Winter 1995                                            Dan Usher 

According to the system of natural liberty, the sovereign has only three duties of great importance. Indeed, but plain and intelligible to common understandings: first, the duty of protecting society from the violence and invasion of other independent societies; secondly, the duty of protecting as far as possible, every member of the society from the injustice and oppression of every other member of it, or the duty of establishing an exact administration of justice; and thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be in the interest of any individual, or small number of individuals to erect and maintain, because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do more than repay it to a great society.

					Adam Smith

Grades for the course will be distributed 20% for problem sets, 20% for a term paper and 60% for the final exam. There will be no mid-term exam. The text is R. Boadway and D. Wildasin, Public Sector Economics (2nd edition, 1984). The term paper, due on the last day of class, is to be a critical evaluation of an article in public finance published in an academic journal since January 1, 1993 and not already on any Queen's reading list, showing how the article relates to earlier literature, pointing out errors (if any) or dubious assumptions in the article, developing the argument in the article to some extent, and evaluating its contribution to the science of economics. Consideration will be given to requests to do the term paper on another topic instead.

The reading list contains more than a teacher can be expected to teach or students can be expected to read in a one term course. The list has grown over the years as material has been added but not subtracted. A large list may be of some use to students by supplying an overview of the expenditure side of public finance. Students this ear are responsible for parts I, II, III (a,b,c and e), IV, V (a,b,c and d), VI and IX. The more important items on the reading list are indicated by *.

Atkinson, A.B. and Stiglitz J.E., Lectures on Public Economics, 1980.

Auerbach, A. and Feldstein, M., Handbook of Publics Economics (two volumes), 1987.

Cornes, R. and Sandler, T., The Theory of Externalities, Public Goods and Club Goods, 1986.

Mueller, D.C. Public Choice II, 1989.

Starrett, D.A., Foundations of Public Finance, 1988.

*Smith, A., The Wealth of Nations, Book V, chapter 1, of "The Expenses of the Sovereign or Commonwealth".

Musgrave, R., The Theory of Public Finance, 1959, chapters 1, 4, 5, and 6.

Head, J., "The Welfare Foundations of Public Finance Theory", chapter 1, Public Goods and Public Welfare.

Buchanan, J., "Public Finance and Public Choice", National Tax Journal, 1975, 383-94.


PART II The Virtues of a Competitive Economy

a) The Competitive Model

*Boadway and Wildasin, Chapters 1,2.

*Bator, F., "The Simple Analytics of Welfare Maximization", American Economic Review. 1957, 22-59.

*Hayek F., "The Use of Knowledge in Society", American Economic Review, 1945, 519-30.

*Varian, H., Microeconomic Theory, third edition, chapter on general equilibrium.

Bator, F., "The Anatomy of Market Failure",Quarterly Journal of Economics, 1958, 351-79.

b) Equilibrium in Anarchy

*Bush, W. and Mayer L.S., "Some Implications of Anarchy for the Distribution of Property", Journal of Economic Theory, 1974, 401-412.

Usher, D., "Theft as a Paradigm for Departures from Efficiency", Oxford Economic Papers, 1987, 235-52.

Hirshleifer, J., "The Technology of Conflict as an Economic Activity", American Economic Review, Papers and Proceedings, 1991, 130-34.

PART III Types of Goods and Activities

a) Public Goods

*Boadway and Wildasin, chapter 4.

*Samuelson, P.A., "The Pure Theory of Public Expenditures", Review of Economics and Statistics, 1954, 387-389.

*Samuelson, P.A. "Diagrammatic Exposition of a Theory of Public Expenditures", Review of Economics and Statistics, 1955, 350-356.

Head, J.G., "The Theory of Public Goods", chapter 3, Public Goods and Public Welfare.

Atkinson, A.B. and J.E. Stiglitz, Lectures on Public Economics, chapter 15.

b) Clubs and Congestion

*Buchanan, J.M., "An Economic Theory of Clubs", Economica, 1965, 1-14.

*Oakland, W.H., "Congestion, Public Goods, and Welfare", Journal of Public Economics, 1972, 339-57.

Oakland, W.H., "Theory of Public Goods" in Auerback and Feldstein eds. Handbook of Public Economics, 1987.

Cornes, R. and Sandler, T., chapter 10.

c) Natural Monopoly

*Boadway and Wildasin, chapter 3

Hotelling, H., "The General Welfare in Relation to Problems in Taxation and Utility Rates", Econometrica, 1938, 242-269.

d) Common Property

*Gordon, H.S., "The Economic Theory of a Common Property Resource: The Fishery", Journal of Political Economy, 1954, 124-42.

