Samenvatting leeswerk Economie van de Publieke Sector
Week 1: Chapter 1, 2 and 3
Chapter 1: Introduction
▪ Public finance: the field of economics that analyzes government taxation and spending.
Organic view of Government:
- Each individual is part of the organism, and the government is its heart.
- The community is stressed above the individual.
- Example is Nazism: every activity has meaning only as a service to the whole.
- The goals of society are set by the state.
- Individuals are valued only by their contribution to the realization of social goals.
Mechanistic view of Government:
- Tactic created by individuals to better achieve their individual goals.
- The individual is at the center stage.
- Government must somehow reconcile sometimes conflicting individual goals.
A common approach to measure the size of government is by volume of its annual expenditures,
of which there are three types:
1. Purchases of goods and services.
2. Transfers of income to people, businesses, or other governments.
3. Interest payments.
▪ Unified budget: the document that includes all the federal government’s revenues and
expenditures.
▪ Regulatory budget: an annual statement of the costs imposed on the economy by
government regulations. (currently, the government publishes no such budget)
Reasons why a measure of the growth of government can be misleading:
- Inflation. Money increases or decreases in value over time.
- Population has grown or shrunk.
- Not compared with other countries.
▪ Entitlement programs: programs whose expenditures are determined by the number of
people who qualify, rather than pre-set budget allocations.
It is important to note that the tax system, in addition to raising revenues, can also be a means of
making expenditures.
▪ Tax expenditures: a loss of tax revenue because some item is excluded from the tax base or
accorded some other preferential treatment.
Chapter 2: Tools of Positive Analysis
A model should be judged on whether it is plausible, informative, and offers testable
implications.
▪ Substitution effect: the tendency of an individual to consume more of one good and less of
another because of a decrease in the price of the former relative to the latter.
▪ Normal good: a good for which demand increases as income increases and demand
decreases as income decrease, other thing being the same.
▪ Income effect: the effect of a price change on the quantity demanded due exclusively to the
fact that the consumer’s income has changed.
Tax simultaneously produces two effects:
- Induces substitution towards the cheaper activity.
- Reduces real income.
,In order to state that X causes societal effect Y, three conditions must hold:
1. X (cause) must precede the Y (effect).
2. X and Y must be correlated. (X and Y move in the same direction).
3. Other explanations for any observed correlation must be eliminated.
▪ Correlation: a measure of the extent to which two events move together.
▪ Treatment group: the group of individuals who are subject to the intervention being studied.
▪ Control group: the comparison group of individuals who are not subject to the intervention
being studied.
▪ Biased estimate: an estimate that conflates the true causal impact with the impact of
outside factors.
▪ Counterfactual: the outcome for people in the treatment group had they not been treated.
▪ Experimental study: an empirical study in which individuals are randomly assigned to the
treatment and control groups.
Pitfalls of Experimental Studies:
- Ethical issues
- Technical problems arise
- Failure to respond to follow-up surveys
- People in an experiment may not behave the same way as they would if the entire society
were subjected to the policy
Although experimental studies offer a credible way to evaluate the impact of a policy, they are
not foolproof. In particular, researchers must carefully track the subjects in the control and
treatment groups to maintain the original random assignment, and they must be cautious about
generalizing the results to other settings or policies.
▪ Observational studies: an empirical study that relies on observed data that are not obtained
from an experimental setting.
Observational data come from a variety of sources like surveying people, administrative records
or government data.
▪ Econometrics: the statistical tools for analyzing economic data.
▪ Regression line: the line that provides the best fit through a scatter of data points.
The slope of the regression line, known as the regression coefficient, is an estimate of the
relationship between X and Y.
▪ Standard error: a statistical measure of how much an estimated regression coefficient might
vary from its true value.
When the standard error is small in relation to the size of the estimated parameter, the
coefficient is said to be statistically significant.
Types of data:
▪ Cross-sectional data: data that contain information on entities at a given point in time.
▪ Time-series data: data that contain information on an entity.
▪ Panel data: data that contain information on individual entities at different point in time.
Pitfalls of Observational Studies:
- It is difficult to ensure that the control group forms a valid counterfactual.
- Remember, correlation does not necessarily imply causation.
- Someone might not think of all the control variables that should be included, or all the
relevant control variables might not be available in the data set.
- Some variables are hard to measure, even in principle.
Observational studies must be interpreted with care, recognizing the possibility that outside
factors might bias any causal inferences.
,▪ Quasi-experimental study: an observational study that relies on circumstances outside of
the researcher’s control to mimic random assignment.
