Public finance and public policy gruber pdf download

As a matter of fact, you can do a little bit of reading on how to get started in public policy. Public finance is a system where you give people a certain amount of money to spend or spend more on public projects. Like public works projects like clean up our highways , the idea is that you spend it on public projects with the hope of getting more money back in return. Public finance is often used in the context of financing public projects.

In this sense it makes sense. We use it to fund projects that will benefit the people of a certain area. But there are many reasons to use public finance. For example, public finance can be used to finance infrastructure projects like roads, trains, and subways.

Taxation in Theory and Practice The feedback on the novel organization of the tax-related chapters has been very positive. The coverage of taxation begins with the key institutional features and theoretical concepts such as vertical equity and the Haig-Simons tax base that are central to understanding tax policy discussed in Chapter Next are two chapters that cover the theoretical underpinnings of tax incidence Chapter 19 and tax efficiency analysis Chapter These chapters include applications to measure the incidence of taxation in the United States and to design optimal commodity taxes.

The next three chapters focus on the behavioral responses of individuals to income taxation, and discuss key tax policies that affect those behaviors: labor supply and the EITC in Chapter 21, savings and tax-subsidized retirement savings in Chapter 22, and the distribution of asset holdings and capital gains, estate, and property taxes in Chapter Chapter 24 presents an overview of the corporate income tax and reviews the key equity and efficiency issues that are the focus of corporate tax debates.

Finally, Chapter 25, a chapter that has received an overwhelmingly positive response from those teaching from the book, concludes by discussing the motivations for, barriers to, and approaches to fundamental reform of taxation policies in the United States. Integration of Policy Applications The theoretical analysis that is at the core of public finance is most compelling if students can see the real-world applications that are informed by that theory.

This book provides a multitude of policy applications and examples to help students appreciate the insights of public finance. Whenever a new topic is discussed, it is placed in the policy environment in the surrounding text. In addition, there are 54 separate policy applications spread throughout the book to help emphasize the importance of the material. Finally, several chapters in the text are devoted exclusively to policy applications such as global warming and education.

Integration of Empirical Evidence Theoretical development is central to the presentation of core public finance concepts. But the presentation of theory is greatly enhanced by a careful presentation of the empirical evidence that supports, or does not support, these theoretical models.

In this book, empirical evidence is presented in two ways to provide flexibility for instructors with different tastes for this material. Throughout the text, whenever a major theoretical point is made, I discuss the relevant empirical findings on this same question, as well as the certainty that we have about particular empirical findings.

In addition, for those who want to teach a more empirically oriented course, Chapter 3 carefully explains how to interpret empirical results to students of public finance who may not have been exposed to sophisticated empirical methods. I have also included 27 Empirical Evidence boxes, which discuss in more detail the studies that underlie the empirical results presented in the text and illustrate for students the process of research and the methods by which empirical economists answer central policy questions.

I am gratified that the inclusion of these boxes has been so widely applauded by users of the book. Improved Presentation and Pedagogy As inherently interesting as this material is, student interest in any text critically depends on the exposition and presentation.

I have endeavored throughout the text to use a student-friendly, conversational style that emphasizes the intuition, graphics, and mathematics of theory. Instructors using the book have reported that their students have found Public Finance and Public Policy to be an accessible, illuminating, and engaging read.

Several features make this book appealing to potential users: Integrated Applications As noted earlier, the 54 applications in this text allow students to step back from the main text and appreciate the policy relevance of the material.

These applications are integrated directly with the text, rather than set aside, so that students understand the importance of applying the material they are learning. Empirical Evidence Boxes For instructors who wish to explore in more depth the nature of the empirical findings mentioned in the text, Empirical Evidence boxes are set aside from the main text to explain carefully the research process that generates the major empirical findings in public finance.

Integration of Relevant Statistics Throughout the text, and in a number of graphs and tables, I present the statistics about the role of the government that emphasize the importance of this course. It is much easier to explain to students why they should care about social insurance, for example, when they clearly see graphics that illustrate the rise in that activity as a share of the U. Quick Hints Throughout the text are a variety of highlighted Quick Hints to emphasize the intuition of key theoretical points that students often find difficult: How does one decide where to draw deadweight loss triangles see page 52?

