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Overview

Public Finance is an approachable text designed with students in mind. The 13 chapters are intentionally written to be taught easily in one semester without skipping material or losing any information. Public Finance contains all the necessary tools and core chapters that are integral to any Public Finance course in a clear and easy-to-read format. The concise sections and lucid examples are engaging for students, without being dense or tedious. This First Edition text incorporates research from across the discipline and provides empirical tie-ins to the real world. The author also covers special topic chapters that define public finance, like education, social security, and healthcare.

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Product Details

  • ISBN-13: 9780073375748
  • Publisher: McGraw-Hill Companies,Inc.
  • Publication date: 10/3/2008
  • Edition description: New Edition
  • Edition number: 1
  • Pages: 384
  • Product dimensions: 8.20 (w) x 10.10 (h) x 0.80 (d)

Table of Contents

About the Author vi

A Note to Professors vii

Chapter 1 Introduction to Public Finance 1

The Role of Government in Making a Free Market Possible 2

Why the Free Market Usually Works Well for Consumers 2

Taxes, Subsidies, Regulations, and Inefficiency 4

Problems for the Free Market 8

Externalities: Chapters 2 and 6 8

Public Goods: Chapter 3 10

Social Insurance: Chapters 5 and 6 11

Income Distribution, Taxation, and Efficiency: Chapters 7, 8, and 9 13

Education: Chapter 11 15

Low-Income Assistance: Chapter 12 15

Problems for the Government 16

Political Economy: Chapter 3 16

Cost-Benefit Analysis: Chapter 4 17

Which Level of Government? Chapter 10 17

Borrowing Instead of Taxing: Chapter 13 17

Taxes and Government Spending in the United States 18

Summary 22

Key Terms 24

Questions 24

Appendix The Indifference-Curve/Budget-Line Diagram 25

Chapter 2 Externalities and the Environment 27

The Economist's Approach to Pollution 28

Environmental Pollution 28

Coase's Prescription When Victims Are Few: Assign a Property Right 29

The Trade-Off between Environmental Quality and Output 30

The Virtues of Pollution Prices 31

Objections to Pollution Prices and Economists' Responses 33

Charging a Price versus Mandating or Subsidizing Clean Technologies 34

Economic Analysis of a Pollution Tax and Tradable Permits 36

A Pollution Tax 36

Tradable Permits 43

Applications: Acid Rain and Global Warming 49

Tradable Permits for Sulfur Dioxide to Reduce Acid Rain 49

A Carbon Tax or Tradable Permits to Reduce Global Warming 50

Box-Case Study: A Carbon Tax versus a Carbon Cap and Trade Program51

Summary 54

Key Terms 55

Questions 55

Chapter 3 Public Goods and Political Economy 57

The Concept of a Public Good 58

Nonexcludability, the Free-Rider Problem, and Taxation 58

Who Should Produce a Public Good? 59

The Island Wall 60

Box-Current Research: Optimal Protection against Crime 63

Political Economy 64

Political Economy on the Island 64

Box-Case Study: A Global Public Good: Military Protection of a Valuable World Resource 65

The Behavior of Government 70

Voting, Legislators, Policies, and Elections 70

Box-Why Does an Individual Citizen Vote? 71

Logrolling 71

Lobbying, Special Interests, Campaigns, Bureaucracies, and Corruption 72

Box-Case Study: The Politics of Subsidies and Tariffs 73

Public Choice, Government Failure, and Constitutions 74

Summary 75

Key Terms 76

Questions 76

Chapter 4 Cost-Benefit Analysis 79

Cost-Benefit Analysis 80

A Private Firm 81

Building a Factory 81

Government 83

Building a Highway 83

Benefits of Improving the Safety of a Highway 85

Box-In the News: The 2007 Minneapolis Interstate Highway Bridge Collapse 87

The Value of a Statistical Life 87

Mistakes to Avoid 88

Reducing Global Warming 88

Uncertainty and the Risk of Catastrophe 89

The Social Discount Rate 89

Cost-Effectiveness Analysis 89

Box-Current Research: The Debate over the 2006 Stern Review on Global Warming 90

Paying for a Costly Medical Treatment 91

Intervening Militarily 92

Box-Case Study: The 2003 U.S. Military Intervention in Iraq 93

Summary 95

Key Terms 96

Questions 96

Chapter 5 Social Security 97

Four Ways to Prepare for Retirement 98

Workers Support Retirees 98

Each Generation Self-Sufficient 99

The Rate of Return 100

Box-The Derivation of r* = g[subscript L] + g[subscript W] + g[subscript L]g[subscript W] When Workers Support Retirees 102

