Includes bibliographical references (pages 880 - 892) and index.

1. Defining Public Sector Responsibilities
The Economic Role of Government
The Mixed Economy of the United States
Different Perspectives on the Role of Government
An Impetus for Government Action: Market Failures
Achieving Balance between the Public and Private Sectors
The Emerging Consensus
Thinking Like a Public Sector Economist
Analyzing the Public Sector
Economic Models
Case Study Musgrave's Three Branches
Normative versus Positive Economics
Disagreements among Economists
Differences in Views on How the Economy Behaves
Disagreement over Values
Case Study Public Sector Economics and the Global Economic Crisis
Review and Practice
Summary
Key Concepts
Questions and Problems
2. Measuring Public Sector Size
What or Who Is the Government?
Types of Government Activity
Providing a Legal System
Government Production
Government's Influence on Private Production. Note continued: Government Purchases of Goods and Services
Government Redistribution of Income
Overview of Government Expenditures
Gauging the Size of the Public Sector
Growth in Expenditures and Their Changing Composition
Case Study Estimating the Full Budgetary and Economic Costs of War
Comparison of Expenditures across Countries
Government Revenues
Taxes and the Constitution
Federal Taxation Today
State and Local Government Revenues
Comparison of Taxation across Countries
Deficit Financing
Playing Tricks with the Data on Government Activities
Review and Practice
Summary
Key Concepts
Questions and Problems
3. Market Efficiency
The Invisible Hand of Competitive Markets
Welfare Economics and Pareto Efficiency
Case Study On the Prowl for Pareto Improvements
Pareto Efficiency and Individualism
The Fundamental Theorems of Welfare Economics
Efficiency from the Perspective of a Single Market. Note continued: Analyzing Economic Efficiency
The Utility Possibilities Curve
Exchange Efficiency
Production Efficiency
Product Mix Efficiency
Review and Practice
Summary
Key Concepts
Questions and Problems
4. Market Failure
Property Rights and Contract Enforcement
Case Study Property Rights and Market Failures: The Tragedy of the Commons Revisited
Market Failures and the Role of Government
1. Failure of Competition
2. Public Goods
3. Externalities
4. Incomplete Markets
Case Study Student Loans: Incomplete Reform of an Incomplete Market
5. Information Failures
6. Unemployment, Inflation, and Disequilibrium
Interrelationships of Market Failures
Case Study Market Failures: Explanations or Excuses?
Redistribution and Merit Goods
Two Perspectives on the Role of Government
Normative Analysis
Positive Analysis
Review and Practice
Summary
Key Concepts
Questions and Problems. Note continued: 5. Public Goods And Publicly Provided Private Goods
Public Goods
Public Goods and Market Failures
Paying for Public Goods
The Free Rider Problem
Case Study Economists and the Free Rider Problem
Pure and Impure Public Goods
Case Study Property Rights, Excludability, and Externalities
Publicly Provided Private Goods
Rationing Devices for Publicly Provided Private Goods
Efficiency Conditions for Public Goods
Demand Curves for Public Goods
Pareto Efficiency and Income Distribution
Limitations on Income Redistribution and the Efficient Supply of Public Goods
Distortionary Taxation and the Efficient Supply of Public Goods
Efficient Government as a Public Good
Review and Practice
Summary
Key Concepts
Questions and Problems
Appendix: The Leftover Curve
6. Externalities And The Environment
The Problem of Externalities
Private Solutions to Externalities
Internalizing Externalities. Note continued: The Coase Theorem
Using the Legal System
Case Study The Exxon Valdez Oil Spill
Failures of Private Solutions
Public Sector Solutions to Externalities
Case Study Double Dividend
Market-Based Solutions
Regulation
Innovation
Information Disclosure
Compensation and Distribution
Protecting the Environment: The Role of Government in Practice
Air
Water
Land
Concluding Remarks
Review and Practice
Summary
Key Concepts
Questions and Problems
7. Efficiency And Equity
Efficiency and Distribution Trade-Offs
Analyzing Social Choices
Determining the Trade-Offs
Evaluating the Trade-Offs
Two Caveats
Social Choices in Practice
Measuring Benefits
Ordinary and Compensated Demand Curves
Consumer Surplus
Measuring Aggregate Social Benefits
Measuring Inefficiency
Case Study Drawing a Poverty Line
Quantifying Distributional Effects
Case Study The Great Gatsby Curve. Note continued: Three Approaches to Social Choices
The Compensation Principle
Trade-Offs across Measures
Weighted Net Benefits
The Trade-Off between Efficiency and Fairness Revisited
Review and Practice
Summary
Key Concepts