Why is the subsidy to employer-provided health insurance a subsidy to employees and not to employers see page ? How can the income effect actually lead higher wages to cause lower levels of labor supply see page ?

Mathematical Appendices The text explains the material primarily through intuition and graphics, with relatively little reliance on mathematics. Nevertheless, many instructors will want to use mathematics to make key points about tax incidence, public goods provision, adverse selection in insurance markets, optimal taxation, and other topics.

Five appendices develop the mathematics of these topics. Two additional appendices focus on the details of empirical analysis. Marginal Definitions Key terms are boldfaced throughout the text, and marginal definitions allow students to focus on the key concepts.

Full-Color Graphics This is the first public finance text to use fullcolor graphics, allowing the students to better understand the graphical analysis that is so often confusing to them.

Highlights At the end of each chapter is a summary of the key themes and concepts from the material in that chapter. Questions and Problems At the end of each chapter are an average of 15 questions and problems.

Questions on empirical analysis that draw on material in Chapter 3 are denoted separately with an e, and there is a careful delineation between basic and more advanced problems.

The questions throughout the text have been reviewed, revised, updated, and augmented with additional problems for the third edition. Whats New in the Third Edition The dynamic public policy environment of the past few years required a thorough updating of most aspects of the book.

All statistics, data-related tables and figures, and applications have been updated completely to reflect the most recent available data. In addition, a number of major changes were made throughout the book, including new applications, updating of existing applications and empirical examples, and a number of new text discussions. Highlights of the changes include: Chapter 1: A new introduction focuses on the contentious debate between Democrats and Republicans over the proper size and composition of the major stimulus package passed in the spring of Chapter 4: This chapter contains an updated discussion of the enormous deficits currently faced by the federal government.

Chapter 6: A new application on Congress Takes On Global Warming discusses the most significant legislative initiative to tackle this externality to date: the Waxman-Markey bill passed out of the House of Representatives in Another new application, Public Policy Toward Obesity, extends the shorter coverage in the previous edition into a longer discussion that addresses a variety of policy options for combating the most important public health problem facing the United States in the long run.

Chapter 7: The Empirical Evidence box on Measuring Crowd-Out has been updated to reflect exciting new studies on this topic. Chapter 9: The application on Farm Policy in the United States has been updated and includes a new discussion of the successful approach to ending agricultural subsidies in New Zealand.

The application called on Government Corruption has been extended to include the recent case of Governor Rod Blagojevich in Illinois. An interesting new example included in the chapter discusses the unintended consequences of providing public information on Congressional pork. Chapter A more thorough discussion of empirical research on competition between private and public schools has been added to the section on vouchers.

Chapter The application on Flood Insurance and the Samaritans Dilemma has been updated to discuss recent legislative actions to reform the problematic flood insurance program. Chapter The discussion of the moral hazard effects of disability insurance DI is augmented through a discussion of evidence on the impact of program-screening stringency on labor force and DI application decisions. Chapter A new section discusses the distribution of medical spending in the United States, a new section discusses in more depth the reasons that individuals end up uninsured, and a new application on The Problem with McAllen, Texas highlights the important role of geographic disparities in health care spending and their implications for cost control efforts.

Chapter A new introduction highlights the debate over health reform in the presidential elections. The application on The Medicare Prescription Drug Debate has been updated to reflect the experience since with this major new government program, including the most recent health economics research. And the entire final section on health care reform has been updated to reflect both recent developments in health economics and recent policy developments.

A new application on The Massachusetts Experiment with Incremental Universalism discusses the innovative health care reform in Massachusetts that has been the basis for ongoing health care reform efforts in the U.

Chapter In addition to a thorough updating of all facts about tax collections and the tax code in the United States, a new Empirical Evidence box on The Social Benefits of Homeownership discusses the difficult issue of convincingly measuring these benefits. Chapter I have reintroduced the section on the potential inefficiencies of progressive tax systems from the first edition and excised the discussion of simulated evidence on the optimal income tax.

