Public Finance

Public Finance

A Normative Theory

4th Edition - August 1, 2013

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  • Author: Richard Tresch
  • Paperback ISBN: 9780128228647
  • eBook ISBN: 9780323984157

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Public Finance: A Normative Theory, Fourth Edition provides a classic text on the normative theory of government policy. This valuable and accessible resource covers the welfare aspects of public economics, with considerable coverage of European examples. The work presents detailed and comprehensive coverage of theoretical literature, empirical work, environmental issues, social insurance, behavioral economics and international tax issues. The book is organized logically, written in an engaging manner, and is both sufficiently rigid for use by those with PhDs in math and accessible to students less well trained in math.

Key Features

  • Provides a logical progression from normative theory to concise mathematical applications
  • Covers European examples, welfare economics and tax law updates
  • Includes pedagogical supplements such as end-of-chapter questions and answers


Advanced undergraduate and graduate students studying public finance and public economics, and more broadly welfare economics.

Table of Contents

  • Cover image
  • Title page
  • Table of Contents
  • Copyright
  • Preface
  • Part I. Introduction: The Content and Methodology of Public Sector Theory
  • Chapter 1. Introduction to Normative Public Sector Theory
  • The Fundamental Normative Questions
  • Government Expenditure Theory: Philosophical Underpinnings
  • Government Expenditure Theory and Market Failure
  • The Government Sector in the United States
  • The Theory of Taxation
  • Fiscal Federalism
  • The Theory of Public Choice
  • Behavioral Public Finance
  • Summary
  • Chapter 2. A General Equilibrium Model for Public Sector Analysis
  • A Baseline General Equilibrium Model
  • Efficiency: The Pareto Optimal Conditions
  • Equity: The Social Welfare Function and the Optimal Distribution of Income
  • Maximizing Social Welfare
  • Policy Implications and Conclusions
  • Chapter 3. First-Best and Second-Best Analyses and the Political Economy of Public Sector Economics
  • Lump-Sum Redistributions and Public Sector Theory
  • First-Best Analysis
  • Second-Best Analysis
  • Similarities Between First-Best and Second-Best Analyses
  • The Political Economy of the Social Welfare Function
  • Conclusion
  • Part II. The Theory of Public Expenditures and Taxation—First-Best Analysis
  • Chapter 4. The Social Welfare Function in Policy Analysis
  • Social Welfare and the Distribution of Income: The Atkinson Framework
  • Social Welfare and Consumption: The Jorgenson Analysis
  • Social Welfare and Social Mobility
  • Chapter 5. The Problem of Externalities—An Overview
  • Policy-Relevant Externalities
  • The Analysis of Externalities: Modeling Preliminaries
  • Chapter 6. Consumption Externalities
  • How Bad Can Externalities Be?
  • The Worst of All Worlds—All Goods (Factors) Are Pure Public Goods (Factors)
  • The Existence of at Least One Pure Private Good
  • Nonexclusive Goods—The Samuelson Model
  • Aggregate Externalities
  • Chapter 7. Production Externalities
  • The Condensed Model for Production Externalities
  • Aggregate Production Externalities
  • U.S. Antipollution Policy: The CAC Approach
  • Concluding Comments: The Problem of Nonconvex Production Possibilities
  • Chapter 8. An Application of Externality Theory: Global Warming
  • Consumption–Production Externalities
  • Legislating Pollution Standards
  • Defensive Antipollution Strategies
  • The Kyoto Protocol, the Copenhagen Accord, and the Paris Climate Agreement
  • Long-Lived Externalities
  • Additional Issues
  • Chapter 9. The Theory of Decreasing Cost Production
  • Decreasing Cost in General Equilibrium Analysis
  • Reflections on U.S. Policy Regarding Decreasing Cost Services: The Public Interest in Equity and Efficiency
  • Appendix: Returns to Scale, Homogeneity, and Decreasing Cost
  • Chapter 10. The First-Best Theory of Taxation and Transfers
  • Public Choice and Pareto-Optimal Redistribution
  • Altruism, Free Riding, and Crowding Out of Private Charity
  • Other Motivations for Redistributive Transfers
  • Chapter 11. Applying First-Best Principles of Taxation—What to Tax and How
  • Designing Broad-Based Taxes: The Economic Objectives
  • Ability to Pay: Theoretical Considerations
  • Horizontal Equity
  • Vertical Equity
  • Reflections on the Haig–Simons Criterion in Practice: The Federal Personal Income Tax
  • The Inflationary Bias Against Income From Capital
  • Taxing Realized Gains: Auerbach’s Retrospective Taxation Proposal
  • The Taxation of Human Capital
  • Summary
  • Part III. The Theory of Public Expenditures and Taxation: Second-Best Analysis
  • Chapter 12. Introduction to Second-Best Analysis
  • A Brief History of Second-Best Theory
  • Philosophical and Methodological Underpinnings
  • Preview of Part III
  • Chapter 13. The Second-Best Theory of Taxation in One-Consumer Economies With Linear Production Technology
  • General Equilibrium Price Models
  • The Measurement of Loss From Distorting Taxes
  • The Optimal Pattern of Commodity Taxes
