowance, income-related employment and support allowance 2. proposal responds to criticisms of the existing set of means-tested benefits --complex, poorly understood by claimants --complicated to administer, especially when people move in and out of work --provide poor incentives to work, can penalise savings 3. intended to improve work incentives through higher work allowances and lower withdrawal rate 4. smooth the transition in and out of work, both in terms of income and administratively 5. reduce poverty among people in work who are earning low wages 6. simplify the benefit system, making it easier to understand and administer

Means-tested Welfare

1. based on assessment of household "means" (income or wealth) 2. Paid only if income or wealth falls below the defined threshold 3. Ex: social care for the elderly (home-based help with cooking, washing, etc). In the UK this is only provided free to old people with assets (savings) of less than about 23,000 pounds.

means-tested benefits, no taper

1. benefits paid only to people with income < L 2. 100% withdrawal of income at L issues: 1. severe disincentive effects at incomes below that point 2. possible "poverty trap" where someone would be better off not working

Working Tax Credit (WTC)

1. cash benefit paid to working individuals and families with low-incomes 2. assessed on the basis of individual income 3. based on family income 4. aims to enhance work incentives and reduce the problem of "better off not working" 5. they are costly and they pay benefits to people who are not the poorest in society 6. reflect a view that the long-term solution to individual families' poverty is to get people to work (increase LFP)

Bureaucracy Model (Niskanen)

1. citizens measure size of government by quantity of taxes 2. some taxes and tax collection measures are less obvious to citizens than others - and are more likely to be used by the government (principal: agent problem) 3. because of these "hidden taxes" voters do not realize the true size of government

Requirements of efficient bargaining between polluters and victims

1. clear definition and enforcement of property rights 2. zero transaction costs 3. full information, non-strategic bargaining

uniform fees

1. clubs charge all members the same fees 2. two equal-sized clubs cannot be in equilibrium. At that point, an individual has an incentive to move to the other club, since they will pay less in fee than the benefits they receive. 3. one club will grow until it reaches optimal size, and then it will refuse to accept additional members, leaving the remainder of the population either in a sub-optimal club, or no club at all. 4. is this outcome optimal for society as a whole? Maybe not. The clubs make decisions that are efficient for their own members, but not necessarily for society as a whole.

Small clubs

1. congestion effects are significant, so the optimal size of the club is small relative to the total population 2. clubs will choose efficient size, and provide the club good to the efficient level

In-kind Transfers

1. constrain recipients' behavior --"the money must be spent on x" 2. enforced in various ways --vouchers (food stamps can not be converted into cash equivalent) --direct payment (housing benefit) --direct provision of goods and services (health care and education) 3. can be universal or targeted/means-tested 4. in the US, cash benefits are largely targeted at the elderly and in-kind benefits are largely targeted at the poor

Abatement Costs

1. costs of installing pollution filters 2. the additional costs using "clean" production technologies compared with "dirty" production technologies 3. costs (in terms of reduced profit) of reducing emission by operating polluting plants at lower output 4. costs (in terms of foregone expected profits) of premature closure of polluting production factories

Controlling moral hazard

1. deductibles and co-insurance (increasing the cost to the individuals) 2. better information and monitoring 3. rationing on the basis of assessments of needs -public insurers have less incentive to control MH -private insurers cannot sustain huge losses indefinitely without going bankrupt

In-kind transfers which permit top up

1. ex: food stamps 2. may constrain behavior if individual would have had a higher utility with a cash transfer instead of IKT (if they don't like consuming food and want to consumer more of other goods)

Club Good

1. excludable goods with congestion excludable and subject to congestion (partial rivalry) when the number of consumers increases ex: cinemas, private parks, satellite television, art gallery 2. private provision is then feasible, and possibly efficient --membership fees --congestion: as the number of members increases, the benefit per member decreases

social assistance (welfare)

1. final safety net for people whose income falls below certain minimum threshold (Benefit of last resort) 2. usually dependent on assessment of needs and family resources

means-tested benefit, with income taper

1. full benefit paid up to income L, and then reduced at a taper rate 2. each pound of income reduces benefit by a taper rate (eg 10%) until the benefit reaches zero. 3. additional income above the entitlement threshold (L) leads to a gradual reduction in benefit where additional work will lead to additional net income 4. disincentive reduced, but not eliminated 5. rate of taper + income rate determines the effective marginal tax rate

