Module Code and Title:        CET306 Public Economics

Programme:                           BA in Development Economics

Credit Value:                          12

Module Tutor:                        Rudrarup Mukherjee

General objective: This module aims to introduce the students to the role of state in managing economy through fiscal policy instruments, such as, taxes, public expenditure, public debt, and State-Owned Enterprises. It focuses on provision of public goods, and prepare framework for the analysis of social choices.

Learning outcomes – On completion of the module, students will be able to:

1. Explain the impacts of government interventions on the income-leisure choice of individuals. 
2. Identify the needs for public interventions in an economy.
3. Analyse the trade-offs among the objectives of different functions of the government. 
4. Examine the principal forms of market failures and their respective solutions, and the role of government. 
5. Examine the problems related to the provision of public goods and the remedial measures. 
6. Examine and interpret the difficulties in aggregating heterogeneous public choices. 
7. Examine the viability of a public project using cost-benefit analysis. 
8. Analyse the tax incidences, and tax inefficiencies to frame appropriate tax system. 
9. Examine the importance of tax reforms. 
10. Assess various arguments in fiscal policy debates by examining the impacts of various fiscal policies of different regimes. 
11. Examine the effects of budget deficit on an economy. 
12. Explain public debt management. 

Learning and Teaching Approach: 

Assessment Approach:

Each student will submit an assignment covering topics related to Unit I. The assignment should have a maximum limit of 750-850 words. 

1    Adequacy of references used

2    Defining the concepts

1    Use of effective analytical tools

5    Finding the solution

1    Concluding remarks

Each student will examine the trend of public expenditure on health/ education/social security net/infrastructure in any developing nation. Word limit: 750-850 

1    Situation analysis

3    Usage of appropriate statistical/econometric method 

5    Discussion on findings 

1 Conclusion and recommendation 

A class test of time duration 45 minutes, covering Unit-III and IV would be conducted. The test will comprise structured questions like MCQ, fill-in the blanks, matching, definitions, analytical, and open-ended questions. 

Each student to prepare a report on the social cost and benefit analysis of a public sector project (using real/hypothetical data). Word limit: 800-1000

1     Structure of report

2    Identification of appropriate social costs and benefits of the project

1    Justification of methodology used.

3    Discussion of findings

1    Presentation of findings 

2    Defence of the work in Q&A 

A panel of 4-6 students will discuss any relevant issue related to Bhutan’s (or any other developing country) public expenditure/public debt /taxation policy. Each student in a panel will be given 3 minutes to speak, and 2 minutes Q&A 

3    Critical thinking 

3    Effective communication (Subtle summary of views, use of technical terms) 

5    Theoretically embedded arguments 

2    Evidences to support theoretical arguments 

2    Effective/convincing responses to the questions 

Students will take a written exam of 1.5-hr duration covering topics up to the mid-point of the semester. The exam will comprise structured questions like MCQ, fill-in-the-blanks, matching, definition, as well as open-ended essay questions.

Students will take a written exam of 2.5-hr duration encompassing all the subject matters covered in the semester. This assessment is comprehensive and summative in nature, and will comprise structured questions like MCQ, fill-in-the-blanks, matching, definition, as well as open-ended essay questions.

Overview of assessment approaches and weighting

Pre-requisites: CET103 Intermediate Microeconomics 

Subject matter:

1. Unit I: Theoretical Tools of Public Finance
   1. Constrained utility maximization 
   2. Putting the tools to work
   3. Market equilibrium and social welfare 
   4. Need for state interventions, price and quantity controls 
   5. Impacts of state interventions on individual decisions 
2. Unit II: Public Economic Theory
   1. Public expenditure, definition, classifications, and importance, views on growth of public expenditure: Wagner’s Law, Wiseman-Peacock hypothesis
   2. Financing of public expenditure: types of public revenue, public borrowing 
   3. Fiscal functions: allocative, distributive and stabilisation, role of public expenditure and public debt 
   4. Trade-off between different objectives 
3. Unit III: Externalities
   1. Externality theory, negative and positive externalities and consequent market failure 
   2. Private-sector solutions to negative externalities: property rights and Coase theorem, problems of implementing Coase theorem. 
   3. Public-sector remedies for externalities: corrective taxation, subsidy, pollution controlling and optimum level of pollution 
   4. Distinctions between price and quantity approaches to addressing externalities: the advantages and disadvantages
4. Unit IV: Public Goods
   1. Public goods, pure public goods, features of pure public goods, public goods and market failure
   2. Private provision of public goods, overcoming the free-rider problem 
   3. Public provision of public goods, crowding out effect 
   4. Publicly provided private goods and inefficiency 
   5. Comparison of conditions for optimum provision of public and private goods 
   6. Mechanisms for aggregating individual preferences; public choice theory, standard voting model, arbitrary behaviour and voting failure 
   7. Arrow’s impossibility theorem, and theory of social choice 
5. Unit V: Cost-Benefit Analysis
   1. Measuring the costs of public projects, present and future costs
   2. Measuring the benefits of public projects, present and future benefits, measuring the benefits of saved time and saved lives, the difficulties 
   3. Shadow pricing, and its importance in cost-benefit analysis 
   4. Social cost and benefit analysis, and viability of a public project 
6. Unit VI: Taxation
   1. Principles of taxation and types of taxes 
   2. Tax incidence, three rules of tax incidence 
   3. Tax inefficiency, impact of taxation on work-effort, progressive taxation and inefficiency 
   4. Tax incidence extensions, impacts of taxation on labour market 
   5. General equilibrium analysis of tax incidence
   6. Optimal commodity taxation and optimal income taxes, relationship between tax-revenue and tax-rate: Laffer curve 
   7. Fundamental tax reforms 
7. Unit VII: Fiscal stability
   1. Budgetary deficit: sources and financing
   2. Deficit finance: types, measures, impacts on the economy 
   3. Importance of public debt management 
   4. Sovereign wealth funds: advantages and disadvantages

Reading List:

Essential Reading

Gruber, J. (2019). Public Finance and Public Policy. Worth Publishers. 

Musgrave R.A. & Musgrave, P.B. (2017). Public Finance in Theory & Practice. McGraw Hill Publications.

RGoB (of last five years). Budget report: Financial Year. Ministry of Finance.

Stiglitz, J. E., Rosengard, J.K.(2015). Economics of the Public Sector. W.W. Norton & Company, 4^th edition, 2000.

Additional Reading

Cullis, J. & Jones, P. (2009). Public Finance and Public Choice. Oxford University Press. 

Rashid, H (2012). Understanding the Causes of the Rupee Shortfall: A Macroeconomic Policy Challenge for Bhutan and the Way Forward. Unpublished paper. 

Public Debt Reports by Ministry of Finance, Royal Government of Bhutan 

Budget Performance Reports by Ministry of Finance, Royal Government of Bhutan. 

Date: June 2022