Elective Course - 4th Semester (Spring 2nd year) | Course ID:  | E-Class
According to the curriculum, students must choose three elective courses during the fourth semester

Lecturers

Vassilis T. Rapanos
Georgia Kaplanoglou

Language of instruction

Greek and English

Course outline

The subject of economic policy covers a vast field of research, both theoretical and empirical. The course aspires to cover a range of topics in both fields, primarily from a microeconomic perspective. The first part deals with the basic notions of welfare economics and explores the reasons why a market economy may fail to lead to socially desirable outcomes, even under the assumption of perfectly competitive markets. It aims to introduce students to some of the important concepts and techniques required to identify the limits of what markets can achieve, to review some sources of market failure (public goods, externalities, asymmetric information etc.) and to evaluate the potential for benevolent government intervention to achieve better outcomes.

The role of government intervention and various facets of economic policy are thus studied as (sometimes imperfect) reactions to a range of market failures.  The rationale is given as to why a set of government policies discussed in this and other courses of the Master’s programme (e.g. tax policy, competition policy, industrial and regional policy, financial policies) arise as a means of ensuring the existence and efficient operation of markets, as well as of promoting an equitable distribution of resources. In the same framework, the course also explains the limitations of government intervention and ways to measure its cost in a partial-equilibrium setting. In this aspect, the course aims at providing an understanding of the motivations for and process of policy making, from an economic perspective.

Emphasis will be given to the basic tools of economic analysis and in particular to the principles underlying the construction and the types of social welfare functions put forward by moral philosophers. The course will additionally highlight the notion of equity as a potential objective of government policy and the theories of social justice that provide the moral basis for redistribution. It will also present the basic analytical tools for addressing issues of inequality measurement.

The second part of the course focuses on tax policy, an area of particular importance especially in the current conjunction where the pressure for increase in public spending is growing and most governments become aware of the problems relating to the aging of the population. As a famous American jurist, Wendell Holmes, said, “Taxes are what we pay for civilized society.” The price of civilized society depends not only on the amount of revenue raised, but on the way it is done. A series of critical policy questions arise: How progressive should the tax system be? Should we tax the amount people earn or the amount people spend? Should we tax companies in face of tax competition? What is the scope of using “green taxes”? How much complexity can people tolerate in furtherance of social or other tax policy objectives? Should the tax system reward good behaviour and punish bad?

The course analyses in a systematic way the central concepts and basic models of optimal taxation theory, based on second best welfare theory.  It first covers the theory of optimal commodity taxation, optimal income taxation, the optimal tax mix and the theory of marginal tax reform. It addresses issues like the optimality of the tax structure depending on the tax instruments available to the government, the trade-off between equity and efficiency in the design of taxes, the scope for a progressive income tax structure taking into account behavioural responses and the potential for welfare improving reform of an existing tax structure. The course then deals with aspects of corrective taxation and other facets of environmental policy. More specifically, it discusses the use of taxation of commodities which generate pollution and other external costs, it discusses the economic principles for environmental taxation and reviews the arguments for using taxes and other market mechanisms in environmental policy design. The course finally analyses the basic elements in company taxation, the incidence of taxes and discusses aspects of forms of non-compliance and tax evasion.

In all the issues covered, prominence is given in the interplay between tax theory and tax policy, in exploring how optimal taxation theory can act as a guide to tax policy and in discussing the extent to which the insights gained by theoretical results are indeed reflected in real tax policies.  Tax revenues represent about 40% of GDP in most OECD countries (including Greece), therefore the way these revenues are raised has tremendous implications both for income redistribution and the creation of various types of incentives influencing the behaviour of economic agents. The objective of this part of the course is therefore for students to understand the major tax policy issues that policymakers face and that drive the current political debate in an international context and to understand the implications of alternative tax policy choices.

Course contents

Part I. Introduction to Economic Policy and Welfare Economics

1 - 2. Markets and economic efficiency
3 - 4. Theories of Justice, Social Welfare Functions and the Social Optimum
5 - 6. Market Failures and Government Intervention: Microeconomic Aspects

Part II. Tax Policy

7 - 8. Optimal Commodity Taxation
9 - 10. Optimal Income Taxation
11. Company Taxation
12. Optimal Tax Mix an Optimal Tax Theory in Practice
13. Tax Evasion and Compliance

Main References

• Hindriks, J. and G. Myles, (2013), Intermediate Public Economics, MIT Press.
• Salanié, B., (2003), Economics of Taxation, Cambridge: MIT Press.
• Atkinson, AB (2015), “Can we reduce income inequality in OECD countries?”, Empirica, Vol. 42, pp. 211-23.
• Gruber, J. (2016), Public Finance and Public Policy, Worth Publishers, New York, NY.
• Tirole, J. (2015), “Market Failures and Public Policy”, American Economic Review, vol. 105, n. 6,p p. 1665–1682.
• Mankiw, N.G., M. Weinzierl and D.Yagan, (2009), “Optimal Taxation in Theory and Practice”, Journal of Economic Perspectives, Vol. 32 (4), pp. 147-174
• Lecture notes on e-class

More references will be distributed at the end of each lecture

Assessment

Written examinations in Greek or English after the end of the semester and a re-examination in September