*Seabright, P., "Managing Local Commons: Theoretical Issues in Incentive Design", Journal of Economic Perspectives, Fall, 1993, 113-134.

de Meza, D. and Gould, J.R., "The Social Efficiency of Private Decisions to Enforce Property Rights", Journal of Political Economy, 1992, 561-580.

Ostrom, E. and Gardner, R., "Coping with Asymmetries in the Commons: Self-governing Irrigation Systems Can Work", Journal of Economic Perspectives, Fall 1993, 93-112.

e) Externalities

*Boadway and Wildasin, chapter 5.

*Coase, R., "The Problem of Social Cost", Journal of Law and Economics, (1960), 1-44.

*Baumol, W.J., "On Taxation and the Control of Externalities", American Economic Review, 1972, 307-322.

*Arrow, K.J., "The Organization of Economic Activity: Issues Pertinent to the Choice of Market verses Non-Market Allocations", in Haveman R.H. and Margolis J. eds. Public Expenditures and Policy Analysis (1970).

Mishan, E.J., "The Postwar Literature on Externalities: An Interpretative Essay", Journal of Economic Literature, 1971, 1-28.

Cornes and Sandler, Part II.

Baumol, W.J. and Bradford D.F., "Detrimental Externalities and Non-Conversity of the Production Set", Economica, 1972, 160-76.

Worcester, D.S., "Pecuniary and Technological Externality, Factor Rents, and Social Cost", American Economic Review, 1969.

f) Network Externalities

Katz, M. and Shapiro, C., "Network Externalities, Competition and Compatibility", American Economic Review, 1985, 424-40.

Katz, M. and Shapiro, C., "Technology Adoption in the Presence of Network Externalities", Journal of Political Economy, 1986, 822-41.

Symposium on ?Network Externalities" in The Journal of Economic Perspectives, Spring 1994, 93-150, articles by Katz and Shapiro, Besen and Farrell, Leibowitz and Margolis.

Church, J. and King, I., "Bilingualism and Network Externalities", Canadian Journal of Economics, 1993, 337-45.

g) The Acquisition of Knowledge: 1) Invention

*Barzel, Y., "Optimal Timing of Innovations", Review of Economics and Statistics, 1968, 348-355.

Brander, J. and Spencer, B., "Strategic Commitment with R&D: the Symmetric Case", Bell Journal of Economics, 1983, 225-35.

Usher, D., "The Welfare Economics of Invention", Economica,1964, 279-287.

Hartwick, J., "Efficient Prizes in Prototype Development Contests", Economic Letters, 1982, 375-379.

h) The Acquisition of Knowledge: ii) Technical Change as an Externality

*Solow, R.M., "A Contribution to the Theory of Economic Growth", Quarterly Journal of Economics, 1956, 65-94.

*Romer, P.M., "Increasing Returns and Long Run Growth", Journal of Political Economy, 1986, 1002-37, Sections I to IV and Va.

*Barro, R. and Sala-1-Martin, X., "Public Finance in Models of Economic Growth", Review of Economic Studies, 1992, 645-62.

Solow, R.M., "Technical Change and the Aggregate Production Function", Review of Economics and Statistics, 1957, 312-20.

Lucas, R., "Making a Miracle", Econometrica, 1993, 251-72.

i) The Acquisition of Knowledge: iii) Speculation

*Hirschleifer, J., "The Private and Social Value of Information and the Reward to Inventive Activity", American Economic Review, 1971, 561-74.

Hirshleifer, J., "Speculation and Equilibrium: Information, Risk and Markets", Quarterly Journal of Economics, 1975, 519-42.

j) The Acquisition of Knowledge: iv) Advertising

Dixit, A. and Norman, V., "Advertising and Welfare", Bell Journal of Economics, 1978.

Milgrom, P. and Roberts, J., "Price and Advertising Signals of Product Quality", Journal of Political Economy, 1986.

k) The Acquisition of Knowledge: v) Education

Smith, A., "The Education of Youth", The Wealth of Nations (1776), Stigler edition, 282-309.

Friedman, M., "The Role of Government in Education", Chapter VI of Capitalism and Freedom, 1962.

Peltzman, S.,"The Effect of Government Subsidies-in-Kind on Private Expenditures: The Case of Higher Education", Journal of Political Economy, 1973, 1-27.

Usher, D., "Education as a Deterrent to Crime", Queen's Discussion Paper #870, 1993.

Hartwick, J., "Endogenous Growth with Public Education", Economic Letters, 1992.