Questions and Problems
Appendix: Alternative Measures of Inequality
The Lorenz Curve
The Dalton-Atkinson Measure
8. Public Production Of Goods And Services
Natural Monopoly: Public Production of Private Goods
The Basic Economics of Natural Monopoly
Regulation and Taxation (Subsidies)
No Government Intervention
Government Failures
Case Study Rent Control and Agricultural Price Supports: Case Studies in Government Failure
Comparison of Efficiency in the Public and Private Sectors
Case Study National Performance Review
Sources of Inefficiency in the Public Sector
Organizational Differences
Individual Differences
Bureaucratic Procedures and Risk Aversion
Corporatization. Note continued: Case Study Privatizing Prisons
A Growing Consensus on Government's Role in Production
Review and Practice
Summary
Key Concepts
Questions and Problems
9. Public Choice
Public Mechanisms for Allocating Resources
The Problem of Preference Revelation
Individual Preferences for Public Goods
The Problem of Aggregating Preferences
Majority Voting and the Voting Paradox
Arrow's Impossibility Theorem
Single-Peaked Preferences and the Existence of a Majority Voting Equilibrium
The Median Voter
The Inefficiency of the Majority Voting Equilibrium
The Two-Party System and the Median Voter
Case Study Social Choice Theory
Alternatives for Determining Public Goods Expenditures
Lindahl Equilibrium
Politics and Economics
Why Do Individuals Vote?
Elections and Special Interest Groups
The Power of Special Interest Groups
Other Aspects of the Political Process
Case Study Campaign Finance Reform. Note continued: The Altruistic Politician?
The Persistence of Inefficient Equilibrium
Review and Practice
Summary
Key Concepts
Questions and Problems
Appendix: New Preference-Revelation Mechanisms
10. Framework For Analysis Of Expenditure Policy
Need for a Program
Market Failures
Case Study Higher Education in the United States
Alternative Forms of Government Intervention
The Importance of Particular Design Features
Private Sector Responses to Government Programs
Efficiency Consequences
Income and Substitution Effects and Induced Inefficiency
Distributional Consequences
Evaluating the Distributional Consequences
Case Study Incidence of Education Tax Credits
Fairness and Distribution
Equity-Efficiency Trade-Offs
Public Policy Objectives
Political Process
Review and Practice
Summary
Key Concepts
Questions and Problems
11. Evaluating Public Expenditure
Private Cost-Benefit Analysis. Note continued: Present Discounted Value
Social Cost-Benefit Analysis
Consumer Surplus and the Decision to Undertake a Project
Measuring Nonmonetized Costs and Benefits
Valuing Time
Valuing Life
Case Study Children, Car Safety, and the Value of Life
Valuing Natural Resources
Shadow Prices and Market Prices
Discount Rate for Social Cost-Benefit Analysis
Case Study Climate Change and Discount Rates
The Evaluation of Risk
Risk Assessment
Distributional Considerations
Cost Effectiveness
Post-Expenditure Evaluation: Assessing and Improving Government Performance
Case Study Taking a Bite Out of Crime in the Big Apple
Review and Practice
Summary
Key Concepts
Questions and Problems
12. Defense, Research, And Technology
Defense Expenditures
The Value of Marginal Analysis
Defense Strategy
Case Study Game Theory, the Arms Race, and the Theory of Deterrence
Case Study Converting Swords into Plowshares. Note continued: Increasing the Efficiency of the Defense Department
Defense Procurement
Defense Conversion
Accounting and the Defense Department
Research and Technology
Market Failures
Case Study The Scope of the Patent: Can the Human Body Be Patented?
Government Direct Support
Review and Practice
Summary
Key Concepts
Questions and Problems
13. Health Care
The Health Care System in the United States
The Private Sector
The Role of Government
Other Expenditure Programs
Tax Expenditures
Rationale for a Role of Government in the Health Care Sector
Imperfect Information
Limited Competition
Absence of Profit Motive
Special Characteristics of the U.S. Market
The Role of the Health Insurance Industry
Case Study Medical Malpractice
Insurance and Excessive Expenditures on Health Care
Consequences of Inefficiencies in Health Care Markets
Poverty, Incomplete Coverage, and the Role of Government. Note continued: Reforming Health Care
Cost Containment
Case Study Comprehensive Health Care Reform
Extending Insurance Coverage
Medicare Reform: Easing Long-Term Fiscal Strains
Reforming Medicaid
Review and Practice
Summary
Key Concepts
Questions and Problems
14. Education
The Structure of Education in the United States
Federal Tax Subsidies to Private and Public Schools
Why Is Education Publicly Provided and Publicly Financed?
