ECONOMICS 336Y5 – FALL/WINTER 2011-2012
Course
Description
This is a year-long course in Public Economics. The course focuses on externalities and market failure, and the appropriate role of government in response to such failure. This will lead us to study the actual functions of government, with a view to identifying ways of improving government performance through different sorts of policy reform.
The course has five goals: first, to provide you
with a useful set of conceptual tools for analyzing issues in Public Economics;
second, to give you an understanding of basic empirical methods used to shed
light on economic behaviour; third, to familiarize
you with the key institutional features of the Canadian public sector; and
fourth, to apply the tools learned to examine a variety of important public
policy issues – using markets to combat environmental pollution, introducing
education vouchers to improve the performance of the public school system, and
developing energy policies in response to global warming, among others. A fifth goal of the course is to help develop
your skills in writing clearly about economics (and subjects beyond).
Lectures: Thursday
12:00pm-2pm in Room IB 150.
Instructor: Prof. Robert McMillan
Office: Room
K263, Kaneff Centre
Phone: 905 828-3911
Office Hours: Thursday 2:00pm-3:15pm
Email: mcmillan@chass.utoronto.ca
Web Site: www.economics.utoronto.ca/mcmillan
(linking through to Undergraduate Public Economics (ECO336Y5Y) under
“Teaching”)
Please note: the course website will be used
extensively during the year, to provide you with important course-related
information and sample problems to solve (see below).
The course will involve two
writing assignments, to be handed in during the first and second semesters
respectively, two in-class term tests, and a final examination. Together, the writing assignments are worth
20 percent, Term Test 1 is worth 18 percent, Term Test 2 is worth 22 percent,
and the Final Examination is worth 40
percent of the overall grade. Term Test
1 will take place on November 10, 2011, and Term Test 2 on March 1, 2012.
The
term tests and final exam are not optional. Students should therefore plan to attend each
test on the given date. If a student
misses a term test, then it remains at the instructor’s discretion whether the
student gets to write a makeup test: the default score for missing a term test
is zero.
Sample questions will be posted on the course website and solutions made available subsequently. Sample questions will not be graded, though you would be well-advised to work through these carefully; their purpose is to give you a flavour for the types of question that will appear on the exams.
Writing Requirement
This is a designated writing course that satisfies
the Commerce Program writing requirement.
Learning to write clearly and well is important, and one goal of the
course is to help you to improve your skills in writing about economics. This will have spillover benefits for other
parts of the course and beyond.
The first writing assignment will involve you
presenting economic arguments in a verbal, non-technical way concerning
economic issues. It will be due at the
start of class in October.
The writing assignment for the first semester is
worth 8 percent of the overall grade. In
it, you will be graded on the quality of your writing and the quality of your
economic reasoning.
The second assignment will involve you writing an
essay assessing a pressing policy issue in public economics in clear,
non-technical language. The writing assignment
for the second semester is worth 12 percent of the overall grade, and the work
will be due in towards the end of the second semester.
The writing for this course must be your own work. Note: plagiarism is an academic offence. This course will be using “Turnitin” as a safeguard.
(See note on “Academic Misconduct” below.)
Students who find it difficult to write grammatical
English are strongly advised to seek out help from the Academic Skills Centre
on campus.
Students should note that copying, plagiarizing, or other forms of
academic misconduct will not be tolerated. Any student caught engaging
in such activities will be subject to academic discipline ranging from a
mark of zero on the assignment, test or examination to dismissal from the
university as outlined in the academic handbook. Any student abetting or
otherwise assisting in such misconduct will also be subject to academic
penalties. As a student it is your responsibility to ensure the
integrity of your work and to understand what constitutes an academic offence.
If you have any concerns that you may be crossing the line, always ask
your instructor. Your instructor can explain, for example, the nuances
of plagiarism and how to use secondary sources appropriately; he or she
will also tell you what kinds of aids -- calculators, dictionaries, etc. – are
permitted in a test or exam. Ignorance of the rules does not excuse
cheating or plagiarism. For more information regarding the Code of Behaviour on Academic Matters please visit http://www.utm.utoronto.ca/regcal/WEBGEN121.html
“Students will be required to submit their course essays to
Turnitin.com for a review of textual similarity and detection of
possible plagiarism. In doing so, students will allow their essays to be
included as source documents in the Turnitin.com reference database, where they
will be used solely for the purpose of detecting plagiarism. The terms
that apply to the University's use of the Turnitin.com service are
described on the Turnitin.com web site”.
The recommended text for the course is:
Harvey S. Rosen, Bev Dahlby,
Roger S. Smith, and Paul Boothe, Public Finance in
The text is available at the UTM Bookstore and will also be on reserve in the library.
A list of readings is given in the Course Outline below. Assigned readings are given a star: please read them before coming to class. (The unstarred readings are for those of you who wish to read some more advanced work on the relevant topic. Several of these papers may be a challenge to read, but contain interesting ideas none-the-less.) For the exams, you will be responsible for all the material covered in lectures – the readings are intended to provide background to these. Additional readings will be announced later and placed on reserve in the library.
Prerequisites
Prerequisites are strictly checked and enforced and must be completed before taking a course. By taking this course you acknowledge that you will be removed from the course at anytime if you do no meet all requirements set by the Department of Economics. For further information you can consult the Undergraduate Academic Handbook which is found in the Economics Department Office, Kaneff Center Room 121. It can also be found in the 2011-2012 Course Calendar, which is available from the Registrar’s Office.
Course Outline
The following outline gives a brief list of the topics we will cover in the course, intended as a roadmap. Note that we may spend several lectures on each topic, and depending on the time, we may not get right to the bottom of the list.
