Prof. Bryan Caplan

Econ 849


Public Finance Syllabus


Course Focus:

The course provides a survey of public finance, or as I prefer to call it, "public economics."Over the past four decades, public economics has grown from a narrow focus on taxation to the comprehensive economic analysis of the public sector.In the first part of the course, we will study the fundamentals of public economics: efficiency analysis, public goods, taxation, voting, interest groups, political competition, and political collusion.After the midterm, we will turn to a variety of what I think of as "cutting edge" topics: empirical public opinion research, ideology, Wittman's critique of the political failure literature, Brennan and Lomasky's expressive voting model, the economics of anarchy, and my own theoretical and empirical work on voter irrationality.



I assume that you are familiar with graduate microeconomics and basic calculus and econometrics.




Most of the course material will consist in detailed notes that will be handed out in class.There are six required texts:


Robert Cooter, The Strategic Constitution


A (free) online versionof Cooter is available at:


Steven Landsburg, The Armchair Economist

Steven Landsburg, Fair Play

Geoffrey Brennan and Loren Lomasky, Democracy and Decision

Donald Wittman, The Myth of Democratic Failure

Bryan Caplan, The Myth of the Rational Voter



My papers are available on my webpage at:


Readings marked with a + are available on Jstor (


Finally, I will hand out miscellaneous readings, marked with a *, in class.


Grading and Exams:


There will be one midterm and a final exam - essentially, an exam for each Part of the course.The midterm counts 30%; the final exam is 50%; homework counts for the remaining 20%.These weights are fixed - improvement on later exams will not retroactively raise your grades on earlier exams.


There is no formal grade for participation, but if you are one of the students who (in my judgment) contributes most to the quality of class discussion you will be "bumped up" a fractional grade (e.g. B- to B).




There will be approximately four homework assignments during the semester.Depending upon how good a job you do, your homework will receive a check-plus (4 points), a check (3 points), or a check-minus (2 points) if you turn it in; otherwise you receive 0 points.Late homework loses one point.Late homework is no longer accepted after I pass out my suggested answers for a given assignment.


Office Hours


The best way to contact me is by email at questions and requests can be satisfied by going to my homepage at office is in 8 Carow Hall; my office number is 3-2324.My official office hours are MTh 1:30-3:00, but you can also schedule an appointment or just drop by and see if Iím available.


Tentative Schedule:


My proposed schedule for the semester follows.If it proves too ambitious, I will try to simply say less about each topic rather than cut the topics for the final weeks.




PART I: Basics of Public Economics


Week 1: Efficiency


        The many meanings of efficiency

        Pareto efficiency

        Kaldor-Hicks efficiency and deadweight costs

        K-H efficiency versus utilitarianism

        Allocative inefficiency, productive inefficiency, and lobbying inefficiency

        The comparative institutions approach and "second best"

        Moral philosophy and efficiency



Landsburg, The Armchair Economist, pp.60-82, 95-105


Week 2: Public Goods and the Logic of Collective Action


        Private versus social benefits and costs

        Negative externalities and "public bads"

        Positive externalities and "public goods"

        The irrelevance of non-rivalry

        Normative versus positive public goods theory

        Bad but popular examples; good but unpopular examples

        Externalities, efficiency, and fairness

        Productive inefficiency of non-profit supply

        Coase, property rights, and externalities

        Demsez and privatization

        Fallacies of group action

        Individual impact: probability and magnitude

        Calculating the probability of electoral decisiveness

        Empirical evidence on collective action problems

        The paradox of public good provision



Brennan and Lomasky, pp.54-65


Week 3: Taxation: Incidence, Efficiency, and Equity

        The concept of incidence

        Incidence and elasticity

        Deadweight costs of taxation

        Deadweight costs and elasticity

        The Laffer curve

        The Ramsey rule

        Normative optimal taxation versus positive optimal taxation

        Landsburg's Perfect Tax

        Egalitarianism, Rawls, and tax equity

        Landsburg, Rothbard, and tax equity



* Frederic Bastiat, "What Is Seen and What Is Not Seen"


Landsburg, Fair Play, pp.76-85, 98-128, 136-142


* Rothbard, Power and Market, pp.135-162


Week 4: Voting, I: The Basics


        Rational, instrumental voting

        Single-peaked preferences

        Two-party, winner-take all elections

        Political competition and platform convergence

        Voter participation and franchise restrictions

        The effect of fringe parties

        Multi-peaked preferences

        Individual and social intransitivity

        Multiple voting dimensions



Cooter, chapter 2


Week 5: Voting, II: Information and Bargaining


        The economics of imperfect information

        Political knowledge and rational ignorance

        Empirical evidence on political knowledge

        Informed voting as a public good

        Education and voter ignorance

        Other group differences in political knowledge

        Voter ignorance, principal-agent problems, and optimal punishment

        The principle of aggregation

        Voter ignorance and the "miracle of aggregation"

