Department of Economics
Honours Programme in Economics
2016
Public Economics
[Module code 11143-771]
Module lecturers
Ada Jansen (coordinator)
CGW Schumann Building
Room 521
Tel: 808-2737
E-mail: [email protected]
Krige Siebrits
Andreas Freytag
CGW Schumann Building
Room 509A
Tel: 808-2234
E-mail: [email protected]
Friedrich-Schiller University
(Jena, Germany)
Honorary Professor (Stellenbosch)
E-mail: [email protected]
Internal Moderator: Prof AP de Villiers
Copyright © 2016 University of Stellenbosch
All Rights Reserved
1
A. GOALS
The goals of the module are to:

develop an understanding of various views on the role of the government in an economy;

study the theories of public choice, government expenditure and taxation, and thereby to
master the principles of public economics; and

study the influence of public sector activities on the economy, particularly at the micro
level and with special reference to South Africa.
B. MODULE CALENDAR AND LECTURE SESSIONS
The dates, themes and lecturers of the lecture sessions are given below. Most sessions will take
place on Thursdays from 11:00 to 13:00 in the Jan Sadie Lecture Room (Room 207B) in the CGW
Schumann Building. As indicated in the table below, the exception will be session 5 on 17 August
2016. Any changes in the programme will be announced in advance. Attendance of all sessions
is compulsory and punctuality is expected at all times. Students are also expected to read
the prescribed literature before the lectures. For most sessions, students will be asked to
provide a short oral summary of selective readings.
Sessions
No
Date
Time
Topic
Lecturer
1
21-07-2016
11:00-13:00
Introduction
Siebrits
2
28-07-2016
11:00-13:00
Market failure: Efficiency issues (1)
Siebrits
3
04-08-2016
11:00-13:00
Market failure: Efficiency issues (2)
Siebrits
4
11-08-2016
11:00-13:00
Market failure: Equity
Siebrits
5
17-08-2016
16:30-18:30
Public choice
Freytag
6
18-08-2016
11:00-13:00
Government failure
Freytag
7
25-08-2016
11:00-13:00
The economic role of the government
Siebrits
8
01-09-2016
11:00-13:00
SEMESTER TEST
—
—
08-09-2016
—
RECESS
—
9
15-09-2016
11:00-13:00
Theory of taxation: efficiency and equity (1)
Jansen
10
22-09-2016
11:00-13:00
Theory of taxation: efficiency and equity (2)
Jansen
11
29-09-2016
11:00-13:00
Direct taxation of individuals
Jansen
12
06-10-2016
11:00-13:00
Direct taxation of companies
Jansen
13
13-10-2016
11:00-13:00
Indirect taxation
Jansen
14
20-10-2016
11:00-13:00
Intergovernmental fiscal relations
Jansen
2
C. ASSESSMENT
Assessment will take place by means of a test, an essay on topics listed in Section E and a final
examination. All components are compulsory and must be completed. If the test is not written, a
valid medical certificate must be submitted to Ms Carina Smit (Room 506A, Schumann building)
within48 hours of the test. The test will then be assessed during the October/November 2016
examination. The weights of these components are as follows:
Component
Percentage of final mark
Test
20
Essay
30
Examination
50
Total
100
The test will take place on 01 September 2016, and will cover the work of the first six sessions.
D. DIAGNOSTIC QUESTIONS FOR READING AND ASSESSING ACADEMIC PAPERS
During the course of the module students are expected to participate in class discussions and
will be asked to present views on prescribed material. The following list of diagnostic questions
should be useful for active reading and assessment of academic papers.
a. What is the main argument?
b. What is the nature of the article, e.g. descriptive (qualitative) or quantitative (mathematical/ statistical/econometric; literature/opinion survey; regression, time-series or costbenefit analysis; econometric modelling; development and testing of new measuring techniques)?
c. Does the article reflect a good understanding of the existing literature?
d. Have the author/s added something valuable to the literature?
e. Were the arguments presented logically?
f.
Did the authors present alternative perspectives on the problem at hand? Are you aware of
relevant alternatives?
g. What are the underlying assumptions of the methods used (i) in general and (ii) in this
particular case?
h. In empirical work:
1. Is there a clear hypothesis, based on plausible theory?
2. Do the explanatory variables and proxy variables make economic sense?
3. What are the measurement problems with the variables used in the model?
4. Will it be possible to replicate the study? If not, what is the missing information?
5. Is the purpose to see how answers differ on account of different techniques? If so, what
techniques were used and why? Do the answers differ significantly?
3
i.
Are the policy implications of the findings pointed out? What are they? How realistic are
the policy implications, given the research?
j.
Are avenues for future research identified? What are they?
k. Do the assumptions/method(s)/conclusions correspond/differ with other articles that you
have read? In what way? Which of the articles are the most convincing? Why?
l.
What are the strong and weak points of the article?
m. Has the paper deepened your knowledge of the particular field of study/subject?
E. ESSAYS
The submission date for the essays will be 10 October 2016. The topics are as follows.
1. Should South Africa's social grants be replaced by basic income grant system?
2. Sugar taxes: A theoretical assessment.
3. Government financing of university education in South Africa: A critical assessment.
4. An assessment of revenue sharing in the Southern African Customs Union.
5. Evaluating the economics effects of personal income tax reform in South Africa: a microsimulation exercise.
6. Excise taxes and cigarette consumption in South Africa.
7. The impact of tax incentives on investment – are they beneficial?
8. The state of fiscal decentralisation in South Africa.
No more than THREE students may select the same topic. Allocation of topics will be on a firstcome, first-served basis. First and second choices should be sent electronically to
[email protected] by 23:59 on 19 August 2016. The final allocation of topics will be
posted on the website.
Essays must comply with the standards of academic writing, should not exceed 2 000 words and
be presented in 1.5 line spacing and font size of 12. Omission of word count and deviation of
more than 100 words (either side) will be penalised. Essays are to be submitted electronically in
Microsoft Word format and screened via Turnitin. Students are reminded that plagiarism is a
serious offense.
Students are welcome to discuss their essay framework with any of the lecturers before
embarking on their research.
F. LITERATURE
Section G lists the prescribed and recommended literature for the various sessions. Links to the
readings (except the prescribed books) will be made available on the module website
(http://www.ekon.sun.ac.za).
4
The prescribed books are:

