Applied Public Economics

Olivier Bargain (University College Dublin and IZA)

[email protected]

This course is designed to acquaint MA/PhD graduate students with key issues in applied public economics, with a particular emphasis on the positive evaluation of public policies (using reduced form or structural models) and their normative analysis (using optimal tax theory and computer-based simulations). Undergraduate microeconomics and econometrics are prerequisite to this course.

Part I: Public economics: the fundamentals • The role of the state • Partial and general equilibrium • The classic framework: the exchange economy (Pareto efficiency; fundamental welfare theorems) • Analyses in general equilibrium - some applications using CGE models • Efficiency: the state as a correction of market failure (externalities, public goods) • Equity: theoretical elements on welfare economics (social welfare, comparability and aggregation)

Part II: Analysis of income distributions and tax simulation • Statistical tools to analyze income distribution • Concepts and measures of inequality and poverty • The link to welfare theory • Simulation-based analysis of tax -benefit policies and distributional impact

Part III: Equivalence scales • Horizontal equity • Equivalence scales • Formal representation of equivalence scale • Cost of children • Methods (Engel, Rothbarth) • New development (indifference scales)

Part IV: Policy evaluation and causal effects • Problem of evaluating policies • Social experiments • Natural experiments (difference-in-difference, fixed-effects) • Estimators based on conditional independence (regression, matching) • Discontinuity design Part V: Structural analysis of tax-benefit reforms • Econometric methods • Labor supply modeling • Behavioral tax reform analysis (employment and distributional effects)

Part VI: Optimal taxation • Optimal income taxation • Mirrlees 1971, Stiglitz 1982 • Application using discrete approach of Saez • Implicit social preferences • Change over time and comparison of European welfare Systems

General references ƒ Auerbach, A and MS Feldstein Handbook of Public Economics, Amsterdam: North-Holland (volume 1, 1986; volume 2, 1987; volumes 3 & 4, 2002). ƒ Blundell, R. , and T. MaCurdy, “Labor Supply: A Review of Alternative Approaches.” In Handbook of Labour Economics, eds. Orley Ashenfelter, and David Card, Volume 3: 1559-1695. Amsterdam: Elsevier Science, 1999 ƒ Blundell R. and M. Costa Dias : “Alternative Approaches to Evaluation in Empirical Microeconomics”, forthcoming in the Journal of Human Resources; also as IZA discussion paper 3800. ƒ Myles, G.: Public Economics, Cambridge University Press, 1995 ƒ Lambert, P. The Distribution and Redistribution of Income: A Mathematical Analysis. (Manchester: Manchester University Press, 2002) ƒ Salanié, B., The Economics of Taxation, MIT Press, London, 2003.