ECN 456--Public Finance (Winter 2015)
 

  #ANNOUNCEMENTS

 #CLASS POLICIES

  #WEEKLY SUMMARY/ASSIGNMENTS

 #SAMPLE TESTS


ANNOUNCEMENTS (last update: April 15, 2015)

402 Elliott Hall
TEL: 370-3291
FAX: 370-4275
Email: Stano@oakland.edu

Winter 2015 Office Hours:  W:  1:30-2:30 & by appointment

 

Final Outline (Test on April 7, 2015)

Remember to bring about 5-6 pages of lined paper for your test book.

The Test rquires you to do 2 essay questions out of 3 choices.  The questions involve:

#1.  Lump-sum v. price-distorting taxes. (CH11)

#2.  Haig-Simons definition of income.  (CH 13)

33.  U.S. (personal) individual income tax.  (CH 14)

Potential Paper Topics (in addition to those shown on my syllabus)

Obama education/tax/spending proposals

The public sector in other countries



WEEKLY SUMMARY/ASSIGNMENTS (Based on previous course.  I will update each week as we progress through the semester).
 



January 6:   Reviewed Chapter 1, which provides a broad overview of public finance.   The crucial part is found is the Appendix (Tools of Microeconomics).  This must be studied very carefully in order to have a firm foundation for many of the subsequent chapters.  We covered material through the end of "Consumer Equilibrium" on p 38.  I will complete Ch. 1 and then go on to Ch. 2 on January 13.  There are no specific assignments from the 'Questions for Review' for Ch. 1.

QUESTIONS FOR DISCUSSION (Due: Jan 13)   You should formulate brief answers and be prepared to discus in class.

1.  List 10 services provided by governments.  Indicate whether they are provided at the federal and/or state & local levels.

2. List 5 means by which governments can collect revenues.

3. A bill was introduced (and defeated) some time ago to exempt college text books from the Michigan sales tax.   Develop two arguments that could be used to support this bill and two arguments to oppose it.   Be prepared to discuss your position.



January 13

Continued with indifference curves, consumer equilibrium, and income/substitution effects. Reviewed price elasticity of demand, consumer surplus, and the labor-leisure choice (used income/sub effects to analyze impact of change in wages and of a transfer payment.  Went rapidly through production and costs:  isoquants, MRTS, isocost, cost minimization/output maximization, cost curves in the short and long-run.  Just started Perfect Competition on p. 47.  You should review the remainder of the Appendix.

We had a discussion, with examples, of academic plagiarism and the standards I expect for this course.

ASSIGNMENT:  (Due Jan. 20)  Prepare a brief report on a public finance issue that interests you (Do a Google search for information and sources).  The report should be one double-spaced page (about 200-250 words).  Cite your source(s).  Describe the issue and the rationale(s) for government intervention (e.g., stabilization, equity, market failure (monopoly power, externality, etc.).  Describe some possible proposals to handle the issue, and any thoughts that you may have on it. 

Presenters:  Everyone (about 1-2 minutes).   I will collect the written report from everyone.

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January 20

Brief presentations of assignment due today.  Began analysis of efficiency within a partial equilibrium context.  Discussed whether competition will lead to efficiency and examples when perfect competition fails:  externalities, monopoly power, taxes/subsidies. Decsribed Pareto Efficiency within a general equilibrium analysis using the Edgeworth Box.  Briefly described compensation tests and equity v. efficiency trafeoffs. 

ASSIGNMENTS  (Due Jan. 27):  Ch. 2:  Questions for Review:  #8 PC, #9 JC; Problems #2 AC*, #3 EC, #4 ED, #5 RJ  (I will collect only from the presenters but all students should be thinking about these questions).  *More extensive problem, counts as 2 presentations.

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January 27

Moved into Ch. 3 on externalities.  Described negative and positive externalities and the consequences for efficiency.  Showed effect of internalization of negative externality through a tax.   Try to analyze positive externalities.  Introduced Coase Theorem and showed, under certain circumstances with well defined property rights, how the externality will be internalized regardless who owns the property right.  Described limitations of Coase theorem as well as other approaches to externality problem.  We finished up Ch. 3 including positive externalities, trading pollution rights, efficient levels of pollution, and applying the equimarginal principle to determine least cost allocations of pollution abatement. 

ASSIGNMENTS (Due February 3)

Ch.3:   Problems:  #1 DK*, #2 MM, #3 AP, CH 4# KS

Everyone (for discussion--will not be collected):  Think about an issue that we have not yet raised that relates in a potentially significant way to externalities.  Think about possible solutions to the externality problem. 

 

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February 3

We started Ch. 4 by distinguishing between private and public goods (and some other categories).  We distinguished between the demand for private & public goods including numerical problems, and examined the efficient amount of public good.   Lindahl equilibrium, voluntary contribution, underproduction.  Completed most of Ch. 5:  collective choice rules, median voter model, problems of majority voting, Arrow's Theorem, political process including logrolling and role of bureaucracy.   Don’t worry about pp. 171-194 with the exception of the bit we did on Arrow’s theorem on p. 174. 