This change allows students to focus more on the important theoretical issues in this area. Chapter I have added a discussion of recent proposals to use behavioral incentives to increase retirement savings. Chapter I have added a discussion of the debate over the taxation of capital gains during the presidential election.

Chapter A new introduction focuses on President Barack Obamas proposed reforms of the taxation of international income for U. The application on Executive Compensation and the Agency Problem has been updated to reflect the renewed focus on executive compensation during the financial meltdown of For students, the Web site provides the following features: Self-Test Quizzes Students can test their knowledge of the material in the book by taking a multiple-choice quiz about each chapter in the text.

Students receive immediate feedback, including a hint to the correct response and a page number in the text where they can study further. All student answers are saved in an online database that can be accessed by instructors. Flashcards Students may review their knowledge of key terms by studying the definitions and testing themselves with these electronic flashcards.

Research Center This tool allows students to easily and effectively locate outside resources and readings on the Web that relate to topics covered in the textbook. Each URL is accompanied by a description of the site and its relevance to the chapter.

Student PowerPoint Slides This version of the PowerPoint presentation created by Fernando Quijano of Dickinson State University is ideal for students who need extra help in understanding the concepts in each chapter. This resource enables students to review and independently prepare for classroom lectures. The PowerPoint presentation for each chapter comes complete with notes, summaries, and graphics. For instructors, the Web site provides the following features: Quiz Gradebook All student answers to the self-test quizzes are saved in an online database that can be accessed by instructors.

Instructors can view and export reports of their students practice activity. The slides are xxxiii. The slides can be customized to suit instructors individual needs and serve as a fantastic resource when building a lecture presentation. Solutions Manual Instructors have access to the files for the detailed solutions to the texts end-of-chapter problems.

It includes a complete set of multiple-choice and short-answer questions created to effectively test student analysis, interpretation, and comprehension of the concepts covered in the textbook.

Each question is identified by level, text topic reference, and key concepts. With Diploma, instructors can easily write and edit questions, as well as create and print tests.

Questions can be sorted according to various information fields and questions can be scrambled to create different versions of tests. Tests can be printed in a wide range of formats. The softwares unique synthesis of flexible word-processing and database features creates a program that is extremely intuitive and capable. Acknowledgments This book is the product of the efforts of an enormous number of people. While Ill try my best to acknowledge them all, I apologize in advance to those I have forgotten.

My initial debts are to the teachers and colleagues who taught me public finance: Peter Diamond, Marty Feldstein, Jim Poterba, and especially Larry Summers, on whose public finance course this text is very loosely based! I was very fortunate to have been able to learn at the feet of the giants of my field, and I hope that I can do them justice in passing on their insights to the next generation of public finance economists.

I am also grateful to Larry Summers for making it possible for me to work at the Treasury Department in , which gave me an appreciation of the power of public finance analysis and the importance of educating our future generations of policymakers in the right way so that they can think about all aspects of public finance in a thorough manner.

I also owe a debt of gratitude to the generations of undergraduate students at MIT who suffered through the development of the material in this book. I am embarrassed at how much more complete my understanding is of this xxxiv.

Several of my students also helped in working on the book itself, and I am grateful in particular to Liz Ananat, Alan Bengtzen, David Seif, and Chris Smith for their assistance. I am also grateful to my secretary, Jessica Colon, for her invaluable assistance in finding me materials I needed for this book, often at the last minute!

I am also extremely grateful to the hard-working and enthusiastic team at Worth Publishers who made this book possible. Sarah Dorger, senior acquisitions editor, planned this revision, got it under way, provided helpful feedback from the market, and kept things moving along at a brisk pace.

In these tasks she was helped by the able efforts of Marie McHale, senior development editor, and Tom Acox, assistant editor, who worked tirelessly, quickly, and efficiently to ensure that things went smoothly once the manuscript was in Worths hands.