Black, P.A., E. Calitz, T.J. Steenekamp and associates. 2015. Public Economics. 6th edition. Cape
Town: Oxford University Press. [AVAILABLE AT VAN SCHAIK'S BOOKSHOP IN THE NEELSIE
STUDENT CENTRE AND IN PROTEA BOOKSHOP, ANDRINGA STREET].

Mueller, D.C. 2003. Public Choice 3rd edition. Cambridge: Cambridge University Press. [ON
RESERVE IN THE JS GERICKE LIBRARY].
The prescribed and recommended literature also includes sections from:

Rosen, H.S. & T. Gayer. 2014. Public Finance. 10th edition. New York: McGraw-Hill Irwin [ON
RESERVE IN THE JS GERICKE LIBRARY].
G. STUDY OBJECTIVES AND PRESCRIBED AND RECOMENDED READING
This section contains the study objectives of and prescribed and recommended reading for each
session.
Session 1
(21 July 2016: 11h00-13h00)
INTRODUCTION
Krige Siebrits
Study objectives
Once you have studied the prescribed material, you should be able to:

give an overview of the study field of public economics;

discuss the benchmark model of resource allocation and its real-world relevance; and

provide an overview of market failure and government failure.
Prescribed reading

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public Economics. 6th edition. Cape
Town: Oxford University Press: Chapter 2.
Session 2
(28 July 2016: 11h00-13h00)
MARKET FAILURE: EFFICIENCY ISSUES (1)
Krige Siebrits
Study objectives
Once you have studied the prescribed material, you should be able to:

explain the nature and effects of market failures associated with public goods, mixed goods
and externalities; and

discuss the role of government with regards to market failures associated with public goods,
mixed goods and externalities.
5
Prescribed reading

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition. Cape
Town: Oxford University Press: Chapter 4.

Croson, R.T.A. 2008. Public goods experiments. In The New Palgrave Dictionary of Economics
(edited by S.N. Durlauf and L.E. Blume). New York: Palgrave Macmillan.

Thaler, R.H. and C.R. Sunstein. 2003. Libertarian paternalism. American Economic Review,
93(2): 175-179.

Whitman, G. Against the new paternalism: Internalities and the economics of self-control.
Policy Analysis, 563: 1-16.
Session 3
(04 August 2016: 11h00-13h00)
MARKET FAILURE: EFFICIENCY ISSUES (2)
Krige Siebrits
Study objectives
Once you have studied the prescribed material, you should be able to:

explain the nature and effects of market failures associated with imperfect competition and
insurance-market problems; and

discuss the role of government with regards to market failures associated with imperfect
competition and insurance-market problems.
Prescribed reading

Barr, N, 1989. Social insurance as an efficiency device. Journal of Public Policy, 9(1): 59-82.