Monopolized Government

1. government behaves as monopoly and bundles non-monopolized (private goods) with goods they can monopolize (public goods that only they can provide) 2. consumers will then buy the monopolist's package as long as their consumer surplus on the bundled products exceeds the cost of the individual packages 3. this bundling of services results in higher levels of government output --there are certain goods that only the government can provide, and voters will always buy the bundle as long as their consumer surplus exceeds the cost

"Citizen over state"

1. government is demand driven 2. size of government expands because citizens demand more government

"State over citizen"

1. government is supply driven 2. size of government does not depend on citizens demand 3. government supplies more government independent from demand due to inherent inefficiencies in the public sector activities and the incentives facing government bureaucrats (to have a large bureaucracy to increase power, prestige, salary)

Measurement issues in measuring inequality and poverty

1. households as the units of analysis 2. interpersonal vs. life-cycle redistribution

Lifetime Income

1. if households can borrow and save, they can smooth their consumption over temporary income fluctuations. Their lifetime income is the budget constraint. 2. lifetime income would then just be the right measure of those who are truly poor, rather than just experiencing a temporary income loss. 3. The state may be more concerned about helping the truly poor than the temporarily poor.

Adverse selection

1. if insurer cannot distinguish between high-risk and low-risk individuals. 2. information is known by insured persons 3. the offer of actuarially-fair insurance will result in the insurer's portfolio containing a disproportionate share of high-risk individuals

When will wealth effects arise in Coasean bargaining?

1. if the parties bargaining are firms, wealth affects will not arise 2. if the parties bargaining are individuals, wealth effects may arise. --MAC may include behavioral changes (eg. turn down the loud music that upsets the neighbors). The money-equivalent of this will depend on the individual's wealth: a wealthier individual will be more willing to pay more to play loud music --MDC may include utility losses (eg. health effects from pollution, or irritation from neighbor's noise). Wealthier people would be willing to pay more than poor people to avoid the pollution.

Assignment of legal rights (to pollute or not to pollute)

1. if the polluter is assigned rights ("permissive" assignment of rights), then the polluter is wealthier than if the victim is assigned the rights 2. if the victim is assigned rights ("restrictive" assignment of rights) then the victim is wealthier than if the polluter is assigned rights - will lead to payments to the victim from the polluter --invariance thesis does not hold where wealth/income effects either MAC or MDC

Market power and the efficiency of emissions trading

1. in a competitive market, firms should be willing to trade allowances at prices reflecting their marginal abatement costs, so that all abatement-cost-reducing emissions trades take place. 2. where market participants have market power (monopoly), they may restrict their trades in order to affect the price at which trades take place --some trades that would reduce abatement costs will not take place --monopolist may restrict sales in order to get a higher price for each unit sold 3. market power can arise either on the buyer or seller side of the market --reflects the initial allocation of allowances 4. trading may be affected by market power in other markets - ex: the product market --firms may forego allowance trades in order to drive up the costs of their product market competitors

How do we control moral hazard in principal: agent relationships?

1. incentive or performance contracts by (partially) aligning the interests of the principal and agent --bonuses for senior managers based on profits or other targets --sales staff pay linked to performance (commission) --employee share ownership and share option plans

Negative Income Tax

1. income tax rate also applies below the threshold, and taxpayers receive payment in a cash benefit (negative tax) 2. at zero gross income, the cash benefit/payment (intercept) can be interpreted as the citizen's income, with all income above this taxed at a constant marginal rate.

Examples of Principal: Agent Relationships

Employer (P) and employee (A) Financial Adviser (A) and Client (P) Dentist (A) and Patient (P) Shareholders (P) and Managers of firm (A)

Moral Hazard

1. individuals may choose (rationally) to act in ways that benefit them, to the disadvantage of the other party to the contract. 2. In insurance industry, moral hazard takes the form of individual actions by insured people that increase the expected value of loss --dangerous driving, reduced incentives for household security, demands for "unnecessary" medical tests/treatments -presents an efficiency problem because the insured person's decisions no longer reflect the full cost and benefits of their decisions. The benefits enjoyed by the insured (unnecessary medication) may not be worth the full costs to the insurer.