Thanks to Scott Guile, senior marketing manager. This entire project was feasible because of the assistance of several colleagues who generously devoted their time to checking the text carefully and to rounding out the package of materials. Matthew Schurin University of Connecticut was kind enough to take the time to pass along several suggestions for the third edition.

Thank you to Michael Reksulak Georgia Southern University for his accurate checking of work that often went well into the night to ensure that we made our deadlines.

David Figlio University of Florida and Casey Rothschild MIT provided the wonderful questions and problems that are found at the end of each chapter, and Kate Krause University of New Mexico and Casey Rothschild provided the elegant solutions to the end-of-chapter problems. A huge number of colleagues were very receptive when pestered for questions, insights, and informal reviews of the text. In addition to this gargantuan list, there was also a large number of terrific colleagues who were willing to give their time and energy to formal reviews of the textbook.

Several individuals stand out above the others in facilitating the book as you see it now: My development editor, Jane Tufts, has worked on all three xxxvi. Her ability to understand what I am trying to say, even when Im not exactly saying it, and translate it into clear text is uncanny.

She has been a pleasure at all times to work with, and my ability to write has been immeasurably improved for the experience of working with her. Josh Goodman now assistant professor of public policy at the Kennedy School of Government at Harvard was my research assistant on the first edition of this book, and his contribution is no less than the roughly one-half of this book that is examples, anecdotes, statistics, and graphs.

He worked tirelessly for more than a year to meet my most demanding and esoteric requests for examples and applications, in most cases turning up the ideal case study to illustrate the point I was trying to make. He turned my chicken-scratch diagrams into beautiful PowerPoint presentations. And he was a master at finding any statistic or fact, no matter how obscure.

I am also extremely grateful to Maggie Liu, Anna Radinova, and Andy Wu, who worked long hours to update the hundreds of facts in this edition, to expand on existing applications, and to provide new ones as well. Finally, my greatest debt is to my family. I am grateful to my parents, Marty and Ellie, for providing me with the education and skills that allowed me to pursue this project.

I hope my children, Sam, Jack, and Ava, can find some small solace for the time I spent away from them and on this book in their prominent place as examples throughout the text. And I am most of all grateful to my wonderful wife, Andrea, whose sacrifice throughout this project was the largest of all. Her unending support, from the initial decision process through the last page proof, was the backbone on which this effort was built, and I hope that someday I can make it up to her.

The unemployment rate, which had been at 4. The Dow Jones stock market index had fallen As President Obama said in a meeting with nine Democratic and Republican leaders at the White House three days after taking office, We are experiencing an unprecedented economic crisis that has to be dealt with and dealt with rapidly.

Senate Minority Leader Mitch McConnell called the potential stimulus package a critical piece of legislation2 and Senator Majority Leader Harry Reid warned that if Congress failed to pass a stimulus package, our entire country will suffer and the world will suffer.

Democratic proposals for a stimulus package centered around increased spending, primarily for expanded health benefits for lowincome families and the uninsured, increased aid to state and local governments, and increased educational spending. A second part of the stimulus about onethird of the total would come from tax cuts, primarily for middle- and lowerclass taxpayers. As the Democratic Speaker of the House, Nancy Pelosi, said, [President Obama] said he wanted action, bold and swift, and that is exactly what were doing today.

Eric Cantor of Virginia, the second-ranking House Republican, called the stimulus bill. They proposed lowering the lowest two income tax brackets, introducing a tax credit for small businesses, cutting the corporate tax rate to 25 percent from 35 percent, and removing the taxation of unemployment benefits. The Republican alternative met with strong opposition as well. As the New York Times editorialized, Every dollar spent on a politically expedient tax cut is money that is not spent where it could do more good.

It also perpetuates the corrosive debate in which taxes are portrayed as basically evil and tax cuts as unmitigated good. That is not a debate that Mr. Obama should engage. Of that total, The remainder was devoted to tax reductions, mostly from new tax cuts and tax credits for low- and middle-income families. John McCain of Arizona, who said,Were laying multitrillion dollars of debt on future generations of Americans.