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition. Cape
Town: Oxford University Press: Chapter 4.

Kessides, I.N. 2005. Infrastructure privatisation and regulation: Promises and perils. World
Bank Research Observer, 20(1): 81-108.
Session 4
(04 August 2016: 11h00-13h00)
MARKET FAILURE: EQUITY
Krige Siebrits
Study objectives
Once you have studied the prescribed material, you should be able to:

discuss Nozick's entitlement theory and apply it to South Africa;

discuss the Pareto and Bergson criteria for assessing the welfare effects of public policy;

explain the role of targeting in government spending programmes;
6

discuss the strengths and weaknesses of the benefit incidence approach and the behavioural
approach to assessing the distributive effects of public spending; and

outline the potential and limits of conditional cash transfer programmes.
Prescribed reading

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition. Cape
Town: Oxford University Press: Chapter 5.

Das, J., Q-T. Do and B. Özler. 2005. Reassessing conditional cash transfer programs. World
Bank Research Observer, 20(1): 57-80.

Hoddinott, J. 2007. Social protection: To target or not to target. IDS Bulletin, 38(3): 90-94.

Van de Walle, D. 1998. Assessing the welfare impacts of public spending. World Development,
26(3): 365-379.
South African application (not prescribed)
Inchauste, G., N. Lustig, M. Maboshe, C. Purfield, I. Woolard. 2015. The distributional impact of
fiscal policy in South Africa. Policy Research Working Paper Series No. 7194. Washington D.C.: The
World Bank.
Session 5
(17 August 2016: 16h30-18h30)
PUBLIC CHOICE THEORY
Andreas Freytag
Study objectives
Once you have studied the prescribed material, you should be able to:

understand the median voter theorem;

understand the logic of collective decision-making;

understand the role of the agenda setter; and

explain log-rolling.
Prescribed reading

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition. Cape
Town: Oxford University Press: Chapter 6.

Mueller, D.C. 2003. Public choice 3rd edition. Cambridge: Cambridge University Press: Chapter 5.
Recommended reading

Buchanan, J.M. and G. Tullock. 1962. The calculus of consent. Ann Arbor: University of Michigan Press: Chapter 6.

Mueller, D.C. 2003. Public choice. 3rd edition. Cambridge: Cambridge University Press: Chapter 6.
7
Session 6
(18 August 2016: 11h00-13h00)
GOVERNMENT FAILURE
Andreas Freytag
Study objectives
Once you have studied the prescribed material, you should be able to:

understand the logic of collective action;

explain state failure and market failure and their differences;

understand the political economy nature of distributional problems;

understand the nature and effects of corruption; and

understand the measurement of corruption.
Prescribed reading

Mueller, D.C. 2003. Public choice 3rd edition. Cambridge: Cambridge University Press: Chapter 20.
Recommended reading

Aidt, T.S. 2003. Economic analysis of corruption: A survey. Economic Journal, 113(491):
F632-F652.

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition. Cape
Town: Oxford University Press: Chapter 6.

Olson, M. 1965. The logic of collective action. Cambridge: Harvard University Press.
Session 7
(25 August 2016: 11h00-13h00)
THE ECONOMIC ROLE OF THE GOVERNMENT
Krige Siebrits
Study objectives
Once you have studied the prescribed material, you should be able to:

discuss the evolution of views on the economic role of the state;

outline long-term trends in government spending in South Africa and elsewhere; and

summarise theories that attempt to explain growth in government spending.
Prescribed reading

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition. Cape
Town: Oxford University Press: Chapter 7.

Tanzi, V. 1997. The changing role of the state in the economy: A historical perspective. IMF
Working Paper WP/97/114. Washington, D.C.: The International Monetary Fund.
8
World Bank. 1997. World development report 1997 – The state in a changing world. Washington, D.C.: The World Bank: 1-15.

South African application (not prescribed)
Burger, P. 2014. Facing the conundrum: How useful is the ‘developmental state’ concept in
South Africa? South African Journal of Economics, 82(1): 1-22.

Session 8
(01 September 2016: 11h00-13h00)
SEMESTER TEST
Sessions 9 and 10
(15 September 2016: 11h00-13h00 and 22 September 2016: 11h00-13h00)
THEORY OF TAXATION: EFFICIENCY AND EQUITY (1 AND 2)
Ada Jansen
Study objectives
Once you have studied the prescribed material, you should be able to:

explain the meaning of all relevant tax terminology;

discuss the properties of a good tax;

analyse tax incidence (shifting) in a partial and general equilibrium framework;

explain “excess burden”, using indifference curve analysis;

determine the magnitude of excess burden, using the consumer surplus approach;

explain the Ramsey rule and its applicability; and

explain the theory of optimal taxation.
Prescribed reading

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition.
Cape Town: Oxford University Press: Chapters 11 and 12.

