1. PUBLIC ECONOMICS AND ECONOMIC HISTORY
Manuela Samek Lodovici – LIUC
Daniele Pozzi –LIUC
James Wickham – Trinity College Dublin 1

2. Aim of the course
The course’s focus is on the role of government in market economies.
The aim of the course is to make you able to:
understand the role of the government in modern economies
assess the rationale for public intervention in different policy fields;
understand the equity and efficiency effects of public intervention and the response of private agents to the governments’ actions;
discuss the design of public programmes
understand differences in government intervention across countries. 2

3. Course outline
The course is organised into three inter- disciplinary modules:
PUBLIC ECONOMICS (Prof. Samek)
EUROPEAN WELFARE STATES (Prof. Wickham)
THE DEVELOPMENT OF MODERN MARKET ECONOMIES: AN HISTORICAL PERSPECTIVE (Prof. Pozzi) 3

4. Timetable 2018 Public Economics (Prof. Samek): February 20 – April 6th
European Welfare States (Prof. Wickham): April 10-13
Economic History (Prof. Pozzi): May

5. Exams and grading system
The grade for each module will be based on an obligatory written examination and an optional part.
The final grade for the course will be the weighted average of the grades of each module with the following weights:
Public Economics 57%
Economic History 30%
Welfare States: 13%
The intermediate exam on April 3 will cover the Economic History Module.

6. Public Economics module (Prof. Samek): outline
1 - An introduction to public economics:
the economic role of government,
the rationale and shortcomings of public intervention according to economic theory,
the efficiency and equity effects of government intervention
2 - Public expenditures:
basic theory,
application to some expenditure programmes: welfare policies, education policies, employment policies
3 - Taxation:
microeconomic and redistributive effects of fiscal policy and of the structure of taxation.
4- Application on Climate change and public policy
Two seminars to be held by Dr. A. Goria.

7. Public Economics Module: references
Lecture Slides
Public Economics textbooks available in the library
J. Gruber, Public Finance and Public Policy, Chapters 2, 5, 6, 7, 11, 12,13, 14,17, 18,19, 20
E. Stiglitz, Economics of the public sector, W.W. Norton & Company, 3rd edition, 2000, chapters 3,4,5, 6,7,8,9, 10,14, 15,16,17,19,20,26; or
other textbooks in the library, such as H.S. Rosen, Public Finance. Irwin, 1992.
Optional readings to be indicated during classes

8. Public Economics Module: examination
Written examination at the end of the course.
Optional: short review paper (4-5 pages) and oral presentation on one/two articles ( points on the grade of the written exam).
The list of articles will be made available by early March, review papers to be handed in before the written exam.

9. Welfare States Module (Prof. Wickham): outline
The European social model
Varieties of welfare states and blocked societies
Inequality and economic growth: Europe 2020

10. Welfare States Module:Readings and examination
Suggested readings (the instructor will indicate the optional ones)
Anthony Giddens, Europe in the Global Age, Cambridge: Polity Press, 2007, Chapters 1, 2, 3.
James Wickham, ‘Potential and weaknesses of the European Social Model’, Employment Research Centre, Trinity College Dublin. Briefing paper for Infowork Project. Available at
T.R. Reid, ‘The European Social Model’, Chapter 6 of The United States of Europe (2004).
André Sapir (2005). Globalisation and the Reform of European Social Models, Brussels: Brugel Institute, Policy Briefs. Available at
Palier, Bruno and Kathleen Thelen (2010). 'Institutionalising dualism: Complementarities and Change in France and Germany Politics and Soicety 38.1:
Albert Alesina and Edward Glaeser (2004). Fighting Poverty in the US and Europe: A world of difference, Oxford UP, chapter 2.
European Commission (2010), Europe 2020: A European strategy for smart, sustainable and inclusive growth. European Commission
Written examination

11. Economic History Module (Prof. Pozzi): outline
The origins of market economy
Development in historical perspective
Evolution of the relationship market / State
A historical perspective on:
Market and natural environment
Market and political freedom
National cases of development
UK, US, Germany, China

12. Economic History Module: examination and references
Students attending classes: written final exam based on the readings indicated in the syllabus and on the notes taken during classes. The instructor could indicate suggested readings for the students who would require it. The books from where the readings come from are available at the Library. All other students: not-attending students or students failing the test : check with Professor Pozzi

13. 1. Introduction: public intervention in the economy
Public intervention is widespread and largely influence our daily life:
The government provides goods and services (health, social assistance, education, defence, environment, infrastructures, etc.),
it defines the rules for socio economic behaviour (legal structure and property rights, environmental regulation and protection of natural resources, safety regulations, employment regulations, etc.)
it ensures a stable socio-economic environment (macroeconomic policies,..)
it finances its activities with taxation and this affects income distribution, and production, consumption and saving decisions. 13

14. The extent of public intervention
Public intervention in the economy is very differentiated across countries:
In extent as shown for example by its incidence on GDP
In the composition of spending
In the structure and incidence of taxation
The variance among countries is mainly explained by different choices concerning the distributive role of government.

