Economics 3B03: Public Sector Economics

J. Leach
KTH 419
x23819
leach@mcmaster.ca (messages without subjects are automatically deleted.)
O ce hours: 9:30 10:30 on Mondays and Thursdays, or by appointment.
This course presents the theoretical basis for government participation in
a private enterprise economy. The nature and extent of this participation is
examined.
This course is quite mathematical. It requires a great deal of problem solving
using basic mathematical procedures (calculating derivatives, simplifying equations, and solving equation systems by recursive sustitution). If you not able or
not willing to do this kind of work, you should choose another course.

Avenue to Learn Website

There is a website for this course. The course outline and assignments will be
distributed through this site, and a version of the lecture slides is available there.
Your grades can also be veried on this site. I do not plan to use any other
features of WebCT.
Please check that you have access to the site for this course. If you go the
Avenue to Learnhomepage and sign in with your Mac ID and password, you
will see a list of all of the courses to which you have access. This course should
be among them.

Text

J. Leach, A Course in Public Economics, Cambridge University Press, 2004

Both new and used copies of the textbook are available in the bookstore. It
is also available as an ebook at:
http://www.ebooks.com/255096/a-course-in-public-economics/leach-john/
I expect to cover chapters 1 11 and 14. Some of the material in chapter 4
will be excluded and some additional material might be added. Specic chapter
references will be given in class. (You can browse the lecture notes on the
website if you want to nd out what youre getting into.)

Course Outline

Three issues are examined in this course.

1. The competitive price system and the two fundamental theorems of
welfare economics (i.e., why competitive economies are a good thing).
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2. Why the two fundamental theorems generally do not apply to real

economies: public goods, externalities, common properties, increasing returns
to scale, co-ordination failures and concealed information.
3. How to x competitive economies with public goods, externalities, or
common properties.
All of the material covered in the lectures is contained in the textbook.
Chapter and page references will be given as the course proceeds.

Evaluation

Your nal grade will be calculated as follows:

assignments: 10%
each mid-term: 25%
nal exam: 40%
There will be about 5 or 6 assignments during the term. Since there will
be no assignment during the rst week and no assignments before the midterms, you should expect new assignments to be handed out almost every week.
Each assignment will be relatively short and will be due one week after it is
handed out. The assignments will require you to solve algebraic problems. Late
assignments will not be accepted.
The mid-term exams will consist of algebraic problems and/or questions for
which paragraph-length answers are expected. If a mid-term exam is missed
and a medical excuse is provided, the mid-terms weight will be moved to the
nal exam. Mid-terms missed without a medical excuse will receive a grade of
0.
Both midterms are held during class time. Their time and place will be
announced as soon as I have room reservations. Student cards are required at
all exams.
The nal exam will be administered by the Examinations O ce. It will be
multiple choice. The questions will be much like those in Economics 2G3/2X3
that is, you will generally be expected to solve an algebraic prob- lem to discover
the correct response. The Examinations O ces rules will apply to missed nal
exams.

Can I Fail this Course?

Yes, its easy. Lots of people have done it without even trying. If you want to
take a more systematic approach to failing, here are some tips from students
who have successfully failed in previous years.
1. Be bad at microeconomics. The prerequisites say that you must have
passed intermediate microeconomics; they dont say that you actually have
to know the basic principles and how to apply them. You memorized a
few denitions and trusted to luck and that got you through the second
year course. Why should a third year course be any dierent?
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2. Be bad at mathematics. The prerequisites just say that you must have
passed a calculus course. You memorized all those formulas to get through
the nal exam, but surely no-one expects you to actually remember them
a year later? Besides, what dierence does one mistake in the middle of
ten lines of algebra make? You get part marks, dont you? Well, dont
you?
3. Dont read the textbook. The textbook is just a boring and longwinded version of the lecture notes. If you read the lecture notes the night
before the exam, youll be ne. He probably wont ask the things you
dont understand anyway.
4. Dont attend classes. The classes are just a boring and long-winded
version of the lecture notes. If you read the lecture notes the night before
the exam, youll be ne. He probably wont ask the things you dont
understand anyway.
5. Dont do the assignments. The assignments cover the same stu as
the midterms. Why do everything twice? Besides, you work best under
pressure, and what better pressure than the fty minute time limit on the
exam? And since each assignment is only worth 2%, it can only change
your nal grade by a single grade point. Do you really care whether you
get a C+ instead of a B-, or an F instead of a D-?
6. Skip the midterms. The midterms cover the same stu as the nal
exam. Why do everything twice? Besides, you work best under pressure.
An all-nighter before the nal exam is all you need.
7. Be graduating this year. The instructor knows how little this course
means to you, and hell push you through even if you do nothing. He
understands that Im graduating this year!is a get-out-of-jail-free card.