Feldstein, M. 2008. Effects of taxes on economic behaviour. National Tax Journal, 61(1):
131-139.

Rosen, H.S. & T. Gayer. 2014. Public finance. 10th edition. New York: McGraw-Hill Irwin:
Chapter 16.
Recommended reading

Rosen, H.S. & T. Gayer. 2014. Public finance. 10th edition. New York: McGraw-Hill Irwin:
Chapters 14 and 15.
9
Session 11
(29 September 2016: 11h00-13h00)
DIRECT TAXATION OF INDIVIDUALS
Ada Jansen
Study objectives
Once you have studied the prescribed material, you should be able to:

define and explain the main tax bases in South Africa;

distinguish between different direct taxes in South Africa;

evaluate the personal income tax according to the norms of efficiency and equity;

describe the impact of inflation on the burden of taxation;

explain the effect of direct taxation on the labour supply and saving;

evaluate the arguments for and against capital gains taxation; and

evaluate income tax reform options for developing countries.
Prescribed reading

Bird, R. & E. Zolt. 2011. Dual income taxation: A promising path to tax reform for developing countries. World Development, 39(10): 1691-1703.

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition.
Cape Town: Oxford University Press: Chapter 13.

Steenekamp, T.J. 2012. Taxing the rich at higher rates in South Africa? Southern African
Business Review, 16(3): 1-29.
Session 12
(06 October 2016: 11h00-13h00)
DIRECT TAXATION OF COMPANIES
Ada Jansen
Study objectives
Once you have studied the prescribed material, you should be able to:

define the company tax base in the SA context;

evaluate company taxation according to the norms of efficiency and equity ;

discuss the rationale for and against tax incentives; and

evaluate the impact of tax incentives on investment.
Prescribed reading

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition.
Cape Town: Oxford University Press: Chapter 13.

James, S. 2014. Tax and non-tax incentives and investments: Evidence and policy implications. IFC, World Bank. Washington, D.C.: The World Bank.
10

Zee, H., J. Stotsky and E. Ley. 2002. Tax incentives for business investment: A primer for
policy makers in developing countries. World Development, 30(9): 1497-1516.
Session 13
(13 October 2016: 11h00-13h00)
INDIRECT TAXATION
Ada Jansen
Study objectives
Once you have studied the prescribed material, you should be able to:

distinguish between different indirect taxes in South Africa;

discuss key issues in VAT design

evaluate the Value Added Tax (VAT) according to the norms of revenue-raising capabilities, efficiency and equity; and

discuss indirect tax policy reform options for developing countries.
Prescribed reading

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition.
Cape Town: Oxford University Press: Chapter 15.

Carter, A. (Ed.). 2013. International Tax Dialogue: Key issues and debates in VAT, SME
taxation and the tax treatment of the financial sector. Chapter 2: The Value Added Tax:
Experience and Issues. International Tax Dialogue.

Martinez-Vazquez, J. and R.M. Bird. 2010. Value added tax: Onward and upward? International Studies Program Working Paper 10-26. Andrew Young School of Policy Studies
Atlanta: Georgia State University.
Session 14
(20 October 2016: 11h00-13h00)
INTERGOVERNMENTAL FISCAL RELATIONS
Ada Jansen
Study objectives
Once you have studied the prescribed material, you should be able to:

explain the economic rationale for sub-national governments and compare the merits of
fiscal decentralisation and centralisation;

discuss the Tiebout model and its relevance for intergovernmental fiscal systems;

understand the issues in respect of borrowing powers and debt management at subnational level;

describe the assignment of expenditure functions and revenue sources to national, provincial and local spheres of government in South Africa,;
11

provide a critique of fiscal centralisation trends in South Africa; and

distinguish between different kinds of intergovernmental grants and explain the conditions under which each could be used.
Prescribed reading

Amusa, H. and P. Mathane. 2007. South Africa's intergovernmental fiscal relations: An
evolving system. South African Journal of Economics, 75(2): 265-292.

Black, P.A., E. Calitz, T.J. Steenekamp and Associates. 2015. Public economics. 6th edition.
Cape Town: Oxford University Press: Chapter 18.

Calitz, E. and H. Essop. 2013. Fiscal centralisation in a federal state: The South African
case. Southern African Business Review, 17(3): 131-155.
12