15. Total general government expenditure in European countries, % of GDP, 2014- Eurostat data

16. Main components of government expenditure, 2015 (% of total expenditure)

17. Evolution of total general government expenditure, EU-28, , % of GDP and % of total expenditure

18. Total tax revenue by Member States and EFTA countries, 2014 and 2015, % of GDP

19. Main components of government revenue, 2015 (% of total revenue) - Source: Eurostat
Source: Eurostat (gov_10a_taxag)

20. Public Deficit and Public Debt
In most countries public expenditures are higher than revenues
The public balance is the difference between government spending and tax revenues in a particular year. The public balance may be positive or negative (deficit)
The public debt is the total amount of money owed by the government to creditors due to the accumulation of past deficits.
The crisis has increased the public deficit and debt in all OECD countries. Austerity policies (cuts in public expenditures and increased in taxes) have been implemented to reduce public deficits and public debt, but these policies have made it more difficult to get out of the recession.

21. Government revenue and expenditure, 2015 (% of GDP)

22. Public balance, 2014 and 2015 (% of GDP)

23. General Government Debt as a percentage of GDP, 2014 and 2015

24. Fundamentals of Public Economics
Public economics: considers the role of the government in market economies, the rationale behind its intervention and the economic and social effects in terms of the efficiency and equity trade offs.
MAIN QUESTIONS:
When and how much should the government intervene in the economy (should the government intervene more or less than it does?)
How might the government intervene (should it intervene differently?)
What are the effects of public intervention?
How social choices are made? 24

25. When should the government intervene in the economy?
Roles and tools of Government intervention
Behind public intervention in modern market economies is the need to correct actual or perceived market failures (efficiency goal) and to ensure an equitable distribution of resources (equity goal). Often there is a trade off between these two goals.
The public sector has different roles in market economies:
Allocation of resources (efficiency goal)
Income (re)distribution (equity goal)
Stabilisation of the economic cycle
These roles interact with each other. 25

26. When and how to intervene? Allocation role (growth and efficiency)
ALLOCATION ROLE: provide in an efficient way (increasing the size of the pie) goods and services when the market is not able to produce them efficiently (market failures) through:
The production of public goods or the public financing of private provision: i.e. all those goods and services which are under (or not) produced by the market, due to market failures;
The regulation of market activities to support market competition (property rights, legal system, restrictions )
The use of Taxes and subsidies which change the market price of goods or services and affect the production and consumption decisions of economic agents. 26

27. When and how to intervene? Redistributive role (poverty reduction)
The aim is to foster equity correcting the distribution of resources (how the pie is distributed) resulting from market mechanisms, by shifting resources from some groups in society to others and/or by changing initial endowments through:
Monetary transfers (such as welfare benefits to support the income of the poor or the unemployed)
Transfers in kind (provisions of public services such as education, health services, social services)
Taxes/subsidies (for example with progressive taxation or exemptions or subsidies) 27

28. When and how to intervene? Cycle Stabilisation role
Smoothing the business cycle and external shocks, supporting full employment and controlling inflation through:
Fiscal policy (transfers and taxation, automatic stabilizers, public expenditures)
Support to productive activities 28

29. What are the effects of government intervention?: Government failures
Behind public intervention in modern market economies is the need to correct actual or perceived market failures (efficiency goal) and to ensure an equitable distribution of resources (equity goal)
However government intervention may also produce negative direct and/or indirect effects (government failures) due to:
Limited information
Limited control on private markets responses to public intervention
Limited control over the public bureaucracy
Limitations imposed by the political process

30. What are the effects of public intervention?
Have to consider the timing (short vs long term effects) and direct and indirect effects of public intervention on individuals and markets:
Direct effects : effects expected assuming that the behaviour of economic agents do not change as a consequence of government intervention
Indirect effects: effects arising because economic agents change their behaviour in response of the intervention (for example increasing taxation may reduce labour supply)
It is very difficult to measure effects (especially indirect and long term effects) and to establish causation: i.e. whether the effects we observe are due to the government intervention under analysis or not: impact evaluation and cost-benefits analysis (see Gruber ch.3)

31. How decisions are taken?The analysis of social choices
Political economy studies how the political decision making process produces decisions that affect individuals and the economy.
This part of public economics analyses how socially desirable goals are chosen
Socially desirable goals relate to:
- the capacity to support socio-economic growth,
- the capacity to guarantee adequate living conditions to citizens,
- the capacity to guarantee equality in opportunities for all.

32. Key economic issues in public economics
Efficiency:
What is produced, how it is produced and how much it is produced (public vs private goods/services): given available resources make the pie as large as possible
Equity
For whom it should be produced and who should pay for it: distribute the pie in the most equitable way
How are decisions taken?
Trade offs:
an efficient outcome could be not equitable
an equitable outcome could be inefficient

33. Theoretical tools at the basis of Public Economics (Stiglitz ch
Theoretical tools at the basis of Public Economics (Stiglitz ch.3 and 5; Gruber ch.1, 2; Rosen ch. 1,2, 3 and 4)
Consumer theory (constrained utility maximization)
Production theory
Equilibrium and social welfare theory