Correcting Information Asymmetries with IKT

1. information asymmetry between the government and people in need. 2. government can not identify the needy 3. if cash benefit is provided, all will claim it (needy and non-needy) 4. design IKT so that it is only attractive to needy 5. individuals self-identify as needy 6. IKT acts a separation device "self-targeting property"

Conventional Income Tax

1. liability starts at income threshold 2. marginal rate applies to each pound above this threshold

how to make IKT self-targeting?

1. limited quantity (no scope for top-up) --better off may prefer to opt out and buy preferred quantity, and choose not to use the government benefit 2. low-quality provision --better-off may wish not to consume (ex: pensioners free bus travel) 3. time costs of claiming (bureaucracy, waiting) --time may have a higher opportunity cost for the rich, employees, etc. 4. stigma/psychic costs --poor may be more willing to target humiliation than the rich

Damage Costs

1. losses in profit experienced by businesses which are adversely affected by production externalities 2. losses in utility suffered by individuals (value of injury to health) 3. cost of defensive measures taken by firms and individuals to reduce their exposure to pollution damage

information asymmetries

1. moral hazard and the incentive to work --how can the government distinguish between the poor who need help, and shrinkers (unmotivated, lazy workers) who do not? 2. information needs for targeting individuals --gathering information to target benefits can be costly

issues concerning the initial distribution of permits

1. most emissions trading systems issue permits free to existing polluters ("grandfathered") 2. foregoes potential auction revenue (or equivalent emissions tax revenues) 3. requires higher taxes to make up for the foregone revenues 4. free distribution creates incentives for rent-seeking lobbying (waste of resources, and potentially corrupting)

In-kind transfers without top-up

1. must consume a fixed amount of the good

Adjusting Household Income to reflect the number of people living from the household's income

1. no adjustment for household size --large households count as rich households 2. calculate per capita income --ignores household public goods (TV sets) and other economies of scale in households 3. Equivalence scales --to reflect differences in numbers and ages of household members 4. Equivalence scales typically assign "weights" to households with different numbers of members --add up the relative weights and then divide household income by this "equivalizaiton factor" to obtain the household's "equivalent income"

production externality

1. occurs where the profits of a firm is affected directly by the actions of another firm or individual 2. Ex: a smoky factory increases the costs of a neighboring laundry 3. Ex: a beekeeper benefits from a nearby apple orchard (pollination)

consumption externality

1. occurs where the utility of one agent is directly affected by the actions of another agent 2. Ex: my neighbor's violin practice sessions reduce my utility 3. Ex: a local factory emits dangerous pollutants which injure my health, and hence my standard of living

Trading in emissions permits

1. opportunities for polluters to buy or sell permits 2. trading provides polluters with flexibility, giving them control over their abatement emissions levels 3. the market in permits determines which firms undertake the required abatement to bring total emissions in line with the cap 4. where firms have different abatement costs, the flexibility offered by trading reduces the costs of achieving the required abatement.

"permissive" assignment of rights

1. polluter has the legal right to pollute 2. would choose xp (zero abatement) in the absence of a deal 3. moving to x* involves extra abatement costs of d+c 4. the net gain from coasian bargaining is d 5. optimum can be achieved if victim pays polluter anywhere between c and c+d to reduce emissions to x*

Equity: efficiency tradeoff

1. poverty trap --paying adequate benefits to the poor to alleviate poverty, while means-testing eligibility to avoid excessive spending on public spending and taxation, can lead to problems where some individuals may be better off not working 2. the overall economy --policies to alleviate poverty require taxes to pay for them and taxes generate a DWL (efficiency cost)

efficiency of the permit market

1. practical significance of transaction costs and/or market power 2. emissions trading will be a poor choice when small numbers of firms are involved