  • Substitutions Among Taxes: Implications for Welfare Loss
  • Chapter 14. The Second-Best Theory of Taxation With General Production Technologies and Many Consumers
  • A One-Consumer Economy With General Technology
  • Many-Person Economies: Fixed Producer Prices
  • Many-Person Economy With General Technology
  • The Social Welfare Implications of Any Given Change in Taxes
  • Chapter 15. Taxation Under Asymmetric Information
  • Lump-Sum Redistributions and Private Information
  • Redistribution Through Commodity Taxation
  • Optimal Taxation, Private Information, and Self-Selection Constraints
  • Optimal Income Taxation
  • Tax Evasion
  • Concluding Remarks
  • Chapter 16. The Theory and Measurement of Tax Incidence
  • Tax Incidence: A Partial Equilibrium Analysis
  • First-Best Theory, Second-Best Theory, and Tax Incidence
  • Methodological Differences in the Measurement of Tax Incidence
  • Theoretical Measures of Tax Incidence
  • The Equivalence of General Taxes
  • Measuring Tax Incidence: A Many-Consumer Economy
  • The Harberger Analysis
  • Important Modifications of the Harberger Model
  • Chapter 17. Expenditure Incidence and Economywide Incidence Studies
  • The Incidence of Government Transfer Payments
  • Tax and Expenditure Incidence With Decreasing-Cost Services
  • Samuelsonian Nonexclusive Goods
  • Economywide Incidence Studies
  • The Sources and Uses Approach
  • Computable General Equilibrium Models of Tax Incidence
  • Dynamic Tax Incidence
  • Chapter 18. Tax Reform: The Tax Base and Tax Rates
  • Tax Reform and Tax Theory
  • Reforming the Tax Base
  • Reforming the Personal Income Tax Rates
  • Chapter 19. Transfer Payments and Private Information
  • First-Best Insights
  • Cash Transfers: Broad-Based or Targeted?
  • Private Information and In-Kind Transfers
  • Chapter 20. Social Insurance: Medical Care
  • The Demand for Insurance
  • Without Insurance
  • With Insurance
  • Private or Asymmetric Information
  • Moral Hazard
  • The Competitive Outcome
  • The Public Policy Response
  • Ex Post Moral Hazard
  • Deductibles and Copayments
  • The Value of Access
  • Adverse Selection
  • Ex Post Versus Ex Ante Efficiency
  • The Nature of Adverse Selection
  • Advantageous Selection
  • A Two-Policy Model
  • Is an Equilibrium Possible?
  • An Information-Enhanced R/S Model
  • Policy Response to Adverse Selection
  • U.S. Policies
  • Medicare and Medicaid
  • Patient Protection and Affordable Care Act
  • Chapter 21. Social Insurance: Social Security
  • The U.S. Social Security System
  • Social Security as Social Insurance
  • The Macroeconomic Effects of Social Security
  • Social Security and Saving
  • The Structure of the Economy: Consumption, Production, and Market Clearance
  • Concluding Observations
  • Chapter 22. Externalities in a Second-Best Environment
  • The Second-Best Allocation of Samuelsonian Nonexclusive Goods
  • The Coase Theorem, Bargaining, and Private Information
  • Chapter 23. Decreasing Costs and the Theory of the Second Best—The Boiteux Problem
  • The Boiteux Problem: The Multiproduct Decreasing-Cost Firm
  • Constrained Government Agencies
  • Chapter 24. General Production Rules in a Second-Best Environment
  • The Diamond–Mirrlees Problem: One-Consumer Economy
  • Production Decisions With Nonoptimal Taxes
  • Second-Best Production Rules When Equity Matters
  • Concluding Comments
  • Chapter 25. Behavioral Public Sector Economics
  • The Behavioral Anomalies
  • Prospect Theory: The Rejection of Expected Utility Maximization
  • Present-Biased Preferences: Self-Control Issues
  • Social Preferences
  • Framing Effects or Context Dependence
  • Mainstream Reactions
  • Positive and Normative Public Sector Economics
  • Prospect Theory
  • Applying Prospect Theory
  • Nudges and Standard Policy Prescriptions
  • Standard Agents Only
  • Behavioral Agents Only
  • A Mixture of Standard and Behavioral Agents
  • Neoclassical Errors When Behavioral Anomalies Occur
  • Can Mainstream and Behavioral Economic Theory Be Reconciled?
  • Refinements
  • Behavioral Public Finance Following Bernheim/Rangel
  • Reworking Optimal Tax Theory
  • A Final Word in Support of Behavioral Economics
  • Part IV. Fiscal Federalism and International Public Finance
  • Chapter 26. Optimal Federalism: Sorting the Functions of Government Within the Fiscal Hierarchy
  • The Potential for Incompatibilities and Destructive Competition
  • Sorting the Functions of Government Within the Fiscal Hierarchy
  • Optimal Federalism and the Distribution Function
  • Chapter 27. Optimal Federalism: The Sorting of People Within the Fiscal Hierarchy
  • The Modeling Dimensions
  • Jurisdiction Formation in Accordance With the Theory of Clubs
  • Fixed Communities and Housing Sites: Adding the Housing Market
  • Anything Is Possible
  • Mobility and Redistribution
  • Chapter 28. The Role of Grants-in-Aid in a Federalist System of Governments
  • Optimal Federalism and Grants-in-Aid: Normative Analysis
  • Alternative Design Criteria
  • Estimating the Demand for State and Local Public Services
  • The Response to Grants-in-Aid
  • Chapter 29. International Public Finance
  • The Taxation of Mobile Capital
  • Summary
  • Multinational Enterprises
  • A Destination-Based Cash Flow Tax
  • Concluding Observations
  • Index

