Lectures on Public Economics Lectures on Public Economics Anthony B Atkinson Joseph E Stiglitz Princeton University Press Princeton and Oxford Copyright © 2015 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu Originally published in 1980 by McGraw-Hill All Rights Reserved Library of Congress Cataloging-in-Publication Data Atkinson, A B (Anthony Barnes), 1944– Lectures on public economics / Anthony B Atkinson, Joseph E Stiglitz ; introduction by Anthony B Atkinson ; introduction by Joseph E Stiglitz pages cm “Originally published in 1980 by McGraw-Hill”—Title page verso Includes bibliographical references and index ISBN 978-0-691-16641-4 (hardback) Finance, Public. Welfare economics. I Stiglitz, Joseph E. II Title HJ141.A74 2015 336—dc23 2014044336 British Library Cataloging-in-Publication Data is available This book has been composed in Minion and Myriad Printed on acid-free paper ∞ Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 For Siobhan, Michael, Richard, Sarah, Charles, and Edward Contents Introduction xi Preface xxvii Introductory Note to the 1980 Edition xxix P A R T O N E T H E A N A LY S I S O F P O L I C Y Lecture 1 Introduction: Public Economics 1–1 Introduction 1–2 Role of the Government 1–3 Guide to the Lectures Note: The Public Sector—Statistical Background 3 12 Lecture 2 Household Decisions, Income Taxation, and Labour Supply 19 2–1 Introduction 19 2–2 Income Taxation and Labour Supply 26 2–3 Broader Models of Labour Supply 36 2–4 Empirical Evidence on Labour Supply 40 2–5 Concluding Comments 47 Note on the Expenditure Function 48 Reading 50 Lecture 3 Taxation, Savings, and Decisions over Time 51 3–1 Intertemporal Decisions and Taxation 51 3–2 The Basic Intertemporal Model 56 3–3 Developments of the Model and Alternative Views 66 3–4 Empirical Evidence—Taxation and the Interest Elasticity of Savings 74 3–5 Concluding Comments 77 Reading 78 Lecture 4 Taxation and Risk-Taking 79 4–1 Risk-Taking and Portfolio Allocation 79 4–2 Effects of Taxation 85 4–3 Special Provisions of the Tax System 91 4–4 Generalization of Results 96 4–5 Concluding Comments 102 Note on Risk Aversion 103 Reading 104 Lecture 5 Taxation and the Firm 5–1 Taxes and the Firm 5–2 Corporation Tax and the Cost of Capital 5–3 Taxation and Investment 105 105 108 117 viii ■ C ontents 5–4 A Wider View of Investment 123 5–5 Empirical Investigation of Taxation and Investment 127 5–6 Concluding Comments 130 Reading 131 Lecture 6 Tax Incidence: Simple Competitive Equilibrium Model 132 6–1 Introduction: Tax Incidence 132 6–2 Static Two-Sector Model 136 6–3 Incidence of Corporation Tax 142 6–4 General Tax Incidence 147 6–5 Incidence in a Two-Class Economy 155 6–6 Numerical Applications of the Model 159 6–7 Concluding Comments 163 Note on the Cost Function 164 Reading 165 Lecture 7 Tax Incidence: Departures from the Standard Model 166 7–1 Introduction 166 7–2 Market Imperfections 167 7–3 Monopolistic Competition 172 7–4 Structure of Production 180 7–5 Non-Market-Clearing 184 7–6 Concluding Comments 188 Reading 188 Lecture 8 Taxation and Debt in a Growing Economy 189 8–1 Introduction 189 8–2 An Aggregate Model of Equilibrium Growth 191 8–3 Growth and Taxation 197 8–4 Taxation in a Life-Cycle Model 202 8–5 Burden of the National Debt 208 8–6 Concluding Comments 214 Reading 215 Lecture 9 Distributional Effect of Taxation and Public Expenditure 216 9–1 Taxation, Spending, and Redistribution 216 222 9–2 Modelling the Distribution of Income 9–3 Distributional Incidence 231 9–4 Empirical Studies of the Redistributive Impact of the Government Budget 235 9–5 Concluding Comments 244 Reading 245 Lecture 10 Theories of the State and Public Economics 246 10–1 Introduction 246 10–2 Voting and Decisions 250 10–3 Administration and Bureaucracies 259 10–4 Power, Interest Groups, and Marxist Theories 263 10–5 Empirical Studies of Public Expenditure 268 Reading 274 C ontents • ix P art T w o T h e D es i g n o f P o l i c y Lecture 11 Introduction to Part Two: Normative Analysis 277 11–1 Introduction 277 11–2 Normative Theories of the State 279 11–3 Pareto Efficiency and Welfare Economics 285 11–4 Standard Public Finance Objectives 291 11–5 Range of Government Instruments 296 Note on the Measurement of Income Inequality 302 Reading 303 Lecture 12 The Structure of Indirect Taxation 304 12–1 Introduction 304 12–2 The Ramsey Tax Problem 308 313 12–3 Application of the Ramsey Results 12–4 Partial Welfare Improvements and Tax Reform 318 12–5 Optimal Taxation in a Many-Person Economy 322 12–6 Concluding Comments 327 Reading 327 Lecture 13 The Structure of Income Taxation 328 13–1 Introduction 328 13–2 A Simple Model 331 13–3 Linear Income Tax 338 13–4 General Income Tax 343 13–5 Concluding Comments 352 Reading 353 Lecture 14 A More General Treatment of the Optimal Tax Problem 354 14–1 Introduction 354 14–2 Indirect Taxes and Linear Direct Taxation 357 14–3 Nonlinear Tax Schedules and Tax Exemptions 364 14–4 Taxation of Savings 370 14–5 Externalities in Consumption and Corrective Taxes 378 14–6 Concluding Comments 381 Reading 382 383 Lecture 15 Public Sector Pricing and Production 15–1 Introduction 383 15–2 Departures from Marginal Cost Pricing 386 15–3 Choice of Technique and Production Efficiency 394 15–4 Cost–Benefit Analysis and Social Rate of Discount 398 15–5 Concluding Comments 402 Reading 403 Lecture 16 Public Goods and Publicly Provided Private Goods 404 16–1 Introduction 404 16–2 Optimum Provision of Pure Public Goods—Efficiency 408 16–3 Optimum Provision of Pure Public Goods—Distribution 415 16–4 Publicly Provided Private Goods 417 16–5 Equilibrium Levels of Public Expenditure 424 16–6 Revelation of Preferences 430 Reading 434 ... of Congress Cataloging-in-Publication Data Atkinson, A B (Anthony Barnes), 1944– Lectures on public economics / Anthony B Atkinson, Joseph E Stiglitz ; introduction by Anthony B Atkinson ;.. .Lectures on Public Economics Lectures on Public Economics Anthony B Atkinson Joseph E Stiglitz Princeton University Press Princeton and Oxford Copyright © 2015 by Princeton University... perceptions (see Brunnermeier and Parker, 2005) Empirical Public Finance Part One of Lectures on Public Economics contains discussion of empirical evidence on taxation and labour supply, taxation