I cant support such a thing. The goal of public finance is to understand the proper role of the government in the economy. On the expenditures side of public finance, we ask: What kind of services should the government provide, if any? Why should the government be spending billions of dollars on aid to local schools, health insurance for the unemployed, and new electrical grids? More generally, why is the government the primary provider of goods and services such as highways, education, and transfers to the unemployed, while the provision of goods and services such as clothing, entertainment, and property insurance is generally left to the private sector?

On the revenue side of public finance, we ask: How much should the government tax its citizens, and how should that amount be related to the economic circumstances of those individuals?

What kinds of activities should be taxed or be given tax relief in difficult times? What effect do taxes have on the functioning of the economy? This is a very broad definition. This study involves answering the four questions of public finance: When should the government intervene in the economy? How might the government intervene?

What is the effect of those interventions on economic outcomes? Why do governments choose to intervene in the way that they do? In this section, we explore these four questions within the context of a specific example: the market for health insurance, in which individuals pay a monthly premium to insurance companies, in return for which insurance companies pay the individuals medical bills if they are ill.

This is only one of many markets in which the government is involved, but it is a particularly useful example, since health care spending is the single largest and fastest growing part of the U.

To understand the reason for government intervention, think of the economy as a series of trades between producers firms and consumers. A trade is efficient if it makes at least one party better off without making the other party worse off. The total efficiency of the economy is maximized when as many efficient trades as possible are made. The fundamental lesson of basic microeconomics is that in most cases the competitive market equilibrium is the most efficient outcome for societythat is, it is the outcome that maximizes the gains from efficient trades.

As discussed in much more detail in Chapter 2, the free adjustment of prices guarantees that, in competitive market equilibrium, supply equals demand. When supply equals demand, all trades that are valued by both producers and consumers are being made. Any good that consumers value above its cost of production will be produced and consumed; goods that consumers value at less than their cost of production will not be produced or consumed.

If the competitive market equilibrium is the most efficient outcome for society, why do governments intervene in the operation of some of these markets? There are two reasons why governments may want to intervene in market economies: market failures and redistribution.

Market Failures The first motivation for government involvement in the economy is the existence of market failures, problems that cause a market economy to deliver an outcome that does not maximize efficiency. Throughout this book, and in particular in Chapters , we discuss a host of market failures that impede the operation of the market forces you learned about in market failure Problem that causes the market economy to deliver an outcome that does not maximize efficiency.

Here we briefly explore a failure in the health insurance market that may cause its equilibrium outcome to be inefficient. At first glance, the market for health insurance seems to be a standard textbook competitive market. Health insurance is supplied by a large number of insurance companies and demanded by a large number of households. In the market equilibrium where supply equals demand, social efficiency should be maximized: anyone who values health insurance above its cost of production is able to buy insurance.

In , there were 45 million persons without health insurance in the United States, or After all, there are many more Americans who dont have a large-screen TV, or a new car, or a home of their own. That a small minority of the population is uninsured does not by itself prove that there is a problem in the market; it just implies that those without insurance dont value it enough to buy it at existing prices.

Is this equilibrium outcome, which leaves 45 million people without health insurance, the most efficient outcome for society? It may not be, as the following example shows. Suppose that I am uninsured, and as a result do not get my yearly vaccination for influenza. By not getting my flu shot, I increase my risk of getting the flu, and increase the risk of passing it on to all of the students who come into contact with me and have not had flu shots.

If these students become ill, their medical costs will rise and their performance in class will worsen. Thus, the total or social value of health insurance is not just the improvement it causes in my health, but also the improvement it causes in my students health, which lowers their medical costs and improves class performance.

Thus, I should have insurance if the total social value, both to myself and to others with whom I have contact, exceeds the cost of that insurance. When I make my insurance decision, however, I dont consider that total social value, only the value to myself.

Suppose that I value the insurance at less than its cost because I dont mind getting the flu, but that society values the insurance at more than its cost because it is very costly for my students to go to the doctor and to perform poorly in class if they get sick. In this situation, I wont buy insurance, even though society which includes me and my students would be better off if I did.