1. Introduction
Text,
Chapter 1.
·The key issue in public economics: what is the
appropriate scope of government?
·Policy example: should smoking be banned?
2. The Actual Scope of Government Activity
* Text, Chapter 1.
·The legal framework in
·Magnitudes, in practice.
·Conceptual issues regarding measurement
(illustrated, in part, using ‘races to the bottom’).
3. Political Economy
What if governments are not benevolent?
·Debt management example (illustrating the value of
pre-commitment).
4. Neo-Classical
Microeconomics: the building blocks
* Text, Chapter 2.
·The Theory of the Consumer (briefly)
·The Theory of the Firm (ditto).
5. Welfare Economics
* Text, Chapter 2.
·Pareto Efficiency – definition
·Competitive Equilibrium – definition and
illustration
·First Welfare Theorem: statement and demonstration.
(Aside: Second Welfare
Theorem, and decentralization.)
·Equity and the Social Welfare Function.
(Another aside, possibly:
Arrow’s “Impossibility” Theorem.)
6. Positive Economics Part A: Economic Theory
* Text, Chapter 19 (first
part).
Labour Supply Example:
·Decomposition into Income and Substitution Effects
·Different ‘types’ of good(?).
·Discrete labour supply.
·Aggregate effects, and why
we might care about the preceding…
7. Positive Economics Part B: Analyzing Data
* Wooldridge’s textbook, the
key parts of which will be summarized in the lectures.
·Econometrics: what is it (in a nutshell)?
Labour supply application:
·Regression mechanics
·Standard errors
·Hypothesis testing and inference.
Problems with regression (in
the context of the labour supply example):
·Selection
8. Reasons for Government Intervention
* Text, Chapter 3.
9. Introducing Externalities
* Text, Chapter 5.
10. Responses to Externalities
* Text, Chapter 5.
·Quantity regulation
·Pigouvian Taxation
·Pigouvian Subsidies
·Social conventions: “Please do not eat shark-fin
soup. Or blue-fin tuna.”
·Defining property rights: The Coase
Theorem.
Ronald
H. Coase (1960), “The Problem of Social Cost,” Journal
of Law and Economics, 3: 1-44.
Joseph
Farrell (1987), “Information and the Coase Theorem,” Journal
of Economic Perspectives, 1(2): 113-129.
11. Policy Example: Tradeable
Permits
·Introduction to permit trading: command-and-control
versus hybrid method.
·Apparatus: the marginal benefit of emissions
schedule
·Goals of environmental policy: Overall efficiency
vs. miminizing aggregate abatement costs
·Permit trading mechanics
·Properties of permit trading equilibrium
·Solving for equilibrium (including permit price
determination) – diagrammatically, then analytically
·‘Hot spots’ problem
·Permit trading in practice: RECLAIM etc.
Aside: von Hayek (1945)
12. Measuring Externalities
* Text, Chapter 7, pages
110-115.
Example: valuing clean air
·Regression approach (the hedonic method)
·Possible biases and a general framework for
understanding these.
13. The Choice of Instruments under Uncertainty
Martin L. Weitzman (1974),
“Prices vs. Quantities,” Review of Economic Studies, 41: 477-491.
14. Externalities Summary
15. Pure Public Goods
* Text, Chapter 4.
·Definitions
·The Planner’s Problem – characterized as a Pareto
problem
·The Samuelson Condition (including diagrammatic
solution)
Paul A. Samuelson (1954),
“The Pure Theory of Public Expenditures,” Review
of Economics and Statistics, 36:
387-9.
·Relation to Cost-Benefit Analysis
·Preference revelation: free-riding
(Aside: Lindahl
decentralization)
·Preference relevation:
mechanism design (the Clarke-Groves Mechanism)
16. Club Goods, Local Public Goods, and the Tiebout
Model
* Text, Chapter 9.
·Club good definition
·Club theory (James Buchanan (1965))
·Tiebout (1956) – efficient
provision of local public goods though ‘voting with feet’
Daniel Rubinfeld (1987), “The Economics of the Local Public
Sector,” Handbook of Public Economics,
Vol. II, eds. by A. Auerbach and M. Feldstein,
Elsevier,
·Valuing public goods through revealed preference
(econometrics again)
Sandra E. Black (1999), “Do
Better Schools Matter? Parental
Valuation of Elementary Education,” Quarterly Journal of Economics, May:
577-599.
17. Public Education
* Text, Chapter 14.
Eric A. Hanushek
(1986), “The Economics of Schooling: Production and Efficiency in Public
Schools,” Journal of Economic Literature,
24(3): 1141-1177.
·
Question: what is the optimal regulatory framework for public education
systems?
18. Policy Example: Education Vouchers
* Charles F. Manski
(1992), “Educational Choice (Vouchers) and Social Mobility,” Economics of Education Review, 11(4): 351-369.
Milton Friedman (1962), Capitalism
and Freedom, The
Thomas J. Nechyba (2000), “Mobility, Targeting and Private School
Vouchers,” American Economic Review, 90(1): 130-46.
19. Some Pressing Issues:
a. An Externality Problem: Global Warming
·Living in
·Intergenerational ‘bequests.’
b. Energy Policy
·Biofuel: the unintended
consequences of government policy.
c. Species Preservation
·Should we bother?
·Ivory-billed woodpeckers, Yangtze dolphins, sharks
(of all kinds), blue whales, spotted owls, tigers, polar bears etc.
d. Habitat preservation
·Sustainable living with 7 billion + people.
·Uses of the boreal forest
·Using giant sequoia trees to make matchsticks.
·Preserving rainforest
·Buying rainforest and REDD…