Tiebout (1956) purpose of decentralised government

1. provision of local public goods. 2. population mobility matches citizens to communities offering the level of public goods they prefer. 3. an alternative solution to the public good provision problem. 4. takes care of preference revelation problem with Samuelson condition 5. Tiebout analyses cases of local public goods: public goods with benefits confined to a particular geographical area (public park, environmental policies that improve local air quality, street lighting)

social security

1. public assistance for poor households or for households with particular needs 2. usually a cash transfer 3. sometimes benefits-in-kind (free school meals, food stamps, pensioner free bus travel) 4. can be "means-tested" or "universal"

Universal Benefits

1. qualifying criteria do not include a "means test" 2. universal benefits are normally "contingent" on some household or individual characteristic or situation such as sickness, disability, old age, unemployment 3. ex: UK Child Benefit paid to mothers of children under age 16

Quantity constraint on emissions

1. quantity of permits issued by the government to set a cap on emissions. --if the cap is less than "business-as-usual" emissions, the scheme will reduce emissions to the level of the cap --if the cap is above the "business-as-usual" level of emission, the scheme will have no environmental impact on emissions, and the permits will have no value

Area under MDC schedule over a particular range

1. shows the total reduction in damage costs if emissions are cut from E0 to E1 2. shows the total environmental benefit achieved through reducing emissions by that amount

Impact of EITC on labor supply

1. single mothers were more likely to work because of the EITC (Eissa and Liebman 1996) 2. income effect of EITC on those who are already in work might reduce hours of work, but this is small compared to the positive work effect on non-workers 3. disincentive on married couple's labor supply decision because EITC is based on family earnings. Second earner faces a very high marginal rate of effective tax. 4. main effects of EITC are felt by women. EITC has little effect on rates of male employment.

Are homogeneous communities desirable?

1. social benefits of mixed communities 2. mix of skills required --Tiebout mechanism sidesteps this by assuming that residence decisions can be separated from labour market decisions 3. homogeneous small communities may be inefficient producers of public goods --heterogeneity may permit larger communities and thus more efficient "spreading" of the costs of public goods 4. an equilibrium based on mobility may not be stable -could cause externalities -possible congestion costs, if public goods are congestible -write-off sunk capital in the area losing population

Issue of tradeable permits (emissions)

1. sold at a fixed price or auctioned 2. issues to existing polluters in proportion to their historic emissions ("grandfathered in"

Flypaper Effect

1. suggests that a government grant to a local government increases the level of local public spending more than an increase in local income of an equivalent size. --lowest estimate from spending shows that $1 increase in additional grant increases local spending by 25 cents. --highest estimate from spending shows that $1 in additional grant is entirely spent on additional local services.

Negative Income tax

1. taxpayers with income below a certain threshold would receive income-related payments at the same rate as the tax applied to additional income above the threshold. 2. equivalent to another proposal: for a guaranteed minimum citizen's income which everyone would receive. Income tax would then apply to all income above this level.

Marginal excess burden

1. the additional excess burden incurred in raising an additional pound in revenue. 2. marginal excess burden is likely to be greater than average excess burden, because the distortionary costs of taxation rise more than in proportion to tax rates --doubling tax rate increased welfare loss by 4x 3. an efficient revenue system, raising a given tax revenue requirement at least economic cost, would use each tax instrument up to the point where the marginal excess burden from each tax is equalised

Large Clubs

1. the efficient size of the club is large relative to the total population --what happens when the optimal club is larger than half the population?

Rich could set G to exclude poor

1. the poor individual should move to the rich community to have public spending on the public good increase from G1 to G2, they will be better off. --however, the rich may be concerned that the inflow of poor voters will become the majority, and they will dictate public decisions in line with poor voters. 2. So, the rich could set G to exclude the poor: 3. if G0>G2, the poor individual will be taxed too high to be able to live in the rich community 4. If G0<G1, the rich will be able to purchase private gods that are substitutes for the public good, but the poor will not be able to afford this. 5. even in the absence of legal restrictions on joining a community, voters can still act to ensure homogeneous communities

Measuring Poverty

1. the starting point for the measurement of poverty is to set a poverty line that separates those viewed as living in poverty from those who are not. 2. strong assumption that there is a precise switch between poverty and non-poverty as the poverty line is crossed 3. Simplest measure of poverty is the head-count ratio, which determines the extent of poverty by counting the # of households whose incomes are not above the poverty line and expressing the number as a proportion of the population. 4. Aggregate poverty gap - the simple sum of the income gaps of the households that are in poverty. The interpretation of this measure is the additional income for the poor that is required to eliminate poverty.