Is There a Market Failure?
The Federal Role
Issues and Controversies in Educational Policy
Education Outcomes
Do Expenditures Matter?
School Vouchers: Choice and Competition
Case Study Vouchers: The San Jose and Milwaukee Experiments
School Decentralization
Performance Standards: No Child Left Behind and Race to the Top
Inequality
Aid to Higher Education
Review and Practice
Summary
Key Concepts
Questions and Problems. Note continued: Appendix: How Should Public Educational Funds Be Allocated?
15. Welfare Programs And The Redistribution Of Income
A Brief Description of Major U.S. Welfare Programs
AFDC and TANF
Earned Income Tax Credit
Food Stamps/SNAP
Medicaid
Housing
Other Programs
Rationale for Government Welfare Programs
Dimensions of the Problem
Analytic Issues
Labor Supply
Cash versus In-Kind Redistribution
Inefficiencies from In-Kind Benefits
Are In-Kind Benefits Paternalistic?
Categorical versus Broad-Based Aid
Is Means Testing Objectionable in Its Own Right?
Other Distortions
Case Study Conditional Cash Transfer Programs
Welfare Reform: Integration of Programs
The Welfare Reform Bill of 1996
Block Granting
Analytics of State Responses to Block Grants
Time Limits
Mandatory Work
The Welfare Reform Debate of 1996
Case Study The Person or the Place?
Concluding Remarks
Review and Practice. Note continued: Summary
Key Concepts
Questions and Problems
16. Social Insurance
The Social Security System
Social Security, Private Insurance, and Market Failures
High Transactions Costs
Risk Mitigation
Lack of Indexing: The Inability of Private Markets to Insure Social Risks
Adverse Selection, Differential Risks, and the Cost of Insurance
Moral Hazard and Social Security
Retirement Insurance as a Merit Good
Social Security, Forced Savings, and Individual Choice
Is There a Need to Reform Social Security?
The Nature of the Fiscal Crisis
Savings
Labor Supply
The Rate of Return
Inequities
Reforming Social Security
Reducing Expenditures
Increasing Revenues
Structural Reforms
Case Study Social Security Abroad
Review and Practice
Summary
Key Concepts
Questions and Problems
17. Introduction To Taxation
Background
Forms of Taxation
Changing Patterns of Taxation in the United States. Note continued: Comparisons with Other Countries
The Five Desirable Characteristics of Any Tax System
Economic Efficiency
Administrative Costs
Case Study Corrective Taxes and the Double Dividend
Flexibility
Transparent Political Responsibility
Fairness
Case Study Corruption-Resistant Tax Systems
General Framework for Choosing among Tax Systems
Utilitarianism
Rawlsian Social Welfare Function
Review and Practice
Summary
Key Concepts
Questions and Problems
18. Tax Incidence
Tax Incidence in Competitive Markets
Effect of Tax at the Level of a Firm
Impact on Market Equilibrium
Does It Matter Whether the Tax Is Levied on Consumers or on Producers?
Case Study The Incidence of Government Benefits
Ad Valorem versus Specific Taxes
The Effect of Elasticity
Taxation of Factors
Case Study The Philadelphia Wage Tax
Tax Incidence in Environments without Perfect Competition. Note continued: Relationship between the Change in the Price and the Tax
Ad Valorem versus Specific Taxes
Tax Incidence in Oligopolies
Equivalent Taxes
Income Tax and Value-Added Tax
Equivalence of Consumption and Wage Taxes
Equivalence of Lifetime Consumption and Lifetime Income Taxes
A Caveat on Equivalence
Other Factors Affecting Tax Incidence
Tax Incidence under Partial and General Equilibrium
Case Study Behavioral Economics, Managerial Capitalism, and Tax Incidence
Short-Run versus Long-Run Effects
Open versus Closed Economy
Associated Policy Changes
Case Study Tax Incidence of Specific Tax Provisions
Incidence of Taxes in the United States
Review and Practice
Summary
Key Concepts
Questions and Problems
Appendix: Comparison of the Effects of an Ad Valorem and Specific Commodity Tax on a Monopolist
19. Taxation And Economic Efficiency
Effect of Taxes Borne by Consumers. Note continued: Substitution and Income Effects
Quantifying the Distortions
Measuring Deadweight Loss Using Indifference Curves
Measuring Deadweight Loss Using Compensated Demand Curves
Calculating the Deadweight Loss
Effect of Taxes Borne by Producers
Effects of Taxes Borne Partly by Consumers, Partly by Producers
Taxation of Savings
Quantifying the Effects of an Interest Income Tax
Taxation of Labor Income
Effects of Progressive Taxation
Case Study The 1993, 2001, and 2003 Tax Reforms
Secondary Labor Force Participants
Measuring the Effects of Taxes on Labor Supplied
Statistical Techniques Using Market Data
Experiments
Review and Practice
Summary
Key Concepts
Questions and Problems
Appendix: Measuring the Welfare Cost of User Fees
20. Optimal Taxation
Two Fallacies of Optimal Taxation
The Fallacy of Counting Distortions
Misinterpretations of the Theory of the Second Best. Note continued: Optimal and Pareto Efficient Taxation
Lump-Sum Taxes
Why Impose Distortionary Taxes?
