What Is Public Economics?
by Anna Rubinchik-Pessach

Public Economics is concerned with a vast spectrum of questions: from defining the best composition of public spending and taxation to the most desirable forms of government that are likely to implement such policies. To start, it is essential to formulate compelling objectives for a society (or a country) and then to examine the most efficient ways to achieve those objectives. Both require a profound understanding of the working of the economy as a whole, and the incentives of those who decide on the policies. Recent advances in the fields of general equilibrium theory and the theory of incentives have provided public economists with an unprecedented opportunity to address the core questions carefully and to state the answers clearly. Those who joined the quest became known as public economic theorists.

The Association for Public Economic Theory (APET) promotes research in this area and held its first meeting at the University of Alabama, Tuscaloosa, in May, 1998. Professors Myrna Wooders from Warwick University in England and John Conley from Vanderbilt University are the founders of the Association, which issues the Journal of Public Economic Theory (JPET). CU economists have contributed to JPET and the association in different ways. Charles de Bartolomé serves as an associate editor for the journal. He and Eckhard Janeba have published their research in JPET.

Last year three CU faculty members, Charles de Bartolomé, Eckhard Janeba and Anna Rubinchik-Pessach presented their work at the third APET meetings in Paris.

Charles's current research focuses on the American city and the stylized fact that inner cities in the U.S. tend have a higher proportion of the metropolitan poor than the suburban communities. The paper he presented in Paris shows that there are often two metropolitan equilibria--one in which poor families concentrate in the inner city and one in which poor families concentrate in the suburbs. That the former equilibrium is the observed equilibrium is a consequence of the historical growth of cities. When metropolitan populations were small the inner city contained the whole population, and public services were low because poor families formed the majority. As the city's population grew, rents rose in the city and richer families found the possibility of forming a suburban community with low rents and higher public services increasingly attractive. At a critical population size, richer families "jumped to" the suburbs and the current equilibrium--with poorer families in the inner city and richer families in the suburbs--was established. Whether this equilibrium is the efficient or the equitable equilibrium depends on the metropolitan population, but the interesting thing is that there is a trade-off between efficiency and equity.

Eckhard focused in his presentation on the observation that governments often appear to target business tax relief to attract investment from abroad, while maintaining higher taxes on immobile investment. These preferential tax arrangements take many forms (including sectoral differences in corporation income tax rates, selective investment tax credits and tax holidays), and have emerged in response to increased mobility of some forms of capital and increased international competition for such bases. Recently, international organizations have attempted to define international standards for capital taxation as a means to control tax competition (e.g., a OECD report on harmful tax competition). We study a general model of competition for multiple tax bases and establish conditions for a restriction on preferential regimes to increase or decrease tax revenues and welfare of countries. Our results show that restrictions are most likely to be desirable when tax bases are on average highly responsive to a coordinated increase in tax rates by all governments, and when tax bases with large domestic elasticities are also more mobile internationally.

Anna (presenting a joint work with Roberto Samaniego from George Washington University) suggested a way to relate the emergence of property rights to economic development. Advances in trade generate a niche for an agency that protects and enforces individual property rights. Its presence facilitates exchange and leaves more time for productive activities. The main result illustrates that increasing gains from trade raise the willingness to pay for protection. If this role is played by a formal government, the finding can be re-interpreted to say that trade fosters government growth. Presenting these ideas in a 400-year-old Sorbonne auditorium surrounded by life-size portraits of Descartes, Pascal, and other great thinkers of the past made the conference especially memorable.

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