Poverty trap

1. the withdrawal of means-tested benefits when someone starts to work can create a "poverty trap" where individuals may be better off not working at all. 2. extent of this problem depends on the generosity of out-of-work benefits, the taper rate for benefits, and the income taxes paid by low-income workers

"Better off not working"

1. this is the poverty trap 2. arises when people pay income tax and at the same time face high rates of benefit withdrawal

"restrictive" assignment of rights

1. victim has legal right to clean air 2. victim would choose XR (zero emissions) in the absence of a deal 3. moving to x* involves extra damage costs of b, but reduced abatement costs of a+b 4. net gain from coasian bargaining is a 5. optimum can be achieved if the polluter pas victim between b and a+b to increase emissions to x* --diagram assumes that abatement and damage costs are unaffected by the assignment of rights

Asymmetric Information and Government Failure

1. voters elect politicians to represent their interests, but cannot be sure that they then do this. 2. politicians in government may have difficulty controlling the actions of the bureaucracy. 3. senior managers in the civil service may have difficulty ensuring efficiency and effectiveness in the implementation of policy by more junior staff or agencies. Ex: Nikskanen's Budget-Maximizing Bureaucracy: 1. assumes Bureaucrats have scope for hidden action that allows them to increase their agency's budget well beyond the socially-optimal level, because they derive hidden benefits (prestige, power, individual income) from running an agency with a larger budget

Optimal provision of club good - how much of the club good should the club provide?

1. where the sum of the marginal rates of substitution between the public good and the private good across all n individuals is equal to the marginal rate of transformation between the public good and private good in production (Samuelson Condition) 2. efficiency is satisfied: exclusion of non-members ensures that the club good will be provided at the optimal level to members 3. joining a club is an act of "preference revelation"

How much insurance?

1. with actuarially-fair insurance, a risk-averse individual will fully insure against uncertainty 2. costs of administration mean that insurance premiums normally exceed the expected value of the loss. In this case, the risk-averse individual may choose only partial insurance.

Tiebout

1. with local public goods, population mobility matches individuals to their preferred level of provision of public goods. 2. people "vote with their feet" 3. mobility leads to population "sorting" 4. leads to homogeneous communities (within a community all residents have the same preferences for public goods)

Requirements for Tiebout mechanism to work

1. zero cost of mobility 2. "enough" communities 3. choice of residence determines public good consumption 4. choice of residence independent of employment 5. lump-sum local taxes Do governments look like this? 1. not in the UK, where they are large. Possibly in the US, where local governments are quite small. 2. high costs of mobility for some groups 3. outside urban areas, choice of residence and employment are not independent 4. lump-sum local taxes are rare

How many members should the club admit?

Adding extra members spreads costs of providing the club good but increases congestion. 1. if there is congestion, an additional member imposes a marginal utility cost (marginal congestion cost) on each member 2. but each extra member pays the fee, reducing the cost of providing the club good to the existing members 3. optimal membership: club should increase its membership up to the point where the marginal utility cost to existing members (rises with size) is exactly offset by the additional fee income from the marginal member (falls with size).

Independence of Irrelevant Alternatives

Adding new options should not affect the ranking of the existing options. -if the group prefers A to C and then B is introduced, they can like or dislike B, it can fall anywhere among the ranking, but the group must still prefer A to C.

Principal: Agent

Agent works on behalf of the principal

Externality

Arises when the utility of an individual or the production function of a firm is directly affected (positively or negatively) by the decisions of another agent in the economy (individual or firm), and where this effect occurs without their consent.

Coase Theorem (efficient bargaining)

Bargaining between polluter and victim may lead to the efficient level of pollution abatement, without the need for government regulation --Coase argues that identifying the "cause" of environmental problems leads to a lot of wasted legal effort --Coase argues that it matters less that we identify whose fault the problem is, than that we assign rights clearly and unambiguously to someone, so that the bargaining can proceed.