Case Study Estimating the Optimal Tax Rate
Case Study Rent Seeking, Inequality, and Optimal Taxation
Designing an Income Tax System
Why Does More Progressivity Imply More Deadweight Loss?
A Diagrammatic Analysis of the Deadweight Loss of Progressive Taxation
Choosing among Flat-Rate Tax Schedules
Case Study The
Tax Increase on Upper-Income Individuals: A Pareto Inefficient Tax?
General Equilibrium Effects
Case Study Flat-Rate Taxes Arrive on the Political Scene
Differential Taxation
Ramsey Taxes
Differential Commodity Taxes in Advanced Countries with Progressive Income Taxes
Interest Income Taxation and Commodity Taxation
Taxes on Producers
The Dependence of Optimal Tax Structure on the Set of Available Taxes
Review and Practice
Summary
Key Concepts
Questions and Problems. Note continued: Appendix A: Deriving Ramsey Taxes on Commodities
Appendix B: Derivation of Ramsey Formula for Linear Demand Schedule
21. Taxation Of Capital
Should Capital Be Taxed?
Relationship among Consumption Taxes, a Wage Tax, and Exempting Capital Income from Taxation
Equity Issues
Efficiency Arguments
Administrative Problems
Effects on Savings and Investment
Effects of Reduced Savings in a Closed Economy
The Distinction between Savings and Investment
National Savings and Budget Neutrality
Effects of Reduced Savings in an Open Economy
Impact on Risk Taking
Why Capital Taxation with Full Loss Deductibility May Increase Risk Taking
Case Study Tax Incentives for Risk Taking
Why Capital Taxation May Reduce Risk Taking
Measuring Changes in Asset Values
Capital Gains
Case Study Equity and the Reduction in Capital Gains Taxes
Depreciation
Case Study Distortions from Depreciation
Neutral Taxation. Note continued: Inflation
Review and Practice
Summary
Key Concepts
Questions and Problems
22. The Personal Income Tax
Outline of the U.S. Income Tax
Legislated versus Actual Tax Rates
Case Study A Loophole in the Earned Income Tax Credit?
Other Taxes
Principles Behind the U.S. Income Tax
The Income-Based Principle and the Haig-Simons Definition
The Progressivity Principle
The Family-Based Principle
The Annual Measure of Income Principle
Practical Problems in Implementing an Income Tax System
Determining Income
Timing
Personal Deductions
Deductions versus Credits
Case Study Temporary Tax Changes
Special Treatment of Capital Income
Housing
Savings for Retirement
Interest on State and Municipal Bonds
Capital Gains
Concluding Remarks
Review and Practice
Summary
Key Concepts
Questions and Problems
23. The Corporation Income Tax
The Basic Features of the Corporation Income Tax. Note continued: The Incidence of the Corporation Income Tax and Its Effect on Efficiency
The Corporation Income Tax as a Tax on Income from Capital in the Corporate Sector
Shifting of the Corporate Tax in the Long Run
The Corporation Tax for a Firm without Borrowing Constraints
Incidence of the Corporation Income Tax with Credit-Constrained Firms
The Corporation Tax as a Tax on Monopoly Profits
Managerial Firms: An Alternative Perspective
Depreciation
Combined Effects of Individual and Corporate Income Tax
Distributing Funds: The Basic Principles
The Dividend Paradox
Mergers, Acquisitions, and Share Repurchases
Does the Corporate Tax Bias Firms toward Debt Finance?