In this case, the competitive outcome has not maximized total social efficiency. This is an example of a negative externality, whereby my decision imposes on others costs that I dont bear. As a result of this negative externality, I am underinsuring myself from societys perspective because I dont take into account the full costs that my medical decisions impose on others.

We will discuss. Later chapters in the book discuss other types of market failure as well. If the competitive equilibrium does not lead to the efficiency-maximizing outcome, there is the potential for efficiency improvement through government intervention.

Since the government can take into account not only my costs and benefits but also the costs and benefits to others as well, the government can more accurately compare the social costs to the social benefits, and induce me to buy insurance if the total benefits exceed the total costs. As we emphasize in answering the fourth question, however, the fact that the private market outcome is not efficiency maximizing does not imply that government intervention will necessarily improve efficiency.

The Measles Epidemic of One of the illnesses for which all children are supposed to be immunized is measles. Measles is transmitted from person to person by respiratory droplets and is characterized by a high fever and severe rash that lasts five to six days. In the early s, there were thought to be 3 to 4 million cases annually in the United States, resulting in reported deaths each year. Other costs associated with measles infection included medical expenditures and work time lost for parents in caring for sick children.

Then, in , a measles vaccine was introduced. Measles vaccination greatly reduces, but does not eliminate, the chance of contracting measles, and the vaccine can wear off over time if you dont get periodic booster shots to reactivate the immunity.

As a result of the vaccine, measles cases had become relatively rare in the United States by the s, with fewer than 3, cases reported per year and very few deaths. Over the period from to , however, there was a huge resurgence in measles in the United States, with over 50, cases and deaths from a disease thought to be largely eradicated.

What happened? In retrospect, it is clear that this outbreak resulted from very low immunization rates among disadvantaged inner-city youths. One-third of all of the new cases were in Los Angeles, Chicago, and Houston, and one-half of those children who contracted measles had not been immunized, even though many had regular contact with a physician. These unimmunized children were imposing a negative externality on other children who had received their immunizations but for whom immunization may have worn off.

There was a negative externality because the unimmunized children raised the risk that these other children would become sick, without bearing any of the costs of raising this risk. The federal government responded to this health crisis in the early s, first through publicly encouraging parents to get their children immunized, and then through an initiative that paid for the vaccines for low-income families. The result was impressive.

And, by , there were only about confirmed cases of measles. Government intervention clearly reduced this negative externality.

Redistribution The second reason for government intervention is redistribution, the shifting of resources from some groups in society to others. Think of the economy as a pie, the size of which is determined by the social efficiency of the economy. If there are no market failures, then the private market forces of demand and supply maximize the size of the pie; if there are market failures, there is the potential for the government to increase the size of the pie.

The government may care not only about the size of the pie, however, but also its distribution, or the size of each persons slice. For reasons we discuss in Chapter 2, society may decide that the resource allocations provided by the market economy are unfair; for example, society may view another dollar of consumption by a very rich person as less valuable than another dollar of consumption by a very poor person.

The primary way to correct such misallocations is through government interventions that redistribute resources from those groups that society has deemed too well off to those groups that society has deemed not well off enough. Thus, society may feel that it is appropriate to redistribute from those with insurance, who tend to have higher incomes, to those without, who tend to have lower incomes. In some cases, society can undertake redistributions that change only the distribution of the pieces and not the size of the pie itself.

Usually, however, redistributing resources from one group to another will entail efficiency losses. These losses occur because the act of redistribution causes individuals to shift their behavior away from the efficiency-maximizing point. For example, if we tax the rich to distribute money to the poor, then this tax may cause the rich to work less hard since they dont get to take home as much money from their work and the poor to work less hard since they dont have to work as hard to maintain their living standards.

When these groups work less hard, they dont produce goods that would be valued by consumers at more than they cost to produce, so social efficiency is reduced. In general, then, there will be a trade-off between the size of the pie and the distribution of the pie, which we call an equityefficiency trade-off.