Ratchet Effect

Constant spending until a crisis, then higher spending afterward. 1. Citizens like public spending, but dislike taxes. 2. Governments like public spending, but are constrained by the desire to be re-elected, and so they must pay attention to the preferences of the citizens. 3. Citizens will consent to higher spending during wartime/major crises. The re-election constraint becomes less binding during this time. 4. After the crises, expenditure does not fall back to its previous level. -citizens become accustomed to higher spending -cutting spending is much harder than increasing spending -higher borrowing during crises means higher debts that need to be paid off -promises made by the government to the taxpayers during periods of upheaval then have to be met

Opt-Out Altenratives

Ex: in private health care or private schooling. For Private Schooling, G0 is a threshold after which the individual prefers private to public education. The lower the public spending in education the higher the utility associated with private schooling. 1. If G<G0 the individual will perceive the quality of state school as poor, and will choose to go private. 2. If G>G0 the individual will opt for public education.

Public Goods

Goods that are non-excludable and non-rival

Transitivity

If the group prefers A to B and B to C, the group must prefer A to C and cannot prefer C to A. -The Condorcet Paradox shows how majority voting fails to meet this condition and leads to cycles in collective preference.

Formal Statement of Coase Theorem

In a competitive economy with complete information, and zero transaction costs, the allocation of resources will be efficient and invariant with respect to the legal rules of entitlement

The Baumol's law can explain why musicians in 1965 made a lot more money than musicians in 1865. True or False?

Increase in capital-intensive technology from 1865 to 1965 lead to an increase in productivity of labour and then an increase in wage.

Coase Theorem

Indicates that sometimes individuals may be able to bargain with polluters, and this may correct externalities without the need for public intervention.

Arrow's Impossibility Theorem

It is impossible to devise a social choice rule that meets this fairly basic set of requirements: 1. Independence of irrelevant alternatives 2. Non-dictatorship 3. Pareto-improvement 4. Unrestricted Domain 5. Transitivity

Efficient Provision of Private Goods

MRS1 = MRS2 = ..... = MRSN = MRT 1. Pareto-optimal provision of a private good (good x) occurs where the Marginal Rate of Substitution (MRS) between good x and other goods is the same for all consumers, and is equal to the Marginal Rate of Transformation (MRT) in production. 2. An extra unit of a private good can benefit either person 1 or person 2 (since consumption is rival) 3. Where the marginal rate of substitution between one private good and another is equal for every individual, and is equal to the MRT between the two goods in production

Government as a redistributor of wealth and income

Meltzer and Richard Theory: 1. assumptions: --lesiure and fraction of total time worked are inversely related --consumption and tax rates are inversely related --consumption and lump sum grants are positively related --income and productivity are positively related 2. assumptions imply that higher levels of productivity equates to a higher level of income, and the higher income increases consumption and well-being 3. individuals demand the combination of tax rates and lump sum payments (given by the government) that will make them better off (max well being) 4. those with a low level of productivity and income will demand a higher tax rate and higher lump-sum payment from government Kristov and Lindert Theory: 1. amount of redistribution is based on social affinity 2. closer the middle class feels to the poor, or the slower incomes are growing, the greater the amount of redistribution

Can an efficient and more equitable outcome be achieved by the market mechanism only?

No, the market mechanism only accounts for "efficiency." We need an initial re-distribution of resources (distributional function of the government). This is the "equity" part of the second fundamental theorem of welfare economics.

Lindahl Equilibrium

Occurs where all individuals demand the same level/quantity of a public good. Individuals will face different tax shares reflecting their differing demands of the public good.

Interest Groups

Olson: 1. an interest group is organized collection of individual voters who have the same preference for a specific policy 2. by lobbying the interest group can obtain policy that has direct benefits for the interest group but the costs of policy are spread across millions of taxpayers

Baumol's Law

Over time, the public sector will increase as a proportion of the economy. 1. The public sector is labor-intensive relative to the private sector. 2. Cannot increase productivity by substituting capital for labor. Ex: hospitals need a minimum number of doctors per patient. Maximum class sizes set a lower limit on the number of teachers per school. 3. Wage rates between the public and private sector must be similar. 4. In the private sector, ↑capital-intensive technology leads to ↑labor productivity which leads to ↑private sector wage. 5. Since the public sector cannot substitute capital for labor, wage increase in the private sector becomes a cost increase in the public sector. 6. For private and public sector output to remain in the same proportion, public sector expenditure must rise as a proportion of total expenditure.

