Public Economics Lectures Part 1: Introduction

Suffi cient Statistics vs Structural Methods
Structural method: estimate N good demand system, recover u
Ex: use Stone-Geary or AIDS to recover preference parameters; then
calculate “exact consumer surplus” as in Hausman (1981)
Alternative: Harberger’s deadweight loss triangle formula
Private sector choices made to maximize term in red (private surplus)
N −1
W (t) = {max u(x 1 , ..., x
x
N −1 ) + Z − (p 1 + t)x 1 − ∑ p i x i } + tx 1
i =2
Envelope conditions for (x 1 , ..., x N ) allow us to ignore behavioral
responses ( dx i
dt ) in term in red, yielding
dW
dt
= −x 1 + x 1 + t dx 1
dt
= t dx 1
dt
→ dx 1
dt
is a “suffi cient statistic” for calculating dW dt
Public Economics Lectures () Part 3: Effi ciency 56 / 105