PART IV The Private Response to Public Policy

a) Introduction to the Social Cost of Taxation

*Usher, D., "The Hidden Cost of Public Expenditure" in R.M. Bird ed., More Taxing than Taxes, I.C.S. Press, 1991.

Browing, E.K., "The Marginal Cost of Public Funds", Journal of Political Economy, 1976, 283-98.

*Atkinson, A.B. and Stern, N.H., "Pigou Taxation and Public Goods", Review of Economic Studies, (1974), 119-128.

*Usher D., "Tax Evasion and the Marginal Cost of Public Funds", Economic Inquiry, 1986, 563-86.

b) Optimal Taxation

*Stiglitz, J., "Pareto Efficient and Optimal Taxation and the New Welfare Economics", Handbook of Public Economics, Auerbach and Feldstein eds., 1987.

*Ballard, C.L. and Fullerton, D., "Distortionary Taxes and the Provision of Public Goods", Journal of Economic Perspectives, 1992, 117-131.

Sandmo, R., "Optimal Taxation: An Introduction to the Literature", Journal of Public Economics, 1976, 37-54.

Baumol, W.J. and D.A. Bradford, "Optimal Departures from Marginal Cost Pricing", American Economic Review, 1970, 265-283.

Diamond, P.A. and McFadden, D.L., "Some Uses of the Expenditure Function in Public Finance", Journal of Public Economics, 1974, 3-21.

Kay, J.A., "The Deadweight Loss from a Tax System", Journal of Public Economics, 1980, 111-119.

Wilson, J.D., "Optimal Public Good Provision with Limited Lump-Sum Taxation", American Economic Review, 1991, 153-166.

(c) Rent Seeking

*Kreuger, A., "The Political Economy of a Rent-Seeking Society", American Economic Review, 1974, 291-303, reprinted in Buchanan, J., Tillison, R.D. and Tullock, G., Toward a Theory of the Rent-seeking Society, Texas: A & M University Press, 1980.

*Tullock, G., "Efficient Rent Seeking", in Buchanan et.al. above.

*Tullock, G., "The Welfare Cost of Tariffs, Monopolies and Theft", Western Economic Journal, 1867, 224-32. (also reprinted in Buchanan et.al. above).

Posner, R.A., "The Social Cost of Monopoly and Regulation", Journal of Political Economy, 1975, 807-827.

Michaels, R.J., "The Design of Rent Seeking Competitions", Public Choice, 1988, 17-29.

Applebaum, E. and Katz, E., "Seeking Rents by Setting Rents", Economic Journal, 1987, 685-699.

PART V: Criteria and Behaviour in the Public Sector

a) The Social Welfare Function

*Boadway and Wildasin, chapters 3 and 6.

Harsanyi, J., "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility", in Phelps, E., Economic Justice.

Tideman, T.M. and G. Tullock, "A New and Superior Process for Making Social Choices", Journal of Political Economy, 1976, 1145-60.

Rawls, J., A Theory of Justice, 1971, chapter II, "The Principles of Justice".

b) Voting

*Black, D., "On the Rationale of Group Decision-Making", in K. Arrow and T. Scitovsky ed. American Economics Association Readings in Welfare Economics

*Tullock, G., "Some Problems of Majority Voting", Journal of Public Economy, 1959, 571-579.

Bowen, H.R., "The Interpretation of Voting in the Allocation of Economic Resources", American Economics Association Readings in Welfare Economics.

Plott, C., "A Notion of Equilibrium and its Possibility Under Majority Rule", American Economic Review, (1967), 787-806.

Buchanan, J.M., "Individual Choice in Voting and the Market", Journal of Political Economy, (1954), 334-343.

c) The Calculus of Influence

*Becker, G., "A Theory of Competition among Pressure Groups for Political Influence", Quarterly Journal of Economics, (1983), 371-400.

d) The Constrained Leviathan

*Niskanen, W., "Bureaucrats and Politicians", Journal of Law and Economics, 1975, 617-43.

*Romer, T. and Rosenthal, "Bureaucrats versus Voters", Quarterly Journal of Economy, 1979, 563-87.

Courant, P., Gramlich, E. and E. Rubinfeld, "Public Employees, Market Power, and the Level of Government Spending", American Economic Review, 1979, 806-17.

Brennan, G. and Buchanan, J., The Power of Tax, 1980.

Usher, D. and Engineer, M., "The Distribution of Income in a Despotic Society", Public Choice, 1987, 261-76.

e) The Economics of Corruption

*Shleifer, A. and Vishny, W., "Corruption", Quarterly Journal of Economics, 1993, 599-618.

Rose-Akerman, S.,

Corruption: A Study in Political Economy, 1978.

