Summary ECS3704 STUDY GUIDE

CONTENTS Study Unit Pages Introduction vii Purpose of the module vii Module outcomes vii Critical cross-field outcomes vii The textbook viii The study guide ix How to use the study guide xi Important verbs xi 1 Benchmark model of resource allocation: Positive and normative approaches 1 1.1 Assumptions of the benchmark model 2 1.2 The benchmark model and allocative efficiency 2 1.3 X-efficiency and economic growth 5 1.4 Market failure: An overview 6 1.5 Enter the public sector: General approaches 6 1.6 Direct versus indirect government intervention 7 1.7 Concluding note on government failure 7 2 Public goods and externalities 8 2.1 Private goods and the benchmark model 8 2.2 Pure public goods: definition 9 2.3 The market for public goods 10 2.4 Who should supply public goods? 11 2.5 Mixed and merit goods 11 2.6 Externalities 12 2.7 Possible solutions to the externality problem 12 3 Imperfect competition 14 3.1 On the social cost of monopoly 14 3.2 The decreasing cost case: regulatory options 15 4 Equity and social welfare 18 4.1 Introduction 18 iv CONTENTS 4.2 Nozick’s entitlement theory 19 4.3 Other Pareto criteria 19 4.4 Bergson criterion 20 4.4.1 The additive social welfare function 20 4.4.2 The ordinal (generalised) social welfare function 21 4.5 Efficiency considerations 22 5 Public choice theory 24 5.1 Public choice theory: a brief overview 24 5.2 Government failure: Politicians, bureaucrats and rentseeking (and corruption) 26 6 Public expenditure and growth 28 6.1 Introduction 28 6.2 Reasons for the growth of government: Macro models 28 6.3 Micro models of expenditure growth 29 6.4 Government and the economy: long- term effects 29 7 Poverty and inequality in South Africa 31 7.1 The distributional context in South Africa 31 7.2 The role of public finance in redistribution 32 7.3 Selected policy issues 33 8 Introduction to taxation and tax equity 35 8.1 Sources of finance 35 8.2 Definition and classification of taxes 36 8.3 Properties of a “good tax” 36 8.4 Taxation and equity: Concepts of fairness 37 8.5 Tax incidence: Partial equilibrium analysis 37 8.6 General equilibrium analysis of tax incidence 39 8.7 Tax incidence and tax equity revisited 40 9 Tax efficiency, administrative efficiency and flexibility 41 9.1 Excess burden of taxation: Indifference curve analysis 41 9.2 Excess burden: Consumer surplus approach 42 9.3 Administrative efficiency 43 9.4 Flexibility 43 10 Income taxation 45 10.1 The personal income tax rate structure 45 10.2 Economic effects of personal income tax 46 10.3 Capital gains tax 48 11 Fiscal federalism 49 11.1 The economic rationale for fiscal decentralisation 49