Efficient Level of Pollution Abatement

Requires a balance between: 1. The costs of pollution abatement 2. The benefits of abatement, in terms of reduced environmental damage **The net benefit of pollution abatement is maximized when: MAC = MDC

Major flaw of Lindahl Procedure/Samuelson Condition

Samuelson Condition requires full information on the individual's marginal rate of substitution between the public and private good. i.e - the value they place on the public good compared with other consumption. 1. Requires individuals to report their demands for the public good honestly, however, they have a strong incentive to understate their preferences. 2. By accepting a slightly lower level of public good provision, they can pay a much lower individual tax share.

Unrestricted Domain

The collective choice method should accommodate any possible individual rankings of options. -collective choice method should work in all circumstances so that the method is not constructed in such a way as to rule out or fail to work on some possible individual rankings of alternatives.

Nondictatorship

The collective preference should not be determined by the preference of one individual.

Which one of the fundamental theorems of welfare economics points towards the allocative function of the government?

The first fundamental theorem of welfare economics. -there is an important distinction between allocative (providing resources to support public goods) and distributional (deciding to whom the resources are allocated to).

Which perspective highlights why we SHOULD have government in a market economy?

The normative perspective

What explains the growth in the scale of the public sector in the 20th century? (which perspective?)

The positive perspective.

Wagner's Law

The share of the public sector in GDP has been increasing over time. 1. The growth in the economy results in an increase in complexity. Economic growth requires the continual introduction of new laws and the development of the legal structure. Law and order imply continuing increases in public sector expenditure. 2. Urbanization and increased externalities associated (such as congestion and crime) with it require intervention. 3. The goods supplied by the public sector of high income-elasticity of demand. (Education, health care, recreation). As economic growth raises income there is an increase in demand for these products, thus public sector expenditure must rise. -↑income, ↑demand for public spending, ↑public expenditure

Emissions Trading: Transaction Costs

Transaction costs may reduce efficiency of tradeable permits market. 1. cost of optimizing --assessing whether to abate or buy permits 2. search costs --find information about distribution of market prices --finding a trading partner 3. cost of assessing validity of rights --if "baseline and credit" trading systems allow trading before abatement verified, invalid permits may be offered for sale 4. costs of negotiation 5. cost of release of confidential information --the act of trading releases information of value to competitors

Condorcet Paradox

Transitive preferences at the individual level do not necessarily imply transitive majority-voting outcomes.

The key feature in the Niskanean model is a monitoring failure? True or False.

True. This is the model of bureacracy and the principal agent problem that arises due to the bureacracy wanting to maximize their agency's budget. Bureacrat's preferences push public spending above the level warranted by voters' preferences.

Pareto-improvement

Unanimity should prevail where it arises. If everybody agrees on the ranking of all the possible options, so should the ranking of the group.

Multi-dimensional Choices

Voters face multi-dimensional choices, rather than the single-dimensional choice of an expenditure level. We can use a given transport budget to: -pay for a high speed train -OR pay for a new runway in Heathrow

Public expenditure rises with income as demand increases. This is an example of the...

Wagner's Law

Universal Benefits

a fixed lump sum paid to all people meeting the eligibility criterion (age, per child, etc.)

First Fundamental Theorem of Welfare Economics

a perfectly-competitive market economy leads to a pareto optimum, provided that certain conditions are met -a claim about efficiency, a market economy under specialized conditions will maximize the value of output -makes no claim about "equity" or fairness

Risk-aversion

a risk-averse individual prefers a guaranteed amount x, to an uncertain prospect (a gamble) with the same expected value -risk-averse individual is prepared to pay an insurance premium in excess of the expected value of the loss

Second Fundamental Theorem of Welfare Economics

after a suitable redistribution of initial wealth, any desired Pareto-efficient allocation can be achieved by a perfectly competitive market economy, provided that certain conditions are met

poverty

an inability to maintain an "acceptable" standard of living -policies tend to focus on individuals at the lower end of the income distribution

