Intermediate Public Economics

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Public economics studies how government taxing and spending activities affect the economy--economic efficiency and the distribution of income and wealth. This comprehensive text in public economics covers the core topics market failure and taxation as well as recent developments in the political economy and public choice literatures. It is unique not only in its broad scope but in its balance between public finance and public choice and its combination of theory and relevant empirical evidence.After introducing the theory and methodology of public economics and reviewing the efficiency of the competitive equilibrium, the book presents a historical and theoretical overview of the public sector. It then discusses departures from efficiency, including imperfect competition and asymmetric information; issues in political economy, including rent-seeking (a topic often omitted from other texts); equity; taxation issues, including tax evasion and its consequences; fiscal federalism and tax competition among independent jurisdictions; and the intertemporal issues of social security and economic growth.This text introduces the reader to the theory of public economics and the most significant results of the analysis, providing an overview of the current state of the field. It is accessible to anyone with a background of intermediate microeconomics and macroeconomics and can be used in advanced undergraduate as well as graduate courses. Although the mathematics has been kept to a minimum, the book remains analytical rather than discursive. Annotated suggestions for further reading and numerous exercises are included at the end of each chapter.

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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