1. Public Finance Instructor: John Hartman
Today: An introduction to Econ 130
Introduction to public finance
The role of government

2. First issue: Crashers Current cap: 60 students Crash list
You must be on the department wait list to be considered for this class if you are not registered
I will hand out a crash list for you to fill out also
No add codes distributed until next week
Enrolled students get priority for seating
Later option for Econ 130
This class is usually offered each fall

3. Before we begin…
Remember that this is a small class  Ask questions if things are not clear
The syllabus is posted online  See
For most of you, attendance is important if you want to get a good grade
If reading this size font is difficult, I urge you to sit near the front

4. Before we begin… I expect you to know the following tools
Calculus
Derivatives, integrals, partial derivatives
Microeconomics
Econ 1, Econ 100A or 104A, Econ 100B or 104B
Macroeconomics (although not as important for this public finance class)
Econ 2, Econ 101 or 105
If you are lacking on any of these skills, please make sure you are comfortable with these skills by next week

5. Structure of learning Read first Lectures & problem solving in class
Do more problems on your own
Prepare for test
Some time in class to review
Come to office hours if needed
Additional office hours will likely be offered close to tests

6. Textbook for this class
Rosen/Gayer
Public Finance, 9th edition
Published by McGraw-Hill/Irwin

7. Reading the textbook Main text and appendix is 560 pages
Too much for a 30-hour class
Look at syllabus for reading assignments
Maximum of 50 pages per week
Maximum of 300 pages overall

8. Office hours and review sessions
Office: NH 2028
Office hours:
Mondays 2:15-3:15 pm
Wednesdays 9:15-10:15 am
Additional office hours before test will be in a larger classroom if demand warrants it

9. Tests Three tests, as of now scheduled for:
Monday, April 26 (in lecture); 65 minutes
Monday, May 17 (in lecture); 65 minutes
Tuesday, June 8 (final, Noon-2:30 pm); 140 minutes
Some problems on tests will be similar to what we cover in practice problems
Some questions will require you to learn material and think your way through

10. Extra credit
To encourage dialogue and discussion in class, each student that makes at least one intelligent question or comment during the quarter in lecture will receive one percentage point added to her or his final grade
In order to receive your extra credit, you will need to include your name when you state your question or comment

11. Lecture slides I will post a subset of lecture slides on-line
Usually posted 2 days to a week before lecture
On-line slides are not meant to be a replacement to lecture

12. Grading If you do not miss a test:
Two best tests count 40% each
Lowest test counts 20%
Exception: If your best test is the final, the final will count 60% and the other two tests count 20% each
If you do miss a test, check the syllabus for details

13. Grading
I try to write tests so that the average score is between 60-80% (of the second best student)
In other words, don’t worry if everything is not correct
Previous Econ 130 classes
20-25% A+, A, or A-
35-45% B+, B, or B-
30-35% C+, C, or C-
Remaining students: D+, D, D-, or F
Some Econ 130 classes are stronger than others

14. More on this class Early on, I will lecture the entire time
Later on many lectures will be about minutes, followed by problem solving
Most lectures will be devoted to a single topic
Some topics will require more than one lecture
A few lectures will cover multiple topics

15. Problems
Problems have been posted on the class website for you to practice on
I will also do some problems at the end of many lectures
As we get closer to each test, I will devote some time to solving problems on the class website

16. Today What is public finance? An introduction to Econ 130
What will we cover over the next 10 weeks?
Introduction to public finance
The role of government
Organic and mechanistic views of government
Size of government
Tiebout’s model

17. What is public finance? Analyzing government taxation and spending
Examples
Preserving the environment
The roads you drive on
Health care reform
Social security sustainability
Fairness of income distribution
Taxation of income: Tax evasion versus tax avoidance

18. An introduction to Econ 130
This class covers four “units,” each with three to five lectures
Unit 1: Introduction and Microeconomic tools
Unit 2: Public goods, externalities, and government
Unit 3: Health care and income redistribution
Unit 4: An introduction to taxation

