Showing papers in "Handbook of Public Economics in 1987"

Chapter 14 The theory of cost-benefit analysis

Abstract: Publisher Summary The theory of cost-benefit analysis is widely used. It contributes to the understanding by giving a formal description of the subject and examining the theoretical basis for some of the techniques that have become the accepted tools of decision-making around the world. The aim of cost-benefit analysis is to provide a consistent procedure for evaluating decisions in terms of their consequences. This might appear as an obvious and sensible way to proceed, but it is by no means the only one. Cost-benefit analysis clearly embraces an enormous field. It offers clear guidelines for the evaluation of government decisions in such varied fields as tax, trade, or incomes policies; the provision of public goods; the distribution of rationed commodities; or the licensing of private investment. The chapter discusses the way cost-benefit analysis should proceed, a fairly unified account of the most salient results of the theoretical literature, and the way the framework encompasses a number of approaches to the definition and formulation of cost-benefit problems and describes the implications for a number of practical issues.

Chapter 11 The economics of the local public sector

Abstract: Publisher Summary This chapter discusses the demand side of the public sector and focuses on normative rather than positive models. The political economy of the local public sector has been studied by both political scientists and economists, but efforts to combine the two have had limited success. The addition of supply-side-political assumptions to Tiebout models has led largely to negative conclusions about the existence and efficiency of the local public competitive analogy. The Tiebout model has provided one useful, albeit somewhat artificial, model of a more or less competitive local public sector. However, the value and usefulness of the Tiebout model is likely to diminish in the future, and an alternative or alternatives are needed. Several monopoly models of local government have been suggested to provide a useful counterpart to the Tiebout approach. Public goods are viewed as brands that differ in one or more of the attributes. The extent to which local governments compete among themselves in the supply of the public good becomes issues that are studied using modern techniques of industrial organization. Local public economics is a subject area that is rich with empirical work, but a good deal of high quality work remains to be undertaken. The relationship between the mobility of households and the provision of local public services is one area that typifies work in local public finance. A well-specified and correctly estimated model helps to evaluate the correct method by which the demands for local public goods are determined.

Chapter 12 Markets, governments, and the “new” political economy

Abstract: Publisher Summary This chapter focuses on the micro-economic reasons for market failure and the micro-political analysis of government performance. Governments provide goods and services directly, redistribute income, and regulate economic relations. The chapter reviews recent recommendations for the institutional reform of the budgetary process. The new political economy is concerned with the most basic question of economic policy: It discusses the circumstances where markets or governments are preferred as the institution for allocating societal resources. The new political economy is the sophistication of analytic technique. The voting process can protect against dictatorship but generally at the cost of social efficiency. In Western societies, the decision has been made to protect democracy; the task then is to search for the most efficient collective choice process consistent with this norm. The results of this examination emerge in the new quantitative political economy and the empirical examination of government spending, taxation, and regulation.

Chapter 9 Theory of public goods

Abstract: Publisher Summary This chapter discusses the class of goods that has come to be known as “public goods” or “collective goods” A distinctive characteristic of such goods is that they are not used up in the process of being consumed or utilized as an input in a production process To be considered public, a good must also be of interest to more than one consumer or firm Otherwise, the fact that the consumption possibilities of others are undiminished is irrelevant The chapter presents the derivation and interpretation of the efficiency conditions for pure public goods The positive issues of the way the private market arrangements provide for public goods are discussed in the chapter The chapter describes alternative mechanisms for making public goods decisions within the public sector Public goods are of particular relevance to public policy, because they tend to be inefficiently provided by private arrangements, such as the market mechanism The category of public “goods” is considered as opposed to public “bads” Because they are not used up in the act of consumption of production, the marginal cost of extending service to additional users is zero Private provision of the good, however, necessitates revenues from users to defray the cost of producing the good Such charges usually lead some potential users to forgo consumption, creating a deadweight efficiency loss

