Modern Public Economics
        Second edition
        Raghbendra Jha
                     B 366815
            Routledge
            Taylor Si Francis Group
         LONDON AND NEW YORK
     Contents
       List of tables xiv
       List of figures xv
       Preface xix
       Preface to the first edition xxi
      PARTI
      Welfare economics 1
       Introduction to Part I 2
      1 A quick primer on consumer demand 3
        1.1 Introduction 3
        1.2 Some key definitions 3
        1.3 Utility functions 7
        1.4 The consumer's utility maximization problem 7
        1.5 Some other useful relations in demand theory 13
        1.6 Consumer's surplus and measurement of welfare
          changes 14
        1.7 Conclusions 17
        1.8 Appendix on welfare evaluation of economic
          changes 18
      2 Perfect competition and Pareto optimality 28
        2.1 Introduction 28
        2.2 Paretian ranking of social states 28
        2.3 Pareto optimality 29
        2.4 The classical theorems of welfare economics 33
        2.5 An extension to the case of uncertainty 43
        2.6 The theorem of second best 51
        2.7 Conclusions 53
        viii Contents
        3 Forms of the social welfare function 54
          3.1 Introduction 54
          3.2 Early attempts at formulating an approach
            to distribution 54
          3.3 Aggregating individual preferences to arrive at
            social choice 58
          3.4 Arrow's general possibility and other impossibility
            theorems 61
          3.5 Beyond the Arrow framework 68
          3.6 Forms of the social welfare function (SWF) 70
          3.7 Concluding remarks 74
        PART II
        The theory of public expenditure 75
          Introduction to Part II 76
        4 External effects and the market mechanism 79
          4.1 Introduction 79
          4.2 Effects of externalities 80
          4.3 A policy example: the pricing of education 85
          4.4 Common property resources 90
          4.5 Multilateral externalities 92
          4.6 Conclusions 94
        5 The theory of pure public goods 95
          5.7 Introduction 95
          5.2 Pareto optimality with pure public goods 96
          5.3 Public goods with distortionary taxation 99
          5.4 The free-rider problem 101
          5.5 Private provision of public goods 110
          5.6 Voting models of public goods 115
          5.7 Concluding remarks 120
        6 Topics in the theory of public goods 121
          6.1 Introduction 121
          6.2 The theory of clubs 121
          6.3 The Tiebout hypothesis 124
          6.4 Multi-product clubs 129
          6.5 Financing pure public goods with distortionary
            taxes 133
                                     Contents ix
      6.6 Public goods provision with asymmetric information 136
      6.7 Rent seeking 143
      6.8 Conclusions 150
    PART III
    The theory of taxation 153
      Introduction to Part III 154
    7 The effects of taxes on savings ! 157
      7.1 Introduction 157
      7.2 The elementary life-cycle model of saving 157
      7.3 Capital market imperfections and the life-cycle model 163
       7.4 Broader life-cycle models of savings and taxes 165
       7.5 Aggregate savings and taxation 166
       7.6 A consumption/expenditure tax 170
       7.7 Savings by firms 178
       7.8 Social security, pensions, and savings 178
       7.9 The extended life-cycle models of savings 180
       7.10 Empirical evidence on effects of taxes on savings 182
       7.11 Conclusions 184
     8 Taxation and labor supply 186
       8.1 Introduction 186
       8.2 The basic model of labor supply 186
       8.3 Comparison of the effects of various types of taxes 189
       8.4 Taxation and the decision to enter the labor market 190
       8.5 Effects of a progressive tax on labor supply 193
       8.6 A summary of the empirical evidence on effects of lower
         taxes on labor supply 200
       8.7 Conclusions 205
         Appendix 205
     9 The effects of taxes on investment behavior 208
       9.1 Introduction 208
       9.2 The Fisherian model 208
       9.3 The aggregate approach 213
       9.4 Comparing the effects of an investment tax credit versus a
         corporate tax cut: a Cobb—Douglas example 222
       9.5 Decisions on the financing of investment expenditure 224
       9.6 The effective rate of taxation and the cost of finance 224