Module Code and Title:       CET204          Public Economics

Programme:                         BA in Development Economics

Credit Value:                         12

Module Tutor:                       Tshering Lhamo Dukpa

General objective: Public economics aims to focus on the justification for public intervention and issues of economic efficiency and equity related to the study of government policy. The module deals with the nature of government intervention and its implications for allocation, distribution and stabilization. It aims to introduce the students to a formal analysis of public finance.

Learning outcomes – On completion of this module, learners should be able to:

1. Explain the principal forms of market failure that provide a justification for government intervention.
2. Indicate the trade-offs captured by public economics models.
3. Identify the assumptions, relevance, and limitations of public economics models.
4. Discuss the design of tax structures using the concepts of efficiency and equity.
5. Analyse the role of public goods.
6. Undertake social cost and benefit analysis.
7. Review and the budgetary status of government.
8. Analyse fiscal policy.
9. Assess the arguments in policy debates.

Learning and Teaching Approach: This module will be taught by means of lectures, tutorials, group work, case studies and self-directed study. Lectures will aim at explanation of various concepts and theories. Focus will be placed on applying theories to the Bhutanese context and using relevant data. Lectures will be complemented by tutorials and guest lectures. Tutorials will also be used to facilitate problem solving. Group work will usually consist of 4-5 students discussing and analysing a particular issue and solving a problem.

Assessment Approach:

A. Individual Assignments (2): Portion of Final Marks: 15%

Two assignments will be given (7.5% each), one before and one after the mid-semester examination, based on library research covering topics related to fiscal functions of the government and provision of public goods. Each assignment should have a maximum limit of 300 words.

• 1%       Adequacy of references used
• 1%       Defining the concepts
• 1%       Use of effective analytical tools
• 3.5%    Solution
• 1%       Conclusion

B. Group Work: Portion of Final Mark: 15%

A report on a group-based activity (groups of 4) involving time series data analysis on public finance in Bhutan. Report word limit: 500 words.

• 1%       Situation analysis
• 2%       Methodology of group work
• 6%       Discussion on findings in the joint report
• 4%       Peer review of individual reports
• 2%       Presentation (individually marked)

C. Case Study: Portion of Final Mark: 15%

Each student to prepare a report on the social cost and benefit analysis of a public sector project (using real/hypothetical data). Word limit: 300 words.

• 1%       Structure of report
• 3%       Identification of appropriate social costs and benefits of the project
• 3%       Justification of methodology used
• 5%       Discussion of findings
• 1%       Presentation of findings
• 2%       Defence of the work in Q&A

D. Midterm Examination: Portion of Final Mark: 20%

Students will take a written exam of 1.5 hr duration covering topics up to the mid-point of the semester.

Pre-requisites:

Subject matter:

1. Theoretical Tools of Public Finance
   • Constrained Utility Maximization
   • Putting the Tools to Work
   • Equilibrium and Social Welfare
2. Public Economic Theory
   • Fiscal functions: allocative, distributive and stabilisation, role of public expenditure and public debt
   • Trade-off between different objectives
3. Externalities
   • Externality Theory
   • Private-Sector Solutions to Negative Externalities
   • Public-Sector Remedies for Externalities
   • Distinctions Between Price and Quantity Approaches to Addressing Externalities
   • Mechanisms for Aggregating Individual Preferences; Public Choice Theory
4. Public Goods
   • Optimal Provision of Public Goods
   • Private Provision of Public Goods
   • Public Provision of Public Goods
   • Comparison of conditions for optimum provision of public and private goods
5. Cost-Benefit Analysis
   • Measuring the Costs of Public Projects
   • Measuring the Benefits of Public Projects
   • Shadow Pricing
   • Social Cost and benefit Analysis
6. Taxation
   • The Three Rules of Tax Incidence
   • Tax Incidence Extensions
   • General Equilibrium Tax Incidence
   • Optimal Commodity Taxation and Optimal Income Taxes
   • Fundamental Tax Reforms
7. Fiscal stability
   • Budgetary Deficit
   • Deficit Finance
   • Public Debt Management
   • Sovereign funds

Reading List:

1. Essential Reading
   • Gruber, J. (2013). Public Finance and Public Policy. Worth Publishers.
   • Stiglitz, J. E. (2000). Economics of the Public Sector. W.W. Norton & Company, 3rd edition, 2000.
2. Additional Reading
   • Cullis, J. & Jones, P. (1998). Public Finance and Public Choice. Oxford University Press.
   • Musgrave R.A. & Musgrave, P.B. (1989). Public Finance in Theory & Practice. McGraw Hill Publications.
   • Rashid, H (2012). Understanding the Causes of the Rupee Shortfall: A Macroeconomic Policy Challenge for Bhutan and the Way Forward. Unpublished paper.
   • RGoB (of last five years). Budget report: Financial Year. Ministry of Finance.

Date: January 15, 2016