19. Unit 1 (begins today) Introduction and Microeconomic tools
Chapter 1: Introduction to public finance and government
Most of Chapter 2: Empirical tools
Part of Chapter 3: Economic theory tools
Most of Chapter 8: Cost-benefit tools
Part of Chapter 22: The Tiebout model

20. Unit 2 Public goods, externalities, and government
Chapter 4: Public goods
Chapter 5: Externalities
Chapter 6: Government and political economy
Chapter 7 & the end of Chapter 8: Government spending on education

21. Unit 3 Health care and income redistribution
Chapter 9: Problems of insurance in the health care market
Chapter 10: Government’s role in health care
Most of Chapter 11: The structure of Social Security; stresses caused by the baby boom generation
Most of Chapter 12: Conceptual issues of income redistribution
Most of Chapter 13: Programs for the poor

22. Unit 4 Primary and secondary effects of taxes
Most of Chapter 14: Taxation and partial equilibrium
Part of Chapter 15: Excess burden
Part of Chapter 16: Tax evasion & tax avoidance
Other taxation topics from Chapters 17 and 18
Basic structure of the United States personal income tax
Rate structure of the United States personal income tax
Marriage neutrality of taxes
Behavioral issues with taxation

23. Before moving on…
If you think that you are weak on your Microeconomics skills, you should read the Appendix at the end of the book or look at an intermediate Microeconomics textbook

24. Introduction to public finance
This class is meant to cover public finance to students that have no direct background in the topic
Some knowledge on public goods and externalities is useful, but not required
Three topics will be covered today
What is studied in a public finance class?
What kinds of views do people have about public finance?
Tiebout’s model
Government will be addressed more in later lectures
Size of government will be covered in the next lecture
Growth of government will be covered in week 4

25. Public finance Public finance, as defined by R/G (p. 2)
“The field of economics that analyzes government taxation and spending policies”
Public finance, as described by Former Czech Prime Minister Vaclav Klaus (From R/G, p. 2)
“Public finance is nothing else than a sophisticated discussion of the relationship between the individual and the state”

26. Public finance
We will study topics in which many argue that government intervention is justified
Public goods and markets with externalities
Subsidized education
Health care reform
Social Security
Income redistribution

27. Public _____
There are at least two other terms that mean the same thing as public finance
Public sector economics
Public economics
Although I may use the three terms interchangeably to mean the same thing, I will usually use the term “public finance”

28. What views do people have?
Different people have different views about public finance
Organic view of government
Mechanistic view of government

29. Organic view of government
Government treats an entire society as a natural organism
Each individual is part of the organism
The government is the heart
Although individual goals differ, some goals are naturally needed for the societal organism

30. Mechanistic view of government
Government is needed for individuals to pursue their individual goals
“Invisible hand” (Adam Smith)
Efficient markets under certain sets of conditions
Property rights and lack of violence needed to have efficient markets
How much government beyond this is debatable
Libertarian: Small government
Social democrats: Larger government needed

31. What this class does Some analysis is done on a society-wide scale
Social costs and benefits
Cost-benefit analysis on a nationwide scale
Other topics talk about individual analysis
Voting theory
Individual income taxes

32. Determining what is “good”
What is “good” to one person may be viewed as bad as others
Let’s do an activity to illustrate this
Everyone starts by standing up
I will show a statement
Stay standing if you agree with the statement
Sit down if you disagree with the statement
There is no “right” answer to any question
Time to stand up

33. Statement 1
I believe that reckless driving should be stopped through government actions (such as the use of police)
Remember: Stay standing if you agree, sit down if you disagree

34. Statement 2
I think that government should build and maintain roads and highways

35. Statement 3
I believe that each baby needs to be securely buckled into a car seat while riding in a car, to be enforced by the government