Becker, G.S. and Stigler, G.J., "Law Enforcement, Malfeasance and the Compensation of Enforcers", Journal of Legal Studies, 1974.

Liu, F.T., "A Dynamic Model of Corruption Deterrence", Journal of Public Economics, (1988), 215-236.

f) The expansion of the Public Sector

*Borcherding, T., "The Causes of Government Expenditure Growth", Journal of Public Economics, 1985, 309-28.

*Usher, D., "The Growth of the Public Sector in Canada" in Laidler, D. (ed) Response to Economic Change, Volume 27 of the McDonald Commission, 1985.

Borcherding, T.E., Pommerehne, W.W., and Schneider, F., "Comparing the Efficiency of Private and Public Production", Zeitschrift fur Nationalokonomie, (1982).

Meltzer, A.H. and Richard, S.F., "A Rational Theory of the Size of Government", Journal of Political Economy, 1981, 914-927.

g) The Problem of Commitment

Persson, T. and Tabellini, G., Macroeconomic Policy, Credibility and Politics, 1990, chapters 1, 6.1, 6.2, and 6.3.

PART VI Redistribution

a) Motives

*Boadway and Wildasin, chapter 14.

*Atkinson, A.B., "How Progressive Should the Income Tax Be?" in M. Parkin, ed. Essays on Modern Economics, 1973.

*Hochman, H. and J. Rodgers, "Pareto Optimal Redistribution", American Economic Review, 1969, 542-557.

Varian, H.R., "Redistributive Taxation as Social Insurance", Journal of Public Economics, 19809, 49-68.

Atkinson, A.B., "Income Maintenance and Social Insurance" in Auerbach and Feldstein eds. Handbook of Public Economics, Volume II, 1987.

b) Impediments to Redistribution: Cash vs. Kind

*Akerlof, G.A., "The Economics of "Tagging" as Applied the Optimal Income Tax, Welfare Programs, and Manpower Planning", American Economic Review, 1978, 8-19.

*Beasley, T. and Coate, S., "Public Provision of Private Goods and the Redistribution of Income", American Economic Review, 1991, 979-84.

*Browning, E.K., and Johnson, W.R., "The Trade-Off Between Equity and Efficiency", Journal of Political Economy, 1984, 175-203.

Nichols, A.L. and Zeckhauser, R.L., "Targeting Transfers through Restrictions on Recipients", American Economic Review, 1982, 301-17.

Blackorby, C. and Donaldson, D., "Cash verses Kind, Self-Selection and Efficient Transfers", American Economic Review 1988, 691-700.

Summers, L.H., "Some Simple Economics of Mandated Benefits", American Economic Review, 1989, Papers and Proceedings, 177-83.

c) Public Provision of Commodities

Usher, D., "The Welfare Economics of the Socialization of Commodities", Journal of Public Economics, October 1977, 151-168.

Weitzman, M.L., "Is the Price System or Rationing More Effective in Getting a Commodity to Those Who Need it Most?" Bell Journal of Economics, 1977, 517-524.

d) The Old Age Pension

*Feldstein, M., "Social Security, Induced Retirement and Aggregate Capital Formation", Journal of Political Economy, 1974, 905-926.

*Barrow, R.J., "Are Government Bonds Net Wealth?", Journal of Political Economy,1974, 1095-1117. *Townley, P.G.C. and Boadway, R.W., "Social Security and the Failure of Annuity Markets", Journal of Public Economics, 1988, 75-96.

*Diamond, P.A., "A Framework for Social Security Analysis", Journal of Public Economics, 1977, 275-98.

*Davies, J.B. and Kuhn, P., "Social Security, Longevity and Moral Hazard", Journal of Public Economy1992, 91-106.

Yarri, M.E., "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer", Review of Economic Studies, 1965, 137-150.

Davies, J.B., "Uncertain Lifetime, Consumption and Dissaving in Retirement", Journal of Political Economy,a 1981, 561-77.

Kotlikoff, L.J., On the Contribution of Economics to the Evaluation and Journal of Public Economics, 1985, 303-326.

Abel, A.B., "Capital Accumulation and Uncertain Lifetimes with Adverse Selection",Econometrica,, 1986, 1079-1097.

Burbidge, J., Social Security in Canada, An Economic Appraisal, Canadian Tax Foundation, 1987.

Bernheim, B.D.,"The Economic Effects of Social Security: Toward a Reconciliation of Theory and Measurement" Journal of Public Economics, 1987, 273-304.