Chapter 13 Income maintenance and social insurance

Abstract: Publisher Summary Historically, income maintenance has taken the form of private charity or the poor law. These have been typically uneven in their impact, varying from locality to locality, and have been dependent on the generosity and caprices of donors or public relief officials. In the administration of state support, concern for the cost has been paramount, and there has been a lively sense of the possible disincentive to work. The main objective of income support is the relief of poverty. It has been an intermediate objective rather than an end in itself, for example, to avoid civil unrest. Today, there is considerable disagreement about the proper role of income maintenance, but it remains widely accepted that the abolition of poverty is a central objective. The second approach seeks to reduce the multiple values to a single indicator by taking total expenditure and comparing this with a target level of total outlay. The third approach takes total income as the variable to indicate poverty; and it is this approach that is most commonly employed in the studies of poverty. In considering these three approaches to the indicator of poverty, there are two different conceptions. The first, and perhaps the more usual, is concerned with the standard of living, and it points to the use of total expenditure or the consumption of specific commodities. The second is concerned with rights to a minimum level of resources or the opportunity to consume, even if not exercised.

Chapter 16 Tax incidence

Abstract: Publisher Summary Economics is at its best when it offers important insights that contradict initial, casual impressions. The theory of tax incidence provides a rich assortment of such insights. Tax incidences basic lesson that the real and nominal tax burdens are not necessarily related means that taxes on capital are born by workers, that investment incentives are injurious to capitalists, that taxation of foreigners simply represent indirect domestic taxation, and that generations alive many decades in the future may be supporting those currently alive. The study of tax incidence is both fun, because it offers such surprising findings, and very important, because of its implications about the impacts of government policies. Much of the current tax incidence literature considers the settings of certainty, perfect information, and market clearing. As more sophisticated models relax these assumptions, the theory of tax incidence is enriched and, with all probability, provides even more surprising and exciting economic insights.

Chapter 15 Pareto efficient and optimal taxation and the new new welfare economics

Abstract: Publisher Summary For more than a hundred years, economists have attempted to show that progressive taxation can be justified on more fundamental principles. Among the earliest of such attempts was that of Edgeworth (1868, 1897), who tried to show that utilitarianism (combined with two other assumptions) implied progressivity. His argument was simple: he postulated that all individuals had the same utility of income function and that they exhibited diminishing marginal utility. As social welfare has been simply the sum of the utility functions of all individuals, it immediately followed that the decrease in social welfare from taking a dollar (or a pound) away from a rich person is less than the decrease in social welfare from taking a dollar away from a poor person. With the advent of the New Welfare Economics in the 1930s, interest in optimal taxation waned: interpersonal utility comparisons of the kind employed in utilitarianism were viewed to be inadmissible. The “new” New Welfare Economics is distinguished by two features: first, unlike much of the “old” New Welfare Economics and unlike the earlier Utilitarian analysis, it does not assume that the government has at its disposal the information required to make lump-sum redistributions and second, it identifies who is able to pay higher taxes at least partly by using endogenous variables, such as income or consumption.

Chapter 10 Incentives and the allocation of public goods

Abstract: Publisher Summary The completely decentralized allocation mechanisms, such as the subscription equilibrium, fail in general to achieve satisfactory allocations. More cooperation among economic agents is needed. Many forms of cooperation are used, many more are conceivable: the voting mechanisms of various kinds and the planning procedures of various kinds. The theory of social choice provides a firm basis for a rigorous approach to the study of the choice made by society among these mechanisms. Social choice often has a dynamic dimension—that is, public decisions are made step by step. This non-tâtonnement interpretation of dynamic collective decision processes leads to a natural weakening of incentives requirements, which is to assume myopic behavior. A short review of various ways to weaken the notion of dominant strategy implementation is presented in the chapter. If moral considerations can be relied upon for a positive attitude toward becoming an informed citizen, it will be important to be able to use social decision mechanisms that, if they offer to agents only a weak incentive to be truthful, at least do not give any incentive to misrepresent their information.