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Summary

Summary Public Finance

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  • Course
  • Public Finance
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  • Rijksuniversiteit Groningen (RuG)
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  • Public Finance

This is the summary that covers the literature for the Final of Public Finance. The summary is made from the book 'Public Finance, tenth edition, global edition'. It is a very broad summary, that describes all the important things in the book. The book is writen by Harvey S. Rosen and Ted Grayer.

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Document information

  • No
  • Chapter 3-6, 8, 12, 14-16, 18, 20, 22
  • January 11, 2021
  • 37
  • 2020/2021
  • Summary

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  • public finance
  • rosen and gayer
  • summary
  • economics and businesseconomics

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  • [TEST BANK] PUBLIC FINANCE IN CANADA 5TH EDITION BY ROSEN, GAYER, SNODDON.
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Chapter 3
Welfare economics: the branch of economics that evaluates the social desirability of alternative
economic states.
Edgeworth Box: a device used to depict the distribution of goods in a two good-two person world
Indifference curves with greater numbers represent higher levels of happiness
Pareto efficient: an allocation of resources such that no person can be made better off without
making another person worse off.




Pareto improvement: a reallocation of resources that makes at least one person better off without
making anyone else worse off
Contract curve: the locus of all Pareto efficient points




Marginal rate of substitution (MRS): the rate at which an individual is willing to trade one good for
another; it is the absolute value of the slope of an indifference curve
Pareto efficiency requires:
MRSadam = MRSeve
Production possibilities curve: a graph that shows the maximum quantity of one output that can be
produced, given the amount of the other output

,Marginal rate of transformation (MRT): the rate at which the economy can transform one good into
another good; it is the absolute value of the slope of the production possibilities frontiers
Marginal cost: the increment cost of producing one more unit of output
MRTaf = MCa/MCf
MCa = w-y
MCf = z-x
Condition for Pareto efficiency:
MRTaf = MRSadam = MRSeve
➔ MCa/MCf = MRSadam = MRSeve
Only when the slopes of the curves for each are equal it is impossible to make a Pareto improvement,
Hence; MRT = MRS is a necessary condition for Pareto efficiency.
To maximize utility:
MRS = Pa/Pf
THE FIRST FUNDAMENTAL THEOREM OF WELFARE ECONOMICS.
A profit-maximizing competitive firm produces output up to the point at which marginal cost an
dprice are equal:
MCa/MCf = Pa/Pf
Utility possibilities curve: a graph showing the maximum amount of one person’s utility given each
level of utility attained by the other person




Social welfare function: a function reflecting society’s views on how the utilities of its members
affect the well-being of society as a whole
Social welfare = W
W = F(Uadam, Ueve)




We conclude that, even if the economy generates a Pareto efficient allocation of resources,
government intervention may be necessary to achieve a “fair” distribution.

,Second fundamental theorem of welfare economics: society can attain any Pareto efficient
allocation of resources by making a suitable assignment of initial endowments and then letting
people freely trade with each other
Monopoly: a market with only one seller of a good (then the First welfare theorem doesn’t hold)
Asymmetric information: a situation in which one party engaged in an economic transaction has
better information about the good or service traded than the other party
Externality: a situation that occurs when the activity of one entity directly affects the welfare of
another in a way that is outside the market mechanism (then the First welfare theorem doesn’t hold)
Public good: a good that is nonrival and nonexcludable in consumption
Merit good: a commodity that ought to be provided even if people do not demand it

Chapter 4
Nonrival: once it is provided, the additional resource cost of another person consuming the good is
zero
Nonexcludable: to prevent anyone from consuming the good it is either very expensive or impossible
Pure public good: a commodity that is nonrival and nonexcludable in consumption
Private good: a commodity that is rival and excludable in consumption
- Even though everyone consumes the same quantity of the good, it need not be valued
equally by all
- Classification as a public good is not an absolute; it depends on market conditions and the
state of technology (impure public good)
- A commodity can satisfy one part of the definition of a public good and not the other
- Some thing that are not conventionally thought of as commodities have public good
characteristics (honesty)
- Private goods are not necessarily provided exclusively by the private sector
(housing/medicine)
- Government provision of a good does not necessarily mean that it also must be produced by
the government
Horizontal summation: the process of creating a market demand curve by summing the quantities
demanded by each individual at every price (only with private goods)




At equilibrium:
MRSadam = MRSeve = MRSfa
Efficiency requires that provision of a public good be expanded until the point at which the sum of
each person’s marginal benefit for the last unit just equals to marginal cost
Vertical summation: the process of creating an aggregate demand curve for a public good by adding
the prices each individual is willing to pay for a given quantity of the good (public goods)
With a private good: (decide how much to buy for a given price)
- Everyone has the same MRS, but people can consume different quantities
With a public good: (decide how much to pay, for a given quantity)
- Everyone consumes the same quantity, but people have different MRSs.

, The equilibrium:
MRSadam + MRSeve = MRT
Free rider: the incentive to let other people pay for a public good while you enjoy the benefits
Perfect price discrimination: when a producer charges each person the maximum he or she is willing
to pay for a good
Privatization: the process of turning services that are supplies by the government over to the private
sector for provision and/or production
What criteria should be used to select the amount of input of private or public provided goods:
- Relative wage and material costs
- Administrative costs
- Diversity of tastes
- Distributional issues
Commodity egalitarianism: the idea that some commodities ought to be made available to
everybody
The real benefit of privatization is to perpetuate the gains (according to Dewenter and Malatesta)

Chapter 5
Externality: a cost or benefit that occurs when the activity of one entity directly affects the welfare of
another in a way that is outside the market mechanism
- Externalities can be produced by consumers as well as firms
- Externalities are reciprocal in nature
- Externalities can be positive public goods can be viewed as a special kind of externality

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