Midlands State University

MIDLANDS STATE UNIVERSITY FACULTY OF COMMERCE DEPARTMENT OF ECONOMICS

Public Sector Economics: EC408

Lecturer: Charumbira M.

Course objectives The course aims to give students a deeper understanding of pubic expenditure and revenue issues and equip them with the theoretical analytical tools required for the analysis of the effects of government expenditure and taxes on resource allocation and social welfare. The course requires a strong background in microeconomics and quantitative methods.

Course assessment 1. Home assignments and/or in-class tests will contribute 20 points to the coursework mark. 2. A term paper will be done in groups to give another 10 points. 3. A three-hour final examination carries 70 points.

Course content

General equilibrium and welfare analysis  Welfare economics as a point of departure: Pareto Optimality, perfect markets and the two fundamental theorems of welfare economics  Walras’ law  Economic rationale for the modern state: market failures, missing markets, distribution and merit goods Theories of the growth of the public sector  Models of government growth; Niskannen model, Displacement model, Growth Accounting model, Rostow-Musgrave model etc. Canons of a good tax system  Efficiency, equity and revenue productivity  The incentive effects of taxation: labour supply, supply of savings, investment and risk-taking  Tax incidence: partial equilibrium analysis, general equilibrium analysis Optimal taxation  Ramsey rule  Optimal commodity taxation and  Optimal income taxation  Buoyancy and revenue elasticity, tax avoidance and tax evasion

1 Public expenditure and tax reform  Debt neutrality or Ricardian equivalence  International and regional perspective of changes in tax regime  Evaluation of Value-added tax  Growth and structure of Zimbabwe’s government expenditures and revenue  Public enterprises: production, pricing rules, public enterprise reform and privatization Theory of public goods  Arrow’s Impossibility theorem  Optimal provision and different allocation mechanisms for public goods; Majority rule, Median Voter Theorem, Point Voting, Logrolling model, Down’s model  The theory of externalities: types of externalities, devices for correcting externalities; Coase theorem, Pigouvian tax Cost-benefit analysis:  Principles guiding public sector project evaluation  Approaches to appraisal of public projects  Divergence of social discount rate from private rate.

References

Stiglitz J. E. (1988) Economics of the Public Sector, W. W. Norton & Company, New York

Lewis S. R. (1984) Taxation for Development, Oxford University Press, Oxford

Myles G. D. (1995) Public Economics, Cambridge University Press, UK