The Impact on the Economy 104

Breaking Out Is Hard to Do 105

Defined Benefit versus Defined Contribution 106

The U.S. Social Security System 108

Background 108

Description of the Current U.S. Social Security Program 112

The Impact on Work 116

The Impact on Saving, Investment, and Capital Accumulation 116

The Impact on Retirement 117

Reforming Social Security 117

Treating the 2040 Problem 118

Box-Case Study: The Clash of Two Distinguished Economists over Social Security 118

Making Each Generation Self-Sufficient 122

Collective Self-Sufficiency 123

Individual Self-Sufficiency: Individual Investment Accounts 123

Combinations and Compromises 123

Box-In the News: The Bush Administration's Social Security Proposal 124

Summary 124

Key Terms 126

Questions 126

Appendix Social Security 128

Chapter 6 Health Insurance 131

Health Insurance in the United States 132

Principles of Health Insurance 133

The Genesis of Health Insurance 133

Starting a Health Insurance Company 133

Moral Hazard and Price Responsiveness 136

Adverse Selection and Asymmetric Information 137

Catastrophic Insurance 137

X% Insurance 139

The Impact of Insurance on Efficiency and Redistribution 140

Limitation of Price and Supply by the Insurer 143

Features of the Health Insurance Markets 144

Patients, Doctors, and the Principal-Agent Problem 144

Regulation by Insurers 145

Employer-Provided Health Insurance 145

Who Bears the Burden of Employer-Provided Health Insurance? 146

Rising Medical Expenditures 148

The Role of Government 148

Medicaid and the State Children's Health Insurance Program 149

Alternative Public Policies for Working Families 150

Medicare for Retirees 153

Box-Current Research: Should Some Medical Care Be Rationed? 157

Health Insurance in Other Countries: An International Perspective 158

Summary 159

Key Terms 162

Questions 162

Appendix Health Insurance 165

Chapter 7 Tax Incidence and Inefficiency 167

Incidence: Who Bears the Burden 168

People, Not Firms, Ultimately Bear All Tax Burdens 168

The Distribution of the Burden Depends on the Relative Elasticities 168

The Distribution of the Burden Doesn't Depend on Who Writes the Check 170

A Tax on Wage Income 172

A Tax on Capital Income 175

General Equilibrium Tax Incidence 176

Inefficiency 178

The Efficiency Loss from a Tax on a Good 180

Optimal Commodity Taxation 182

The Efficiency Loss from a Tax on Wage Income 182

The Efficiency Loss from a Tax on Capital Income 184

A Lump-Sum Tax and the Marginal Tax Rate 185

The Revenue-Rate Curve 186

Summary 187

Key Terms 189

Questions 189

Appendix Tax Incidence and Inefficiency 190

Chapter 8 Income Taxes 199

Mechanics of the U.S. Income Tax 200

Determining Your Income Tax 200

The Alternative Minimum Tax 203

Box-Case Study: A Brief History of the Top Income Tax Rate 204

Different Tax Schedules for Married Couples and Single Persons 205

Concepts Underlying the Income Tax 205

Ability to Pay 205

Proportional, Progressive, Regressive 206

Comprehensive Income 207

Credits versus Deductions 211

Should a Deduction or Credit Have a Ceiling or a Floor? 214

Particular Deductions, Exemptions, and Credits 214

Issues in Taxing Capital Income 216

Retirement Saving Incentives 216

Capital Gains 216

Business Income 216

The Corporate Income Tax 217

The Estate Tax 219

Issues in Taxing Labor Income 221

Household Taxation, Progressivity, and the Second Earner 221

A Labor Income Tax 222

The Payroll Tax 223

Summary 223

Key Terms 225

Questions 225

Chapter 9 Consumption Taxes 227

A Retail Sales Tax 228

A Value-Added Tax 229

A Subtraction VAT 230

Comparing a VAT to a RST 230

Exemptions under a RST or a VAT 231

A Household Rebate with a RST or a VAT 232

The Flat Tax and the X Tax 232

A Household Consumption Tax 233

History of a Household Consumption Tax 233

Computing Household Consumption 234

A Progressive Consumption Tax on Very High Consumption 234

Replacing the Income Tax with a Consumption Tax 235

Impact on Saving 235

Impact on Efficiency Loss 236