Societies typically have to choose between pies that are larger and more unequally distributed and pies that are smaller and more equally distributed. How Might the Government Intervene? Having decided whether to intervene, the next question is how the government should do so. There are several different general approaches that the government can take to intervention.

Tax or Subsidize Private Sale or Purchase One way that the government can try to address failures in the private market is to use the price mechanism, whereby government policy is used to change the price of a good in one of two ways: 1.

Through taxes, which raise the price for private sales or purchases of goods that are overproduced, or 2. Through subsidies, which lower the price for private sales or purchases of goods that are underproduced. Returning to the example of health insurance, one policy option that is currently popular in the United States is for the government to subsidize the purchase of private health insurance to reduce the number of uninsured. For example, the Bush administration has repeatedly proposed that individuals receive a credit against their taxes for expenditures on health insurance.

Restrict or Mandate Private Sale or Purchase Alternatively, the government can directly restrict private sale or purchase of goods that are overproduced, or mandate private purchase of goods that are underproduced and force individuals to buy that good. Current debates over health reforms proposed by President Obama and Democratic Legislators have focused on a requirement that individuals purchase health insurance or face a tax penalty.

Many other nations, such as Germany, mandate that almost all citizens have health insurance coverage. Public Provision Another alternative is to have the government provide the good directly, in order to potentially attain the level of consumption that maximizes social welfare.

In the United States, more than one-quarter of the population has insurance that is provided to it directly by the government; Canada and many other developed nations have publicly provided health insurance for their entire populations.

Public Financing of Private Provision Finally, governments may want to influence the level of consumption but may not want to directly involve themselves in the provision of a good. In such cases, the government can finance private entities to provide the desired level of provision. For example, the legislation to add a prescription drug benefit to the U.

Medicare insurance program for the disabled and elderly involves federal government reimbursement of private insurers to provide prescription drug insurance.

As you can see, there is a wide spectrum of policy options. When considering how to intervene, policy makers should carefully evaluate alternative options before deciding which option is best. This evaluation leads naturally to the third question: How can we evaluate alternative policy options? What Are the Effects of Alternative Interventions? Answering this third question requires that policy makers understand the implications of each policy option under consideration.

This evaluation is the focus of empirical public finance, which involves gathering data and developing. We discuss empirical public finance in much more detail in Chapter 3.

In assessing the effects of government interventions, policy makers must keep in mind that any policy has direct and indirect effects. Direct Effects The direct effects of government interventions are those effects that would be predicted if individuals did not change their behavior in response to the interventions. For example, suppose that the government wants to try to address the problem of the uninsured by providing free public health care, as is done in the United Kingdom.

This is a huge amount, but it is much smaller than existing spending on health care by the U. For example, being uninsured is something that people can change about themselves; it is not a fixed personal characteristic such as being male or African American. By providing free health care to those who are uninsured, the government provides strong incentives for those paying for their own health insurance to drop that insurance and take part in the governments free health care program.

Suppose that half of the non-elderly who are privately insured behaved this way. This would add another 95 million persons to the pool using this public source of care. The key question for evaluating free public health care for the uninsured is therefore: How many privately insured will drop their privately purchased coverage to join a free public option? This is an empirical question. The public finance economist needs some means of drawing on data to make the best estimate of the extent of such movement.

Throughout this book, we discuss a variety of ways that empirical public finance economists make such estimates, and how economists use these to inform their understanding of the effects of alternative government interventions. The methods and results derived from empirical economics are central to the development of The CBO was created in with a mission to provide Congress with the objective, timely, nonpartisan analyses needed for economic and budget decisions.

Legislative spending proposals that are to become law must first have their costs estimated by the analysts at the CBO. Given budgetary pressures on the federal government, policy makers have increasingly referred their legislation to the CBO earlier and earlier in the development process.

If they know what score their spending proposal will receive i. It is not an overstatement to say that the economists who work at the CBO frequently hold the fate of a legislative proposal in their hands. Indeed, the large We dont use the Congressional Budget Office.

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