Academic Dishonesty

Academic dishonesty consists of misrepresentation by deception or by other

fraudulent means and can result in serious consequences, e.g. the grade of zero
on an assignment, loss of credit with a notation on the transcript (notation
reads: Grade of F assigned for academic dishonesty), and/or suspension or
expulsion from the university.
It is your responsibility to understand what constitutes academic dishonesty. For information on the various kinds of academic dishonesty, please refer
to the Academic Integrity Policy, specically Appendix 3, located at
http://www.mcmaster.ca/senate/academic/ac_integrity.htm
The following are two forms of academic dishonesty:
1. Plagiarism, e.g. the submission of work that is not ones own or for which
other credit has been obtained. Specically, with regard to the assignments,
you are allowed to discuss with others the procedure that must be used to solve
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a problem, but you must apply that procedure yourself and write your own
answers.
2. Copying or using unauthorized aids in tests and examinations.

Calculators

In accordance with university policy the only calculator that can be used during
examinations are the various models of the Casio FX991. This policy will be
enforced during all mid-terms and the nal exam.

Course Changes

The instructor and university reserve the right to modify elements of the course
during the term. The university may change the dates and deadlines for any
or all courses in extreme circumstances. If either type of modication becomes
necessary, reasonable notice and communication with the students will be given
with explanation and the opportunity to comment on changes.
It is the responsibility of the student to check his/her McMaster email and
course websites weekly during the term and to note any changes.

Email Policy

All e-mail communications that you send should originate from your McMaster
University e-mail account. This practice protects condentiality and conrms
your identity. It is your responsibility to ensure that communications are sent
to the university from a McMaster account. If I become aware that a communication has come from an alternate address, I might not reply at my discretion.

Immediately Useful Mathematics

Power Functions
1. x0 = 1
2. x

for any non-zero x

1
xa

For example, 3
3. xa

1
1
=
2
3
9

xb = xa+b

For example, 22
4. xa

23 = (2

2)

(2

2) = 25

32 = (2

2)

(3

3) = (2

y a = (xy)a

For example, 22

3)

(2

3) = 62

5.

xa
= xa
xb
because

xa
= xa
xb

1
= xa x
xb

= xa

(using the second and third rules)

6. (xa )b = xab
For example, (32 )3 = (3
7.

x
y

3)

(3

= xa y

3)

(3

3) = 36

= xa y

because

x
y

a
a

xa
ya

Derivatives of Functions of One Variable

Let a, b and c be constants, and let f and g be functions.
1.

d
(a) = 0
dx

2.

d
df
[af (x)] = a
dx
dx

3.

df
dg
d
[f (x) + g(x)] =
+
dx
dx dx

4.

d a
[x ] = axa
dx

For example, these four rules imply that

5.

6.

d
[a + bxc ] = bcxc
dx

df
dg
d
[f (x)g(x)] = g(x)
+ f (x)
dx
dx
dx
d
For example,
(a + bx)x2 = bx2 + (a + bx)(2x) = 2ax + 3bx2
dx
d
df
[f (x)a ] = af (x)a 1
dx
dx
d
For example,
[(b + cx)a ] = ac(b + cx)a
dx

7. Let ln f (x) be the natural logarithm of f (x): Then

For example,

d ln f (x)
1 df
=
dx
f (x) dx

d
3x2
3
ln(x3 ) = 3 =
dx
x
x

d f (x)
f (x)
1
? Note that
= f (x)
so that rule 5 applies.
dx g(x)
g(x)
g(x)
d
1
d
Then note that
=
g(x) 1 so that rule 6 also applies.
dx g(x)
dx

8. Whats

Derivatives of Functions of More than One Variable

See the notes on Algebraic Pareto Optimalityfor the relationship between
simple derivatives and partial derivatives. All of the above rules apply, with
appropriate modication.
Recursive Substitution
...is an iterative procedure for solving systems of equations. If there are n
equations in n variables, use one equation to eliminate one variable from the
remaining n 1 equations. Now use one of these equations to eliminate one
variable from the remaining n 2 equations. Continue in this fashion until
you have one equation in one variable. Find the value of this variable, then
substitute its value into any equation with two variables to nd the value of
another variable. Substitute these values into any equation with three variables
to get another value, and continue in this fashion until of the value of every
variable is known.
For example:
x + 2y + z = 13
x+y

z=5

2x + y + z = 12
From the last equation,
z = 12

2x

Substituting this expression into the rst two equations gives

y

x=1

3x + 2y = 17
There are now two equations in two variables. The rst equation implies
y =x+1
Substituting this expression into the second equation gives
x=3
Substituting this value into either of the two-variable equations shows that y is
4, and substituting these values into any of the original equations shows that z
is 2.