040923 KU Public Economics (MA) (2023S)

*Prerequisites:*

Some familiarity with game theory and microeconomics will be expected.

The necessary game theoretical background can be met by studying Gibbons’ A Primer in Game Theory, Chapter 1, Sections 1.1 and 1.2. or weeks 1 and 2 of the Coursera lecture from the University of British Columbia (Jackson et al, Game Theory).

Students who studied microeconomics at an advanced undergraduate level (esp. consumer theory, producer theory, and walrasian equilibrium) have the necessary microeconomics background. Some specialized concepts from consumer theory will be used extensively: income expansion path (a.k.a. wealth expansion path), price offer curve, compensated demand function, Slutsky equation, equivalent and compensating variations. You find all of these in, e.g., Varian’s Microeconomic Analysis, chapters 7 to 10, or in Mas-Colell, Whinston, and Green’s Advanced Microeconomics, Chapters 2 and 3.

*Course Outline:*

What is the optimal size of government? Which activities should fall within the scope of the public sector? Economist rarely agree on these questions. In this class we start from the assumption that lack of agreement arises mainly out of two reasons. First, these and other common sense questions may be ‘too ambitious:’ the existing economic toolbox may not enable us to clearly answer them. Second, these and other common sense questions are normative: they require agreement on a set of values that legitimizes state intervention. But economists, like citizens, do not agree on such a set: some take Pareto efficiency to be the only legitimate ground , others factor in distributive justice or paternalism.

In this class we will illustrate and discuss some public sector related questions that can actually be addressed by making use of the standard microeconomics toolbox (game theory, consumption and production theory, equilibrium theory). We will also formalize important economic arguments for and against specific types of state intervention, and connect these to the value judgments they explicitly or implicitly involve.

Following usual approaches, we will keep the analysis of government activities and that of government finances separate. Both will be analyzed in this course.