Public Finance and Public Policy:
A Tour Through the Book
PART I Introduction and Background
1 Why Study Public Finance
The goal of studying public finance is to understand the proper role of the government in the
economy. The changing role of government and exciting current policy debates motivate the
study of this field.
2 Theoretical Tools of Public Finance
We review the microeconomic tools necessary to understand the effects of government
intervention in the economy.
3 Empirical Tools of Public Finance
We review the main issues in empirical public finance, the use of data and statistical methods to
measure the impact of government policy on individuals and markets.
4 Budget Analysis and Deficit Financing
We delve into the complexity of budgetary issues that arise as governments consider their
revenue and expenditure policies.
PART II Externalities and Public Goods
A major role of government is to address market failures caused by goods that have external costs
and benefits or public benefits. In this part we discuss when the private market can and cannot
solve these problems and the prospects for government success in addressing the problems.
5 Externalities: Problems and Solutions
When do externalities cause private markets to fail, and what tools does government have to
combat this failure
6 Externalities in Action: Environmental and Health Externalities
We use theoretical tools to examine examples of environmental and health externalities (such as
acid rain, global warming, cigarette smoking, and obesity).
7 Public Goods
8 Cost-Benefit Analysis
9 Political Economy
Goods with public benefits may be underprovided by the private market, under conditions
discussed in Chapter 7, but the public sector faces two key problems in providing those goods:
measuring their costs and benefits (Chapter 8) and effectively translating voters’ preferences for
public projects into public policy (Chapter 9).
10 State and Local Government Expenditures
We discuss the local provision of public goods and the question of whether competition across
localities can solve the problem of underprovision of public goods.
We review the public finance issues involved in providing education, one of the most important
public goods in the United States.
PART III Social Insurance and Redistribution
The increased nature and scope of government spending on social insurance programs is one of
the most fundamental changes in U.S. public policy over the past fifty years.
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12 Social Insurance: The New Function of Government
We examine the general theory of social insurance, highlighting the benefits (consumption
smoothing) and costs (moral hazard) of insurance.
13 Social Security
14 Unemployment Insurance, Disability Insurance, and Workers’ Compensation
We apply the principles of social insurance from Chapter 12 to the study of the nation’s largest
social insurance programs. We discuss the institutional features of these programs, their benefits
and costs, and prospects for program reform.
15 Health Insurance I: Health Economics and Private Health Insurance
16 Health Insurance II: Medicare, Medicaid, and Health Care Reform
The largest and most rapidly growing government expenditure is on health care. We discuss the
nature of health economics and the functioning of private health insurance markets, the role of
the nation’s two largest public health insurance programs, and the structure and impacts of the
Affordable Care Act.
17 Income Distribution and Welfare Programs
We review the facts on income distribution in the United States, the theoretical and empirical
effects of welfare policy, and the impacts of fundamental welfare reform.
PART IV Taxation in Theory and Practice
In this part we move from the study of government expenditures to the study of how the
government raises revenue through taxation.
18 Taxation: How It Works and What It Means
We provide the institutional and theoretical bases for understanding tax policy and its effects,
focusing in particular on the appropriate base for individual income taxation.
19 The Equity Implications of Taxation: Tax Incidence
20 Tax Inefficiencies and Their Implications for Optimal Taxation
Markets do not take taxes lying down. In these chapters, we discuss how market reactions affect
both the equity implications of tax (tax incidence) and the efficiency costs of taxation. We use
this theory to model the optimal design of taxes on goods and on income, and discuss evidence
on the distribution of tax burdens.
21 Taxes on Labor Supply
22 Taxes on Savings
23 Taxes on Risk Taking and Wealth
In these chapters we explore the effect of income taxation on individual behavior and the
resulting implications for tax policy. How do taxes affect labor supply, and what has been the
effect of the Earned Income Tax Credit How do taxes affect savings, and what has been the
effect of tax-subsidized retirement savings How do taxes affect the distribution of asset holdings,
and what has been the effect of the capital gains, estate, and property taxes
24 Taxation of Business Income
We discuss the structure of the corporate income tax and its implications for a firm’s investment
and financing decisions.
25 Fundamental Tax Reform and Consumption Taxation
Fundamental tax reform in the United States focuses on moving to a low-rate, broad-based tax
system. We discuss the benefits of this reform, the political and economic barriers it faces, and
possible reforms such as a consumption or flat tax.
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AND PUBLIC POLICY
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