PUBLIC FINANCE AND FISCAL POLICY
James Gwartney
Spring, 1994
Department of Economics
CENTRAL EUROPEAN UNIVERSITY



Scope of the Course

This course applies the tools of economics to the public sector and the conduct of fiscal policy. The proper functions of government from the viewpoint of economic efficiency will be analyzed. In addition, modern public choice theory concerning the nature and operation of democratic representative governments will be presented. Other topics covered in the course include principles of taxation, the conduct of fiscal policy, federalism, and constitutional economics. The course is intended to give the student a foundation for more advanced studies and research in the fields of government operations and public finance.

The readings are of varying difficult so that the major topics of the course will be accessible to a broad range of students. In several cases, both intermediate and advanced readings will be use to deal with the major topics. The primary text for the course will be Public Finance by David Hyman. Several readings from a more advanced text, Public Finance: Revenues and Expenditures in a Democratic Society by Richard E. Wagner will also be included. Additional readings will be used to supplement and enrich the major topics of. the course.

Students will be required to write a short (l0 to 15 pages) paper on one of the major topics of the class. This paper is intended to help students develop writing and research skills that will be utilized more intensely during the third trimester. A list of approved topics will be supplied to students early in the term. If a student prefers to write on an alternative topic related to this course, they may do so with the permission of the instructor. There will be two exams in the course: a mid-term and a final. The paper and the mid-term exam will each count 30 percent of the student's grade and the final exam will count 40 percent.

I. The Economic Role of the State
A. Protective Function
B. Productive Function
1. Public goods
2. Externalities
3. Competition
C. Distribution of income

Readings:
l. David N. Hyman, Public Finance; Chaps. 2-4
2. Richard E. Wagner, Public Finance, Chap. 2
3. Rubin, Paul H. "Why is the Common Law Efficient?'' Journal of Legal Studies 6, No. 1, pp. 51-63.
4. Staaf, Robert and Louis DeAlessi. "The Common Law Process: Efficiency or Order?" Constitutional Political Economy 2, No. 1, pp. 107-126.

II. The Economics of Collective Decision-making
A. Voting Models
B. Models of Representative Government
C. Logrolling and Bureaucracy
D. Economics of Government Failure

Readings:
l. Hyman, Ch. 5 "Public Choice and the Political Process"
2. Wagner, Part II "Public Choice in Democratic Regimes" (chaps.4-7)
3. James Gwartney and Richard Wagner, "Public Choice and the Conduct of Representative Government" in Gwartney and Wagner, Public Choice and Constitutional Economics.
4. Peacock, Alan. Public Choice Analysis. Cambridge: Cambridge University Press, 1992.
5. Black, Duncan. The Theory of Committees and Elections. Cambridge: Cambridge University Press, 1958.
6. Downs, Anthony. An Economic Theory of Democracy. New York: Harper and Row, 1957.
7. Tullock, Gordon. "The Welfare Costs of Tariffs, Monopolies, and Theft." Western Economic Journal 5, pp. 224-232.
8. Tullock, G. "The Transitional Gains Trap." Bell Journal of Economics 6, pp. 671-678.

III. Methods of Financing Government
A. Principles of Taxation
B. Taxation of Personal Income
C. Taxation of Corporate Income
D. Taxation of Consumption and Employment
E. User Charges

Readings:
1. Hyman, Chaps.10 and 11 and Chaps. 13-17
2. Wagner, Chap. 8
3. Knut Wicksell, "A New Principle of Just Taxation" Chap. 5 in Gwartney and Wagner
4. Stiglitz, Joseph E, and Michael J. Boskin. "Some Lessons From the New Public Finance." American Economic Review 67, pp. 295-301.

IV. Fiscal Policy
A. Alternative Theories of Fiscal Policy
B. The Political Economy of Budget Deficits
C. Fiscal Policy as a Stabilization Tool

Readings:
1. Hyman, Chap. 12
2. Wagner, Chap. 13
3. David Weil, "Fiscal Policy" in The Fortune Encyclopedia of Economics edited by David Henderson
4. Kormendi, Roger C. "Government Debt, Government Spending, and Private Sector Behavior." American Economic Review 73, No. 5, pp. 994-1010.
5. Feldstein, Martin. "The Effects of Fiscal Policies When Incomes Are Uncertain: A Contradiction to Ricardian Equivalence." American Economic Review 78, No. 1, pp. 14-23.
6. Cukierman, Alex, and Allan H. Meltzer. "A Political Theory of Government Debt and Deficits in a Neo-Ricardian Framework." American Economic Review 79, No. 4, pp. 713-732.

V. Federalism and Constitutional Economics
A. The Economics of Decentralized Government
B. Is There a Case for an Economic Constitution?

Readings:
1. Hyman, Chap. 18
2. Gwartney and Wagner, "Pubiic Choice and Constitutional Order", in Public Choice and Constitutional Economics
3. Robert Bish, "Federalism: A Market Economics Perspective" in Public Choice and Constitutional Economics
4. Pilon, Roger. "Freedom, Responsibility, and the Constitution: On Recovering Our Founding Principles."
5. Sunstein, Cass R. "Constitutionalism Prosperity, Democracy: Transition in Eastern Europe." Constitutional Political Economy, No. 3, 1991 .
6. Buchanan, James M. "The Domain of Constitutional Economics." Constitutional Political Economy 1, No. 1, Winter 1990, pp. 1-18.
7. Buchanan, J.M. and Gordon Tullock. The Calculus of Consent. Ann Arbor: University of Michigan Press, 1962.
8. Tiebout, Charles M. "A Pure Theory of Expenditures." Journal of Political Economy 64, pp. 416-424



CRC-Curriculum Resource Center
CEU Budapest, Hungary
Modified: May, 1996

Gwa_PublcFin.S94Econ.v3

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