        Uncertainty and platform convergence

        Divergence between median and mean preferences on a single dimension

        Log-rolling, bargaining, and the Coase theorem

        Bargaining to efficiency on one dimension

        Bargaining to efficiency on multiple dimensions

        Bargaining around intransitivity

        Pork barrel politics

        Supermajority rules



* Delli Carpini and Keeter, What Americans Know About Politics and Why It Matters, pp.68-95, 142-147, 154-161, 188-209


Cooter, chapter 3


Week 6: Redistribution, Divided Government, Interest Groups, and Rent-Seeking


        Normative redistribution: return on investment, insurance, and egalitarianism as return on investment

        Redistribution in practice: the elderly, the poor, and more

        Redistribution in reverse: immigration restrictions

        Principal-agent problems, multiple agents, and overlapping principals

        Division of powers and minimum winning coalitions


        Presidential veto

        The role of the judiciary

        Special interests and the median voter model

        Campaign contributions, political advertising, and rational ignorance

        Concentrated benefits, diffuse costs, and asymmetric information

        Lobbying in equilibrium: rent-seeking, rent dissipation, and efficiency



Cooter, chapter 9


Landsburg, Fair Play, pp.12-23


Week 7: Political Competition and Political Collusion


        Restrictions on political competition: term limits and spending limits

        Pure versus local public goods

        Tiebout and inter-governmental competition

        Some perverse incentives of non-profit competition

        Federalism: for and against

        Federal grants and the "race to the bottom"



Cooter, chapter 6




PART I: Topics in Public Economics


Week 9: Voter Motivation and the SIVH


        Is the median voter model correct?

        The self-interested voter hypothesis (SIVH)

        Empirical evidence on the SIVH

        Sociotropic voting

        Group-interested voting

        The SIVH versus the logic of collective action



+ Meltzer, Allan, and Scott Richard.1981."A Rational Theory of the Size of Government."Journal of Political Economy 89, pp.914-27.

+ Peltzman, Sam.1985."An Economic Interpretation of the History of Congressional Voting in the Twentieth Century."American Economic Review 75, pp.656-75.

* David Sears and Carolyn Funk, "Self-Interest in Americans' Political Opinions"


+ Green, Donald, and Ann Gerken.1989."Self-Interest and Public Opinion Toward Smoking Restrictions and Cigarette Taxes."Public Opinion Quarterly 53, pp.1-16.


Week 10: Ideology


        The dimensionality of U.S. political opinion

        Ideological voting

        Education, ideology, income, and opinion

        Case study: the determinants of party identification

        Case study: the determinants of economic beliefs

        The ideology*education interaction

        Mainstream and polarization effects



+ Keith Poole, Howard Rosenthal.1991."Patterns of Congressional Voting." American Journal of Political Science 35, No. 1, pp. 228-278.


+ Steven Levitt.1996."How Do Senators Vote?Disentangling the Role of Voter Preferences, Party Affiliation, and Senator Ideology."American Economic Review 86, pp.425-41.

* Delli Carpini and Keeter, What Americans Know About Politics and Why It Matters, pp.242-258.

* Zaller, The Nature and Origins of Mass Opinion, pp.97-113


Week 11: Wittman and Democratic Failure


        Critiques of the economic approach

        Wittman's challenge to orthodox public choice

        "Extreme voter stupidity"

        "Serious lack of competition"

        "Excessively high transactions costs"

        The effect of asymmetric political information

        Wittman's sampler: Responses to diverse political failures

        Validity versus soundness



Wittman, chapters 1-4, 6-8, 11-14


Week 12: Expressive Voting


        The instrumental voting assumption

        Instrumental versus expressive value

        Decisiveness revisited

        Decisiveness and the relative prices of instrumental and expressive voting

        Expressive voting as political pollution

        Inefficient unanimity

        Application: Environmentalism

        Answering Wittman, I



Brennan and Lomasky, chapters 1-3, 5-7


Week 13: Ignorance, Irrationality, and Aggregation: Theory and Evidence


        Return to the "miracle of aggregation"

        Ignorance, irrationality, and systematic error

        Rational ignorance versus rational irrationality

        Irrationality as political pollution

        Inefficient unanimity again

        Systematically biased beliefs about economics

        Group differences in economic beliefs

        Application: Protectionism

        Answering Wittman, II

        The interaction of voter motivation and cognition

        Availability cascades



Caplan, chapters 1-3, 5, 6


Week 14: The Economics of Anarchy


        The comparative institutions approach revisited

        Some political economy of dictatorship

        Constitutional reform and endogenous institutions

        Are the functions of the night watchman state really public goods?

        Dispute resolution as a private good

        Rule formation as a private good

        Enforcement as a private good

        Moderate versus radical privatization

        Main objections to radical privatization

        Cowen, anarchism, and collusion



* Murray Rothbard, For a New Liberty, pp.215-241


* David Friedman, The Machinery of Freedom, pp.114-163.


* Tyler Cowen.1992."Law as a Public Good."Economics and Philosophy 8, pp.249-267.


Bryan Caplan and Edward Stringham.2003."Networks, Law, and the Paradox of Cooperation."Review of Austrian Economics 16(4), pp.309-26.