The difference between an experiment and a quasi-experiment is that an experiment explicitly
randomizes people into a treatment or control group, whereas a quasi-experiment uses
observational data but relies on circumstances outside the researcher’s control that naturally
lead to random assignment.
▪ Difference-in-difference analysis: an analysis that compares changes over time in an
outcome of the treatment group to changes over the same time period in the outcome of the
control groups.
▪ Instrumental variables analysis: an analysis that relies on finding some variable that affects
entry into the treatment group, but in itself is not correlated with the outcome variable.
A possible drawback of such an experiment is that the temporary nature of the experiment might
influence the outcome.
▪ Regression-discontinuity analysis: an analysis that relies on a strict cut-off criterion for
eligibility of the intervention under study in order to approximate an experimental design.
Pitfalls of Quasi-Experimental Studies:
- Natural experiment may not truly mimic random assignment to the treatment group.
- It can only be applied to a limited number of research questions.
- Raise concerns about generalizability. They are limited in explaining why something
occurred.
Economic theory plays a crucial role in empirical research by framing the research question and
helping isolate a set of variables that may influence the behavior of interest. Empirical work then
tests whether the theoretically plausible causal relationship between a policy and an outcome
is consistent with real-world phenomena.
- A randomized experiment is the cleanest way to establish a causal relationship.
Chapter 3: Tools of Normative Analysis
▪ Welfare economics: the branch of economic theory concerned with the social desirability of
alternative economic states.
▪ Edgeworth Box: a device used to depict the distribution of goods in a two good-two person
world.
- Adam is happier on indifference curve A3
- Eve is happier on indifference curve E3
, - Adam’s welfare can be further increased without harming Eve as long as Adam can be
moved to indifference curves farther to the northeast while still remaining on Eg. this
process can be continued until Adam’s indifference curve is just touching Eg, which
occurs at point P.
▪ Pareto efficient: an allocation of resources such that no person can be made better off
without making another person worse off.
▪ Pareto improvement: a reallocation of resources that makes at least one person better off
without making anyone else worse off.
- This figure shows reallocation that make both Adam and Eve better off.
- Point P2, is a Pareto efficient allocation.
▪ Contract curve: the lotus of all Pareto efficient points.
▪ Marginal rate of substitution: the rate at which an individual is willing to trade one good for
another; it is the absolute value of the slope of an indifference curve.
Week 1: Chapter 1, 2 and 3
Chapter 1: Introduction
▪ Public finance: the field of economics that analyzes government taxation and spending.
Organic view of Government:
- Each individual is part of the organism, and the government is its heart.
- The community is stressed above the individual.
- Example is Nazism: every activity has meaning only as a service to the whole.
- The goals of society are set by the state.
- Individuals are valued only by their contribution to the realization of social goals.
Mechanistic view of Government:
- Tactic created by individuals to better achieve their individual goals.
- The individual is at the center stage.
- Government must somehow reconcile sometimes conflicting individual goals.
A common approach to measure the size of government is by volume of its annual expenditures,
of which there are three types:
1. Purchases of goods and services.
2. Transfers of income to people, businesses, or other governments.
3. Interest payments.
▪ Unified budget: the document that includes all the federal government’s revenues and
expenditures.
▪ Regulatory budget: an annual statement of the costs imposed on the economy by
government regulations. (currently, the government publishes no such budget)
Reasons why a measure of the growth of government can be misleading:
- Inflation. Money increases or decreases in value over time.
- Population has grown or shrunk.
- Not compared with other countries.
▪ Entitlement programs: programs whose expenditures are determined by the number of
people who qualify, rather than pre-set budget allocations.
It is important to note that the tax system, in addition to raising revenues, can also be a means of
making expenditures.
▪ Tax expenditures: a loss of tax revenue because some item is excluded from the tax base or
accorded some other preferential treatment.
Chapter 2: Tools of Positive Analysis
A model should be judged on whether it is plausible, informative, and offers testable
implications.
▪ Substitution effect: the tendency of an individual to consume more of one good and less of
another because of a decrease in the price of the former relative to the latter.
▪ Normal good: a good for which demand increases as income increases and demand
decreases as income decrease, other thing being the same.
▪ Income effect: the effect of a price change on the quantity demanded due exclusively to the
fact that the consumer’s income has changed.
Tax simultaneously produces two effects:
- Induces substitution towards the cheaper activity.
- Reduces real income.
,In order to state that X causes societal effect Y, three conditions must hold:
1. X (cause) must precede the Y (effect).
2. X and Y must be correlated. (X and Y move in the same direction).
3. Other explanations for any observed correlation must be eliminated.
▪ Correlation: a measure of the extent to which two events move together.
