Public Economics Lectures Part 1: Introduction

Suffi cient Statistics vs Structural Methods
N goods: x = (x 1 , ..., x N ); Prices: (p 1 , ...p N ); Z = wealth
Normalize p N = 1 (x N is numeraire)
Government levies a tax t on good 1
Individual takes t as given and solves
max u(x 1 , ..., x N −1 ) + x N s.t. (p 1 + t)x 1 +
N
∑
i=2
p i x i = Z
To measure EB of tax, define social welfare as sum of individual’s
utility and tax revenue:
N −1
W (t) = {max u(x 1 , ..., x N −1 ) + Z − (p 1 + t)x 1 −
x
Goal: measure dW dt
∑
i=2
p i x i } + tx 1
= loss in social surplus caused by tax change
Public Economics Lectures () Part 3: Effi ciency 54 / 105