Non-rival

an individual's consumption of a good has zero opportunity cost, and therefore does not reduce the amount of the good available for consumption by anyone else. -implies that exclusion would be inefficient, even if practical

Condorcet Winner

an option which would win successive majority votes if considered in pairwise votes against other options

Musgraves

argues society may have paternalistic objectives which underlie public assistance to poorer households. Governments or its agencies may know better than individual households what is in their best interests, and may want to constrain their choices in various ways. ex: education policy where it is sometimes argues that people are short-sighted and save insufficiently or poorly informed about the benefits of education and under-invest in education and training. ex: households otherwise won't care about nutrition or will fail to provide adequate nutrition to their children.

pareto-improving

at least one party to the transaction is made better off; and neither is made worse off by the transaction

relative poverty

defined in terms of exclusion from the normal activities of society -poverty line may reflect social norms and expectations (having a car, TV, etc.)

absolute poverty

defined in terms of inability to subsist

All-or-Nothing Preferences

ex: Olympics -either don't do it at all or spend enough to ensure success, but don't do it half-heartedly

clear definition and enforcement of property rights

if property rights are uncertain, different parties may have different ideas about where the rights lie. -potential purchaser may be reluctant to pay as much as the seller wants, if it is not clear whether the seller has the right to sell

Actuarially-fair insurance

insurance offered at a premium which equals the expected value of insured loss

participation tax rates

measures the total change in taxes and benefits when someone starts work, as a percentage of the total income they would earn. --this, rather than the marginal tax rate is the relevant calculation for the decision whether or not to work. -- bounded by [0,1] --100% = starting to work does not make any difference, get the same if you're unemployed --0% = everything you make is from your income

How sharp should the taper be?

more gradual taper implies: --lower marginal rates --higher public spending --more spending on non-poor --more individual recipients = higher admin costs --more recipients with small entitlements

Contingent Benefits

old age, sickness, disability --generally uncontroversial and limited labor market impact

Non-excludalbe

once the good has been provided to one individual it is impossible to prevent others from benefitting from it -implies that public goods can not be provided by private sector mechanisms (supplying in exchange for payment)

Pros and Cons to IKT

pros: solves principal-agent problem, better at targeting the "really needy" cons: IKT could be a waste, could constrain family choices in a way that is sub-optimal. the vouchers may be a waste of many and may not increase family's utility.

Tobin

society's willingness to redistribute to poor households might not be based on a view that overall income and wealth should be redistributed, but might reflect the narrower view that access to certain goods should be equally distributed. "specific egalitarianism" - view that citizens should be enltitled to access to certain basic needs.

Excess burden = DWL

the additional cost of raising a given revenue through distortionary taxation as compared with a poll tax yielding equal revenue --taxes create DWL because they prevent people from buying a product that costs more after taxing than it would be before the tax was applied

Inequality

the existence of differences in income, or in other measures of economic well-being -policies may redistribute from richer to poorer across any or all parts of the income distribution

elasticity and DWL

the more price-elastic the good, the more DWL/welfare loss it will generate

head-count ratio

the proportion of a population that exists, or lives, below the poverty line

Aggregate Poverty Gap

the simple sum of the income gaps of the households that are in poverty. the interpretation of this measure is the amount of additional income needed for the poor that will pull them out of poverty (is required to eliminate poverty).

government decentralisation

to regional, state, country, municipal level, etc. --countries widely differ in number of levels of government, size of local units, functions assigned to sub-central government, etc.

"efficiency thesis" (coase theorem)

under the required conditions, bargaining will lead to a Pareto-optimum regardless of whether we give the rights to the polluter or the victim

"invariance" thesis (Coase theorem)

under the required conditions, the outcome will be the same equilibrium, regardless of who is assigned the rights --not true when income/wealth effects are present

insurance-type benefits

unemployment insurance

positive perspective to the public sector

what explains economic behavior in the public sector?

normative perspective to the public sector

what should be the role of the public sector in the economy?

externality

when the actions of one agent affect the interest of another agent other than by affecting prices

formal tax incidence

who is legally liable to pay the tax? (who do we collect the tax from?)

effective tax incidence

who ultimately bears the burden of the tax? (Whose living standard falls as a result of the tax?)