London School of Economics and Political Science (LSE)

Modules

Public economics [22]

Prerequisites (if taken as part of a BSc degree): 28 Managerial economics or 66 Microeconomics.

The first section investigate issues of efficiency and equity. The efficiency of the competitive equilibrium is demonstrated. The sources of market failure are introduced and alternative policy schemes designed to improve efficiency are analysed. The policy implications of equity considerations are then reviewed, with an emphasis on the restrictions placed upon government actions by limited information. The second section introduces the public sector and analyse public-sector decision making. The historical growth of public sector expenditure over the previous century is charted and statistics on the present size of the public sector are reviewed. The reasons (both historical and theoretical) for the existence of the public sector are considered, as are theories that attempt to explain its growth. A positive analysis of how the government may have its objectives and actions determined is undertaken. Voting is analysed as a decision-making mechanism. The third section involves a detailed review of the sources of market failure: public goods, club goods, imperfect competition, externalities and information. The motives for government provision of public goods are explored and mechanisms for efficient provision are analysed. The debate over the extent of welfare loss caused by imperfect competition is studied. The concept of a natural monopoly is introduced and policies for their regulation discussed. The market failure caused by externalities is used to motivate the Coase Theorem and the legal and economic basis of the assignment of properties rights. The double-dividend hypothesis and green taxes are also analysed. The fourth section is concerned with taxation. It analysis the basic tax instruments (commodity and income taxes) and the economics of tax evasion. The effects of taxation are analysed and rules for optimal taxes derived. The degree to which taxation can achieve redistribution is studied and taxation is contrasted to other economic allocation mechanisms. These principles are applied to evaluate policy initiatives. The final section studies public economics when there is more than one decision-making body. Fiscal federalism addresses why there should be multiple levels of government and discusses the optimal division of responsibilities between different levels. The study of tax competition shows how tax competition can limit the success of delegating tax-setting powers to independent jurisdictions.