PART VII The Specification and Protection of Property Rights

a) The Justification of Property

Macpherson, C.B. Property: Mainstream and Critical Positions, University of Toronto Press, 1978, read excerpts from Locke, Rousseau, Bentham, Mill and Reich.

b) Torts and Contracts

*Barton, J.H., The Economic basis of Breach of Contract", Journal of Legal Studies, 1973, 323-50.

Cooter, R. and Ulen, R., Law and Economics, chapters 6 and 8.

c) Crime and Punishment

*Becker, G.S., "Crime and Punishment: An Economic Approach", Journal of Political Economy, 1968, 169-217.

*Erlich, Isaac, "The Deterrent Effect of Capital Punishment: A Question of Life and Death", American Economic Review, 1975.

Lempert, R.O., "Desert and Deterrence: An Assessment of the Moral Basis of the Case for Capital Punishment", Michigan Law Review, 1981, 1177-1231.

Polinsky, A.M. and Shavell, S., "The Optimal Trade-off Between the Probability and Magnitude of Fines", American Economic Review, 1979, 880-891.

Polinsky, A.M. and Shavell, S., "The Optimal Use of Fines and Imprisonment", Journal of Public Economics1984, 89-98.

d) Constitutional Economics

Brennan, G. and Buchanan, J.M. The Reason of Rules, Cambridge University Press, 1985.

Gordon, H.S., "The New Contractarians", Journal of Political Economy, 1976, 573-90.


PART VIII Subscription Equilibrium

a) Private Provision of Public Goods

*Atkinson and Stiglitz, Lecture 16.

*Bergstrom, T.C., Blum, L. and Varian, H.R. "On the Private Provision of Public Goods", Journal of Public Economics, (1986), 25-49.

Warr, R.G., "The Private Provision of a Public Good is Independent of the Distribution of Income", Economic Letters, (1983), 207-211.

Warr, R.G., "Pareto Optimal Redistribution and Private Charity",Journal of Public Economics, (1982), 131-38.

Cornes, R. and Sandler, T., "The Simple Analytics of Pure Public Good Provision", Economica, 1985, 101-116.

b)Alliances

Olson, M. and Zeckhauser, R., "An Economic Theory of Alliances", Review of Economics and Statistics, 1966, 266-279.

Bruce, N., "Defence Expenditures by Countries in Allied and Adversarial Relationships", Queen's Discussion Paper #745, 1989.


PART IX Fiscal Federalism

a)Local Public Goods

*Tiebout, C., "A Pure Theory of Local Expenditure", Journal of Political Economy 1956, 416-424.

*Oates, Fiscal Federalism, 1972, chapters 1 , and 3.

b) Optimal Transfers in a Federation

*Buchanan, J.M. "Federalism and Fiscal Equity"American Economic Review, 1950, 583-99.

*Flatters, F., Henderson, V. and P. Mieszkowski, "Public Goods", Efficiency, and Regional Fiscal Equalizations", Journal of Public Economics,a 1974, 99-112.

Boadway, R. and Flatters, F., "Efficiency and Equalization Payments in a Federal System of Government", (i>Canadian Journal of Economics, 1982, 613-33.

*Brown, C. and Oates, W., "Assistance to the Poor in a Federal System", Journal of Public Economics, 1987, 307-30.

Buchanan, J.M. and Wagner, R.E. "An Efficiency Basis for Federal Fiscal Equalization", in Margolis, J. The Analysis of Public Output, 1970.

Buchanan, J. and C. Goetz, "Efficiency Limits of Fiscal Mobility: An Assessment of the Tiebout Model", Journal of Public Economics, 1972, 25-43.

Meyers, G., "Optimality, Free Mobility and Regional Authority in a Federation", Journal of Public Economics, 1990, 107-21.

Bucovetsky, "Rent Seeking and Tax Competition", The Journal of Public Economics, (forthcoming)

b)Provincial Governments' Response to Federal Transfers

*Courchene, T.J. and Beavis, D.A., "Federal-Provincial Tax Equalization: An Evaluation", Canadian Journal of Economics, 1973, 583-602.

Dahlby, B. and Wilson, S. "Fiscal Capacity, Tax Effort and Optimal Equalization Grants", Canadian Journal of Economics, 1994, 657-72.

c) Fiscal Federalism in Canada

*Boadway, R.W. and Hobson, P.A., Intergovernmental Fiscal Relations in Canada, 1993.

Strick, J.C. Canadian Public Finance, (fourth edition), 1992, chapters 7 and 8.

Courchene, T.J., Equalization Payments: Past, Present and Future, 1984.

Boadway, R.W., "The changing Face of Canadian Federalism: The Fiscal Dimension and "Reforming Social Policy" Canada the Federal Government Deliver?", The E.S. Woodward Lectures, 1995.