ASSIGNMENTS (Due February 10)

Everyone (for discussion and to be handed in):  Describe an item in Obama's budget and share your thoughts about it.  (1/2-1 page)

Problems:  Ch 3 #4 PCM;  Ch. 4:  #1 SS, #2 BT, #3 KW, #5 JC; Ch 5: #1 EC, #2 ED

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February 10

Ch. 6: decision criteria and various issues re CBA including: problems of evaluating B,C,r; valuing lie and health; issues with the discount rate; use of CEA.  Completed Ch. 7 with discussion of poverty vs. inequality;  cash vs. in-kind transfers. and inefficiency of price distorting subsidy including insurance application.  Examined different kinds of housing subsidies;

ASSIGNMENTS:  (Due February 17)

Ch. 6: Problems:  #1 RJ; #4 MM; Ch. 7: Problems: #1 AP; #2 KS; #3 (in-class); #4 (in-class)

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February 17

Completed Ch. 7: various transfers and work incentives, negative income tax, wage subsidies, and the EITC.   Completed Ch. 8: background and brief description of Social Security; some key features and issues; brief overview of work and savings incentives; and Social Security reform. 

Assignments:  For Mar. 10:  Skim over CHs 9&10.

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February 24 (Winter Break)

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March 3 (Midterm)

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March 10

Overview of Ch. 9: how health care differs from other goods; brief discussion of insurance and the rationale for government involvement in health care markets.  Worked rapidly through Ch 10 (Intro to Government Finance) reviewing some basic tax terminology and concepts. Started Ch. 11 (a key chapter) that deals with several fundamental concepts in taxation.  These include incidence and excess burden of a unit.

ASSIGNMENTS:  Due: Mar. 17:  Problems: 10.1,10.2(SS),10.3 (BT);11.1(KW);11.3(PCM) _________________________________________________________________________________________

March 17

Preliminary paper presentations.

Completed Ch. 11: incidence and excess burden of ad valorem taxes; unit taxes under monopoly; general equilibrium analysis and tax incidence.  Went fairly quickly through Ch. 12 dealing mainly with budget deficits/debt.  Completed Ch. 13 describing Haig-Simons (comprehensive tax base); excess burden of tax on wage income; and labor market effects; incidence of payroll tax; excess burden of and effects of tax preferences (e.g., state & local interest income).  

ASSIGNMENTS: Due Mar. 24:  Problems: 11.5 (JC);13.1 (AC), 13.2(EC), 13.3(RJ), 13.5 (DK)

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March 24

Completed CH 13.  Ch. 14 on the structure of the federal individual income tax (IIT) and discussion of tax preferences.  Reviewed IIT within context of Haig-Simons comprehensive tax base Discusssed a variety of issues including erosion of the tax base, progressivity, tax capitalization, and tax preferences; bried discussion of MI income tax.

ASSIGNMENTS: Due Mar 31: Problems:  14.1 (MM), 14.2 (AP), 14.3(KS), 14.5(SS); Review Questions: 14.2(BT), 14.3(KW)

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March 31

Covered Ch. 15 on CIT.  Provided brief outline of structure of CIT but focus on some issues on effects of CIT in short run and long run.  Very brief discussion of consumption taxes (Chs. 16) and wealth taxes (Chap. 17).   These last 2 chapters will not be on the final.

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April 7

Early paper presenters: PCM, RJ

Final Exam (1.5 hours)

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April 14

Term Papers Due:  Presentation of Papers

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            April 28         

           

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CLASS POLICIES
 

1. Term paper requirements (see syllabus)

I expect you to select a topic by March 10 and prepare a brief overview for class (with a written summary for me) consisting of:
    1.  What it is about/some main issues
    2.  Why it is relevant/important
    3.  You should identify several sources or references

Paper Format (see syllabus)

You will be graded on clarity, comprehensivenes, and originality.  Remember that the text should be in your own words but that the sources of the information or ideas need to be provided.  Merely editing the work of others constitutes plagiarism even if the references are shown.  Examples of plagiarism will be provided in class. Presentations (about 5 minutes)  will take place on Apr. 7/14).

Late Penalty:  The papers are due on April 14.  They will be returned on April 21.  There is a penalty for late submissions--1 point out of 25 (4%) for each day the paper is late.  Papers will not be accepted after 1 pm on April 19 so that the student will receive zero for the paper.

 

2.  Attendance and Grading scale

Your contributions to the class are important.  The following shows  the attendance points earned (out of the 10 percent allotted for attendance) for each class missed other than those for excused absences, e.g., confirmed illness or death of a relative.  Work requirements are not excused.

0 absences =10,  1=9.5,  2=8,  3=7,  4=6. 5=5,  >5=0

Grading Scale:

95% = 4.0,  80% = 3.0,  70% = 2.0, 60% = 1.0,  <60% = 0.0

e.g., 90% = 3.7, 85% = 3.3, 76% = 2.6

3.  Assignments

Each student  will be given several assignments over the course of the semester for class presentation.  Your written work for these and other assignments will represent the 15% weight."  Failure to show up for a scheduled presentation will result in a 3 percentage point penalty.