Product details

  • No. of pages: 568
  • Language: English
  • Copyright: © Academic Press 2022
  • Published: August 1, 2013
  • Imprint: Academic Press
  • Paperback ISBN: 9780128228647
  • eBook ISBN: 9780323984157

About the Author

Richard Tresch

Richard Tresch
Richard Tresch earned a bachelor’s degree in 1965 from Williams College and a doctorate in economics in 1973 from the Massachusetts Institute of Technology, where he was a teaching assistant prior to joining Boston College. He joined the Boston College faculty in 1969, and during his 49-year-long career in the college, Dr. Tresch has served as the Chairman of the Department of Economics, Director of Graduate Studies, and Director of Undergraduate Studies. Currently, he is Professor Emeritus of Economics at Boston College. In 1996, he was chosen as the Massachusetts Professor of the Year by the Carnegie Foundation for the Advancement of Teaching. He was one of 585 national entrants in the foundation’s U.S. Professors of the Year Program, which salutes outstanding undergraduate instructors, with the award recognized as one of the most prestigious honors to be bestowed on professors. Dr. Tresch, a member of the American Economic Association, has served on the board of editors of the American Economic Review and contributed to the New England Journal of Business and Economics and Public Finance. Moreover, he is the editor of a fourvolume major reference work on public sector economics.

Affiliations and Expertise

Boston College, Massachusetts, USA

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