Download Summary Book Public Finance Rosen and Gayer Lecture s Chapters 3 to 6-8-12!14!15 16 18 20 22 PDF

TitleSummary Book Public Finance Rosen and Gayer Lecture s Chapters 3 to 6-8-12!14!15 16 18 20 22
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Page 2

Public finance summary

Chapter 3 – Tools of normative analysis

welfare economics: the branch of economic theory concerned with the social desirability of alternative

economic states

basic concepts: 1) efficiency � can we improve overall welfare?

2) equity � is it fair?

pareto efficiency: nobody can be made better off without making someone worse off

pareto improvement: a reallocation of resources that makes at least one person better off without

making anyone else worse off

contract curve: the locus of all Pareto efficient points

production possibilities curve: a graph that shows the maximum quantity of one output that can be

produced, given the amount of the other output

marginal rate of transformation (MRT): the rate at which the economy can transform one good into

another good; it is the absolute value of the slope of the production possibilities frontier

marginal cost: the incremental cost of producing one more unit of output

utility possibilities curve: a graph showing the maximum amount of one person’s utility given each level

of utility attained by the other person

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Chapter 14 – Taxation and income distribution

Taxation has 3 effects:

- transfer of money from taxpayer to government

- inefficient allocation of resources

> because tax changes relative prices

> loss to taxpayer, gain to no-one

- transaction costs

> cost of tax administration

> compliance cost to taxpayer

Statutory incidence: who is legally responsible for paying the tax

Economic incidence: who bears the burden

Tax shifting: the difference between statutory incidence and economic incidence

functional distribution of income: the way income is distributed among people when they are classified

according to the inputs they supply to the production process (e.g.: landlords, capitalists)

size distribution of income: the way that total income is distributed across income classes

lump sum tax: a tax whose value is independent of the individuals’ behavior

tax wedge: the tax-induced difference between the price paid by consumers and the price received by


different types of analysis:

- balanced-budget incidence: combined effects of taxation and spending financed by those taxes

- differential tax incidence: who bears the burden if we use this tax instead of that

Progressive tax: the rich pay more

- different definitions

> Average tax rate increases with income � rich pay more tax as % of their income

> Marginal tax rate increases with income � rich also pay more tax on last euro earned

Partial Equilibrium model:

- one market

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3) let governments compete (Yardstick competition)

- democracy: voter decides if government is reelected or not

- many local governments

- compare performance in same period

> crisis affects all

> if better services/lower taxes elsewhere � your local government may not perform well

> vote for different party next time

> if performance can be compared, politicians try harder

4) more innovation and experimentation

- local governments: policy laboratories

- try something new locally; if it fails � only local disaster

if it works � other localities can copy

5) empowerment

- people have more influence on local government than on central government

- influence increases happiness

Financing decentralized governments

- optimal allocation:

> marginal benefit of service = marginal cost

- decision should be made by the same people who benefit and who pay

- local governments financed by local taxes

but: scope for local taxation limited

- tax competition

- local income redistribution difficult

� grants from central to local governments

flypaper effect: a dollar received by the community in the form of a grant to its government results in

greater public spending than a dollar increase in community income

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intergovernmental grants because:

- taxation is mostly at central level

- addressing spillovers

- paternalism

- fiscal equalization

types of intergovernmental grants:

- conditional grants � cannot be spent freely; for schools, welfare

nonmatching grant: amount independent of own spending

matching grant: percentage of own spending

- unconditional grants � decentralized government is free to spend

equalizing grant: grant is higher if spending need is high/tax capacity is low

the corporation tax in many countries causes inefficiently high corporate debt levels because:

Usually, interest is deductible from taxable profit, but dividends are not. This makes debt financing

cheaper than it would be without taxation, and equity more expensive. As a result, corporations

borrow more than they would without corporation tax.

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