Impact on the Distribution of the Tax Burden 237

A Consumption Tax versus a Labor Income Tax 240

Similarities 240

Differences 242

Which Tax is Fairest? 242

Regressivity 242

Taxing What You Take versus Taxing What You Make 242

The Grasshopper and the Ants 243

Pollution Taxes 244

Transportation Taxes 244

Health Taxes 245

Summary 246

Key Terms 248

Questions 248

Chapter 10 State and Local Public Finance 251

Optimal Federalism When Household Incomes are Similar 253

The Tiebout Process 253

State Government for Local Externalities or Scale Economies 255

Optimal Federalism When Household Incomes Differ 256

Residential Location When Incomes Differ: The Separation Process 256

Should a City Government Try to Tax Suburbanites? 257

Should a City Tax Economic Activity That Occurs within the City? 257

Should a City Set a High Tax Rate on Affluent Residents? 258

The Role of State Government When People Separate by Income 258

Box-Case Study: Should Suburbs Help Their Central City? 260

The Property Tax 260

The Mechanics of the Property Tax 261

The Distribution of a Residential Property Tax across Households 261

Who Bears the Burden of a Residential Property Tax? 262

Do Renters of Housing Bear a Burden from the Property Tax? 264

The Burden of a Property Tax on Land 266

The Burden of a Property Tax on Business Firms 266

Arguments for the Residential Property Tax for Local Governments 266

Criticisms of the Residential Property Tax for Local Governments 267

Grants from a Higher Government to Lower Governments 268

Purposes of Grants 268

Different Grants for Different Purposes 268

Summary 270

Key Terms 271

Questions 271

Appendix State and Local Public Finance 272

Chapter 11 Education 275

What Schools Do 275

Elementary and Secondary Education 276

Private Schools without Government 277

Private Schools with Vouchers from Government 277

Public Schools 278

Public Schools plus a Refundable Tax Credit for Private School Tuition 279

Tuition versus Taxes 280

The Public-Private School Tuition Gap 280

The Optimal Quality of a Public School 281

State Funding of Public Schools 283

State versus Local Funding of Public Schools 285

Improving Public Schools 285

Higher Education 287

The Costs and Benefits of Higher Education 287

Private Colleges without Government 288

Public Colleges with Tuition below Cost 289

Student Loans and Financial Aid 289

Box-Case Study: College Grants on a Postcard 290

Summary 291

Key Terms 293

Questions 293

Appendix Education 294

Chapter 12 Low-Income Assistance 295

Federal Spending to Assist Low-Income People 296

Unrestricted versus Restricted Assistance 296

Medicaid 297

The Earned Income Tax Credit 298

Welfare 303

The Impact of Assistance on Poverty 305

Refundable Tax Credits 306

Unemployment Insurance 307

Summary 308

Key Terms 310

Questions 310

Appendix Low-Income Assistance 311

Chapter 13 Government Borrowing 315

Government Debt 315

Deficit versus Debt 315

Commonsense Concern about Excessive Borrowing 316

The Burden of the Debt 317

Investment 318

Capital Expenditures 318

Government Borrowing, Interest Rates, and the Crowding Out of Investment 319

Balanced Budget 319

Disciplining Politicians with a Balanced Budget Rule 319

Box-Case Study: The Deficit and Interest Rates: An Estimate from U.S. Data 320

The Problem with an Always Balanced Budget Rule 320

A Normal Unemployment Balanced Budget Rule 321

Future Considerations 322

Fiscal Imbalance 322

Generational Accounting 323

Deficits, Debt, and Interest 324

U.S. Deficits, Debt, and Interest during the Past Half Century 324

Box-Deficits and Debt with Two Components of Government 325

The Deficit, Debt, and Interest as a Percentage of GDP 327

Inflation, Debt, and Deficits 328

The Long-Term Budget Outlook for the U.S. 330

Box-In the News: Is Medical Care the Primary Cause of the Long-Term Budget Problem? 331

Summary 332

Key Terms 334

Questions 334

Appendix Government Borrowing 335

Glossary 337

Index 345

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