36. Statement 4
I believe that each person in a moving car needs a seat belt on, to be enforced by the government

37. Statement 5
I believe each driver needs liability insurance, to be enforced by the government

38. Statement 6
I believe the government has a right to regulate when each person can use the roads, and the route they take, in order to control traffic patterns

39. Statement 7
I believe that the government has a right to prevent pilots of commercial aircraft from using a cell phone while actively flying

40. Statement 8
I believe that the government has a right to prevent train drivers from sending text messages while driving the train

41. Statement 9
I believe that the government has a right to prevent car drivers from sending text messages while driving the train

42. Statement 10
I believe that the government has a right to prevent car drivers from making calls on a cell phone while driving

43. Statement 11
I believe that the government should charge a 70% tax rate on all income I earn in my lifetime

44. Does everyone agree? No
Different people have different opinions about what the government should do
Experts often disagree about what government should do
We will often assume that the experts in other disciplines have gotten costs and benefits right

45. How do we figure out what is “best?”
Models can help
However, no model perfectly describes the real world
Example: The Tiebout model

46. Communities and the Tiebout model
Many communities form in order to provide a wide array of benefits to the community members
Sometimes these communities are in the form of private clubs
Other communities incorporate into cities
Charles Tiebout, in 1956 published a paper arguing that people shop for the city to meet their tastes for city-offered amenities

47. The Tiebout model People rarely leave the US due to government policy
Mobility in the US due to government policy is substantial
Tiebout makes many assumptions in his model
Not a perfect description of the real world
Gives a good idea of how people decide what community to live in

48. Tiebout’s assumptions
Government activities generate no externalities
Individuals are completely mobile
People have perfect information with respect to each community’s public services and taxes
There are enough different communities so that each individual can find one with public services meeting her demands
The cost per unit of public services is constant so that if the quantity of public services doubles, the total cost also doubles
Public services are financed by a proportional property tax
Communities can enact exclusionary zoning laws—statutes that prohibit certain uses of land

49. Advantages with the Tiebout model
Tailoring outputs to local taxes
Each person or family lives in a community they like
One size does not fit all
Tastes and preferences differ from person to person
Fostering intergovernmental competition
People in government generally want people to live in their community

50. Advantages with the Tiebout model
Experimentation and innovation in locally provided goods and services
States and cities can try new programs
These studies often result in statistical studies by economists
The analyzed results lead to good information for governments throughout the nation

51. Main disadvantage of the Tiebout model
Not an exact description of the real world
Moving costs
No one city is a perfect match for someone’s most desired preference
Some parents send their kids to private school, despite the availability of public schools

52. Other issues with the Tiebout model
Externalities
Both negative and positive
Many public goods are not at the local level
Scale economies in provision of public goods
Per-person cost often decreases as the number of users increases
Inefficient tax systems
Different states and cities often compete to get large businesses to locate in their area
Scale economies in tax collection

53. Summary: Introduction to public finance
Many topics studied in public finance
Topics related to government intervention
Tax-related topics
Different viewpoints about government
Organic view
Society is an organism
Mechanistic view
Government used to reach individual goals
Tiebout model: Find a community that is a good fit for the amenities that you want

54. The rest of this week… For Wednesday Wednesday’s lecture
Read the syllabus, Chapter 1, and pages and
Wednesday’s lecture
Expected value
Marginal analysis
Empirical tools in microeconomics

55. Some ground rules at the end of lecture
I will always try to be done by 3:15 pm
In return, I expect your attention until the final slide
If you must leave early:
Please do so no later than 3:05 pm
Sit near an exit
Leave quickly and quietly
Example of final slide

56. Some ground rules at the end of lecture
After many of the lectures
Problem solving
Your questions (especially near test time)
Review of old test questions
You are welcome to leave after lecture is finished if I do problems
Please do so quickly and quietly

57. With the remaining time today…
Issues with crashers
Any crashers not on the list?
Any administrative issues
Other questions

58. Have a good day