Distortions in Organizational Form Arising because Some Firms Do Not Have Taxable Income
Are Corporations Tax Preferred?
Calculating Effective Tax Rates
The Corporation Tax as Economic Policy. Note continued: Case Study The Proposed Incremental Investment Tax Credit of 1993: An Idea before Its Time?
Taxation of Multinationals
Case Study Foreign Income and the Corporation Income Tax
Should There Be a Corporation Income Tax?
Why Is There a Corporate Income Tax at All?
Review and Practice
Summary
Key Concepts
Questions and Problems
24.A Student's Guide To Tax Avoidance
Principles of Tax Avoidance
Postponement of Taxes
Shifting and Tax Arbitrage
Case Study Shorting against the Box
Tax Shelters
Case Study The Economics of Tax Avoidance
Who Gains from Tax Shelters
Middle-Class Tax Shelters
Tax Reform and Tax Avoidance
The 1986 Tax Reform
Minimum Tax on Individuals
Subsequent Tax Acts
Equity, Efficiency, and Tax Reform
Review and Practice
Summary
Key Concepts
Questions and Problems
25. Reform Of The Tax System
Fairness
Horizontal Equity Issues
Vertical Equity
Efficiency. Note continued: Case Study Marginal Tax Rates and the 1986 Tax Reform
Base Broadening
Interaction of Fairness and Efficiency Concerns
Simplifying the Tax Code
Assessing Complexity
Increasing Compliance
Reducing Tax Avoidance
Reducing Administrative and Compliance Costs
Sources of Complexity
The 1986 Tax Reform
Transition Issues and the Politics of Tax Reform
Tax Reforms for the Twenty-First Century
Reforms within the Current Framework
Major New Reforms
Case Study Ordinary Income versus Capital Gains
Case Study IRAs and National Savings
Review and Practice
Summary
Key Concepts
Questions and Problems
26. Intergovernmental Fiscal Relations
The Division of Responsibilities
Other Interaction between the Federal Government and the State and Local Governments
The Size of Financial Transfers
Case Study Unfunded Mandates
Principles of Fiscal Federalism
National Public Goods versus Local Public Goods. Note continued: Case Study International Public Goods
Do Local Communities Provide Local Public Goods Efficiently?
Tiebout Hypothesis
Market Failures
Redistribution
Other Arguments for Local Provision
Production versus Finance
Effectiveness of Federal Categorical Aid to Local Communities
The Federal Tax System and Local Expenditures
Concluding Remarks
Review and Practice
Summary
Key Concepts
Questions and Problems
27. Subnational Taxes And Expenditures
Tax Incidence Applied to Local Public Finance
Local Capital Taxes
Property Tax
Case Study The U.S. Property Tax Revolt
Income, Wage, and Sales Taxes
Distortions
Limitations on the Ability to Redistribute Income
Rent Control
Capitalization
Incentives for Pension Schemes
Choice of Debt versus Tax Financing
Short-Run versus Long-Run Capitalization
Who Benefits From Local Public Goods? The Capitalization Hypothesis. Note continued: Absolute versus Relative Capitalization
The Use of Changes in Land Rents to Measure Benefits
Testing the Capitalization Hypothesis
Public Choice at the Local Level
Problems of Multijurisdictional Taxation
Review and Practice
Summary
Key Concepts
Questions and Problems
28. Fiscal Deficits And Government Debt
The U.S. Deficit Problem since the 1980s
Sources of the Deficit Problem
Factors Not Contributing to the Deficit Problem
Success in Taming the Deficit: The Experience of the 1990s
Case Study Measuring Budget Deficits: What's Large, What's Real, and What's Right?
Consequences of Government Deficits
How Deficits Affect Future Generations When the Economy Is at Full Employment
Alternative Perspectives on the Burden of the Debt
Case Study Austerity in a Recession: Expansionary or Contractionary?
Improving the Budgetary Process
Budget Enforcement Act and Scoring
Capital Budgets. Note continued: Other Strategies
The Long-Term Problem: Entitlements and the Aged
Review and Practice
Summary
Key Concepts
Questions and Problems

What should be the role of government in society? How should it design its programs? How should tax systems be designed to promote both efficiency and fairness? Nobel Laureate Joseph Stiglitz and new co-author Jay Rosengard use their first-hand policy-advising experience to address these key issues of public-sector economics in this modern and accessible Fourth Edition