▪ Treatment group: the group of individuals who are subject to the intervention being studied.
▪ Control group: the comparison group of individuals who are not subject to the intervention
being studied.
▪ Biased estimate: an estimate that conflates the true causal impact with the impact of
outside factors.
▪ Counterfactual: the outcome for people in the treatment group had they not been treated.
▪ Experimental study: an empirical study in which individuals are randomly assigned to the
treatment and control groups.
Pitfalls of Experimental Studies:
- Ethical issues
- Technical problems arise
- Failure to respond to follow-up surveys
- People in an experiment may not behave the same way as they would if the entire society
were subjected to the policy
Although experimental studies offer a credible way to evaluate the impact of a policy, they are
not foolproof. In particular, researchers must carefully track the subjects in the control and
treatment groups to maintain the original random assignment, and they must be cautious about
generalizing the results to other settings or policies.
▪ Observational studies: an empirical study that relies on observed data that are not obtained
from an experimental setting.
Observational data come from a variety of sources like surveying people, administrative records
or government data.
▪ Econometrics: the statistical tools for analyzing economic data.
▪ Regression line: the line that provides the best fit through a scatter of data points.
The slope of the regression line, known as the regression coefficient, is an estimate of the
relationship between X and Y.
▪ Standard error: a statistical measure of how much an estimated regression coefficient might
vary from its true value.
When the standard error is small in relation to the size of the estimated parameter, the
coefficient is said to be statistically significant.
Types of data:
▪ Cross-sectional data: data that contain information on entities at a given point in time.
▪ Time-series data: data that contain information on an entity.
▪ Panel data: data that contain information on individual entities at different point in time.
Pitfalls of Observational Studies:
- It is difficult to ensure that the control group forms a valid counterfactual.
- Remember, correlation does not necessarily imply causation.
- Someone might not think of all the control variables that should be included, or all the
relevant control variables might not be available in the data set.
- Some variables are hard to measure, even in principle.
Observational studies must be interpreted with care, recognizing the possibility that outside
factors might bias any causal inferences.
,▪ Quasi-experimental study: an observational study that relies on circumstances outside of
the researcher’s control to mimic random assignment.
The difference between an experiment and a quasi-experiment is that an experiment explicitly
randomizes people into a treatment or control group, whereas a quasi-experiment uses
observational data but relies on circumstances outside the researcher’s control that naturally
lead to random assignment.
▪ Difference-in-difference analysis: an analysis that compares changes over time in an
outcome of the treatment group to changes over the same time period in the outcome of the
control groups.
▪ Instrumental variables analysis: an analysis that relies on finding some variable that affects
entry into the treatment group, but in itself is not correlated with the outcome variable.
A possible drawback of such an experiment is that the temporary nature of the experiment might
influence the outcome.
▪ Regression-discontinuity analysis: an analysis that relies on a strict cut-off criterion for
eligibility of the intervention under study in order to approximate an experimental design.
Pitfalls of Quasi-Experimental Studies:
- Natural experiment may not truly mimic random assignment to the treatment group.
- It can only be applied to a limited number of research questions.
- Raise concerns about generalizability. They are limited in explaining why something
occurred.
Economic theory plays a crucial role in empirical research by framing the research question and
helping isolate a set of variables that may influence the behavior of interest. Empirical work then
tests whether the theoretically plausible causal relationship between a policy and an outcome
is consistent with real-world phenomena.
- A randomized experiment is the cleanest way to establish a causal relationship.
Chapter 3: Tools of Normative Analysis
▪ Welfare economics: the branch of economic theory concerned with the social desirability of
alternative economic states.
▪ Edgeworth Box: a device used to depict the distribution of goods in a two good-two person
world.
- Adam is happier on indifference curve A3
- Eve is happier on indifference curve E3
, - Adam’s welfare can be further increased without harming Eve as long as Adam can be
moved to indifference curves farther to the northeast while still remaining on Eg. this
process can be continued until Adam’s indifference curve is just touching Eg, which
occurs at point P.
▪ Pareto efficient: an allocation of resources such that no person can be made better off
without making another person worse off.
▪ Pareto improvement: a reallocation of resources that makes at least one person better off
without making anyone else worse off.
- This figure shows reallocation that make both Adam and Eve better off.
- Point P2, is a Pareto efficient allocation.
▪ Contract curve: the lotus of all Pareto efficient points.
▪ Marginal rate of substitution: the rate at which an individual is willing to trade one good for
another; it is the absolute value of the slope of an indifference curve.
