Modern Public Economics

Raghbendra Jha

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781135198817
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In recent times not only have traditional areas of public economics such as taxation, public expenditure, public sector pricing, benefit cost analysis, and fiscal federalism thrown up new challenges but entirely new areas of research and inquiry have emerged. This second edition builds upon the strengths of the previous edition and incorporates results of research on new areas such as global public goods, environmental taxation and carbon permits trading and the complexities of corporate taxation in a rapidly globalizing world.

The book is a modern and comprehensive exposition of public economics. It includes extended discussions on topics of particular interest to developing countries and covers subjects such as:

• 
  
  

• taxation in an economy with a large informal sector

• 
  
  

• the challenges of using VAT

• 
  
  

• the use of randomized evaluation

• 
  
  

• theory of public expenditure and public goods including global public goods

• 
  
  

• incentive effects of taxation and tax incidence

This book discusses the major traditional areas of taxation and public expenditure as well as emerging issues relating to public economics in the globalized world economy. It will be useful as a reference and update on the modern literature on public economics for professional economists and policymakers, as well as providing invaluable information as a basic text for undergraduate and graduate students in public economics.

Part I Welfare economics

Introduction to Part I

Part I outlines the welfare foundations of Modern Public Economics and consists of three chapters. Chapter 1 introduces and reviews extant major tools of welfare analysis. Chapter 2 discusses in detail conditions under which competitive markets work efficiently and the state would not be called upon to intervene to improve efficiency of allocation. However, efficiency of allocation does not imply optimal distribution. This is a matter of public choice and is often addressed by instruments of democratic decision-making. Chapter 3 discusses the limits of using the democratic process for making such choices.

1 A quick primer on consumer demand

DOI: 10.4324/9780203870044-1

Key concepts: preference ordering; transitivity, quasi-transitivity and acyclicity of preferences; continuity and convexity of orderings; utility functions: direct and indirect, concave and quasi-concave utility functions; compensated and uncompensated demand functions; expenditure functions; Slutsky equation, consumer’s surplus, equivalent and compensating variations; Roy’s identity; excess burden of a tax; the Envelope theorem.

1.1 Introduction

In public economics some key results from consumer demand theory are often used. In some instances, students would have picked up these results in micro theory. However, for the sake of completeness these results are provided here. This review is not meant to be exhaustive but should be viewed as a necessary prelude to studying some aspects of public economics. This chapter then, is an entry point to the study of public economics, not public economics proper.

We begin this chapter with the definitions of some basic notions in consumer demand theory. Later we derive key concepts that will be useful in our study of tax and expenditure policies.

1.2 Some key definitons

Definition 1.1 (weak preference relation or ordering)

In the classical theory of consumer demand the basic weak preference relation for any consumer i is written as R_i (read as ‘at least as good as’). Thus if x and y are two consumption baskets available to individual i and if it is discovered that xR_iy then it follows that commodity bundle x is considered by individual i to be at least as good as commodity bundle y. (Sometimes R_i is also called an ordering.) If, at the same time, y is not R_ix then we say that commodity bundle x is strictly preferred by individual i to commodity bundle y. This is written as xP_iy. If, however, xR_iy and yR_ix then individual i is indifferent between commodity bundles x and y; this is written as xI_iy. The consumer is assumed to have a consumption set X_i from which all choices of consumption baskets must be made. The weak preference relation R_i is defined over this consumption set.

Definition 1.2 (rational weak preference relation)

The weak preference relati...