MD DALIM #841449 2/17/06 CYAN MAG YELO BLK INTERMEDIATE PUBLIC ECONOMICS INTERMEDIATE PUBLIC ECONOMICS Jean Hindriks and Gareth D. Myles The MIT Press Cambridge, Massachusetts London, England 6 2006 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. MIT Press books may be purchased at special quantity discounts for business or sales promotional use. For information, please email
[email protected] or write to Special Sales Department, The MIT Press, 55 Hayward Street, Cambridge, MA 02142. This book was set in Times Roman on 3B2 by Asco Typesetters, Hong Kong and was printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Hindriks, Jean. Intermediate public economics / Jean Hindriks and Gareth D. Myles. p. cm. Includes bibliographical references and index. ISBN 0-262-08344-2 (alk. paper) 1. Welfare economics. 2. Finance, Public. 3. Economic policy. I. Myles, Gareth D. II. Title. HB846.5.H56 2006 336 0 .001—dc22 2005051702 10 9 8 7 6 5 4 3 2 1 a` Nathalie pour son amour et a` mes adorables enfants Matte´o, Moı¨ra, et Salome´ (JH) to Tracy, to Harriet, and to Georgina—it began before you could walk but was finished through your help with the typing (GDM) Contents Preface I PUBLIC ECONOMICS AND ECONOMIC EFFICIENCY 1 An Introduction to Public Economics 1.1 Public Economics 1.2 Methods 1.3 Analyzing Policy 1.4 Preview 1.5 Scope Further Reading Exercises 2 Equilibrium and E‰ciency 2.1 Introduction 2.2 Economic Models 2.3 Competitive Economies 2.3.1 The Exchange Economy 2.3.2 Production and Exchange 2.4 E‰ciency of Competition 2.4.1 Single Consumer 2.4.2 Pareto-E‰ciency 2.4.3 E‰ciency in an Exchange Economy 2.4.4 Extension to Production 2.5 Lump-Sum Taxation 2.6 Discussion of Assumptions 2.7 Summary Further Readi