SAMPLE TESTS

1.  SAMPLE MIDTERM

Value: 100 points--25% of grade.
 

A.  Short essays.  Explain and discuss the significance of 4 of the following.  (5 points each)

a. Efficiency criterion
b. Coase Theorem
c. Logrolling
d. Market failure
e. Net Benefit Criterion
f.  Social rate of discount
 

B.  Longer Questions:  Answer 4 of the following.  You will be graded on clarity, accuracy and comprehensiveness.  (20 points each)
 

1.  The marginal external cost of paper production is constant at 10 per ton per year.  The competitive market equilibrium is 200 million tons annually.

a. Draw a demand and supply showing the competitive solution.

b. Show the MSC and the efficient solution (obviously, without a specific quantity) in your graph as well as the welfare loss.  Explain why the competitive solution is inefficient.

c. Explain why a corrective tax (and how much) can lead to the efficient solution.

d.  Explain carefully one alternative to a corrective tax that can also lead to the
     efficient quantity.
 

2.  The following represents 3 marginal benefit schedules for a pure public good.
 

Quantity  1 2 3 4

Jane  250 140 65 20
William 125 100 45 0
Sarah  90 45 40 15
 

a. Determine the marginal social benefit for the good and the efficient solution assuming the marginal cost is constant at 150 per unit.  Show it graphically.

b. Determine the Lindahl prices necessary to achieve the efficient equilibrium.  Why will voluntary contributions fail to achieve this result?

c. Suppose that the solution is determined by majority voting where each individual pays equal tax prices.  Explain whether the median voter model will produce the efficient solution.

d. Estimate the amount of the welfare loss under the median voter model. Explain your calculation.
 
 

3.  A government program for the poor is introduced.  It pays 50 percent of the cost of clothing (with no limits).

a. Draw a recipient's budget line and equilibrium before the program and after the program.  Explain or indicate the amount of the subsidy.

b. Show and explain how the recipient's welfare can be increased by an equivalent cash transfer, i.e., an amount in cash equal to the subsidy in part (a).

c. Instead of the program in part (a), suppose that an in-kind transfer (fixed allotment subsidy) of an equivalent amount is made available.  Explain which of the two programs the individual will prefer.

d.  Describe the welfare loss (excess burden) to society under of the initial program in part (a).
 

4. A negative income tax is introduced with the following features (for a family of four):  The family (assume only the head works) receives a payment of 25% of the difference between its earnings and $20,800.  Earnings above $20,800 are taxed at a rate of 20%.

a. Draw a graph of the relationship between earned income and disposable income.

b. Draw another graph showing the income-leisure curve (using hours per week with a maximum of 168) for the family head before the program.  Assume the individual is able to earn $10 per hour and was working 20 hours per week before the program.  Draw the income-leisure curve after the program. Show the new equilibrium and explain whether the recipient will work more or less hours than before.

c. Show the amount of the transfer to the individual in your graph for part (b).  Show and discuss the effects of an equivalent lump-sum transfer (that does not vary with the amount earned) on the recipient's hours of work.

d.  How does the program affect the work decisions of higher income families, i.e., those who are well above the $20,800 threshold?
 

5. There is great current interest in reforming social security.  Discuss two features of Social Security (OASI) that are controversial and substantive (e.g., incentives to work or save, redistributions).  Discuss possible reforms if relevant to your issues.
 

6. For those who are not satisfied with the available choices , you may develop your own question (as one of the 4 to answer) on any of the material we have covered for this test.  It should be comparable in depth to questions 1-5.
 
 

2.  SAMPLE FINAL

Value: 100 points--25% of grade.  Select four of the following (25 points each). You will be graded on clarity, accuracy and comprehensiveness.
 

1. Briefly describe three methods, other than taxation, that governments can use to finance spending.  Discuss the major criteria used to evaluate taxes.  Be as specific as possible.

2. Consider a unit excise or sales tax.
a. Using indifference curve analysis, show that an individual could attain a higher level of welfare from an equivalent lump-sum tax.
b. Sow the excess burden of the tax assuming a competitive market.
c. What is tax shifting?  Explain what determines the incidence of the tax.

3. Explain carefully what is meant by the Haig-Simons definition of income and why is it considered a standard.  Discuss either the efficiency effects of a proportional income tax, or the efficiency effects of taxation of interest income.

4.  Provide an overview of the U.S personal income tax.  Also,
a.
What are some main differences with the Haig-Simons approach?
b. Discuss two issues or controversies with the income tax.  Provide possible reforms if relevant.

5.  Why is the corporation income tax controversial?  Also,
a. Analyze the short-run impact of the tax.
b. Show how the noncorporate sector also bears the burden in the long-run.

6. For those who are not satisfied with the available choices , you may develop your own question (as one of the 4 to answer) on any of the material from Chapters 10-15.  It should be comparable in depth to questions 1-5.  You may not select a question that relates closely to your term-paper topic.