Public Finance and Public Policy: Responsibilities and Limitations of Government - 2nd edition

This book is the second edition of Public Finance and Public Policy (2003). The second edition retains the first edition's themes of investigation of responsibilities and limitations of government. The present edition has been rewritten and restructured. Public choice and political economy concepts and political and bureaucratic principal-agent problems are introduced at the beginning for application to later topics. Fairness, envy, hyperbolic discounting, and other concepts of behavioral economics are integrated throughout. The consequences of asymmetric information and the tradeoff between efficiency and ex-post equality are recurring themes. Key themes investigated are markets and governments, institutions and governance, public goods, public finance for public goods, market corrections (externalities and paternalist public policies), voting, social justice, entitlements and equality of opportunity, choice of taxation, and the need for government. The purpose of the book is to provide an accessible introduction to the use of public finance and public policy to improve on market outcomes. Half-title......Page 3 Series-title......Page 4 Title......Page 5 Copyright......Page 6 Dedication......Page 7 Contents......Page 9 Preface to the Second Edition......Page 11 1 MARKETS AND GOVERNMENTS......Page 13 A. Self-interest with virtue......Page 16 Social benefit and efficiency......Page 17 Buyers......Page 18 The concepts of supply and demand......Page 25 The study of economics......Page 26 Multiple and unstable market equilibria......Page 27 Non-competitive markets......Page 28 Competitive markets as a responsibility of government......Page 29 Why might competitive markets fail to result in efficiency?......Page 30 The prima facie case for the competitive market......Page 31 Information......Page 32 Political decision makers......Page 34 Information and spontaneous order: Normative and Positive conclusions......Page 35 Cost-benefit analysis......Page 36 Compensation and social justice......Page 37 B. Are competitive markets socially just?......Page 39 Social justice as the natural right of possession......Page 40 Reservations about the natural right of possession......Page 41 Ex-post equality......Page 42 Efficiency and ex-ante equality......Page 43 Efficiency and the natural right of possession......Page 44 Envy......Page 45 Aversion to inequality......Page 46 Voting......Page 47 A. Benefits of the rule of law......Page 48 Private property rights and markets......Page 49 Ethical behavior......Page 50 Anarchy and the prisoners' dilemma......Page 51 Private deterrence......Page 56 B. Anarchy with strong and weak......Page 57 The equilibrium......Page 58 The burden of inefficiency......Page 61 Roving and stationary bandits......Page 62 C. Anarchy and ethics......Page 64 A mixed population of honest and dishonest people......Page 65 Response to breach of contract by the government......Page 67 Supplement S1A: Market efficiency in general equilibrium......Page 68 Efficient allocation of resources......Page 69 Choice of the combination of goods to produce......Page 70 Efficient distribution of goods among buyers......Page 71 Simultaneity......Page 72 International trade......Page 73 Supplement S1B: The competitive market-adjustment mechanism......Page 74 Supplement S1C: Monopoly profits and social justice......Page 75 Summary......Page 76 1.1 The prima facie case for the market......Page 79 1.2 Efficiency and social justice......Page 80 1.3 The rule of law......Page 81 Supplement S1C: Monopoly profits and social justice......Page 82 2 INSTITUTIONS AND GOVERNANCE......Page 83 2.1 The Political Principal–Agent Problem......Page 85 A. Asymmetric information......Page 86 A government budget......Page 87 Rational ignorance......Page 88 B. Political support and public policy......Page 89 Public finance for political expenses......Page 90 Why vote?......Page 91 The advantages of interest groups over voters......Page 92 The media and the principal–agent problem......Page 93 Regulation of campaign contributions......Page 94 Term limits and the political principal–agent problem......Page 95 C. Rent seeking......Page 96 Rent seeking as the cause of inefficiency......Page 97 Evaluating the social loss from rent seeking......Page 100 Political trade-offs as impediments to rent creation......Page 106 A rent-seeking society......Page 108 Adam Smith and rent seeking......Page 109 Lobbyists and lawyers......Page 110 Corruption......Page 111 A. Incentives and behavior in a bureaucracy......Page 113 B. Demand creation by bureaucracies......Page 114 D. Solutions to the bureaucratic principal–agent problem......Page 115 Contracts......Page 116 Political monitoring......Page 117 The Thomas-à-Becket effect......Page 118 2.3 Life without Markets and Private Property......Page 119 Hayek and the fatal conceit......Page 121 B. Information and efficiency......Page 122 Theft and social justice......Page 123 D. Personal freedom......Page 124 Supplement S2A: Rent seeking and rent dissipation......Page 126 Supplement S2B: Institutions and natural monopoly......Page 128 Financing solutions for natural monopoly......Page 129 Choice of effort......Page 130 Revenue maximization......Page 131 Waste management......Page 132 Ownership by government and privatization......Page 133 Supplement S2C: Labor self-management......Page 134 The kibbutz......Page 135 Summary......Page 136 2.1 The political principal–agent problem......Page 141 2.3 Life without markets and private property......Page 144 Supplement S2B: Institutions and natural monopoly......Page 145 Supplement S2C: Labor self-management......Page 146 3 PUBLIC GOODS......Page 147 The transition from private to collective benefit......Page 150 Characteristics of pure and congestible public goods......Page 151 Public goods and natural monopoly......Page 152 Private supply and holdup problems......Page 153 Exclusion......Page 154 The dilemma of exclusion......Page 155 B. Voluntary personal payments for public goods......Page 156 Efficient voluntary payments for public goods......Page 158 Asymmetric information and under-supply of public goods......Page 159 The ideal Lindahl consensus......Page 161 The Lindahl solution as a benchmark......Page 163 The prisoners' dilemma and voluntary payment for public goods......Page 164 The prisoners’ dilemma and the Lindahl solution......Page 165 Experimental evidence......Page 166 Trust and norms of conduct......Page 168 Cooperation as expressive behavior......Page 169 Complexity in sequential and discrete public-good games......Page 170 Weakest-link public goods......Page 171 Different standards......Page 174 Volunteer-type public goods......Page 175 The game of “chicken”......Page 176 Personal freedom as a voluntarily privately supplied public good......Page 179 D. National security......Page 180 Free riding within a country......Page 181 Democracy......Page 182 Asymmetric warfare and defense against terrorism......Page 183 Poverty and terrorism......Page 184 Incentives and rewards......Page 185 Deterring terrorism......Page 186 Profiling......Page 188 Social and political divisions......Page 189 A. Can governments solve the information problem?......Page 190 B. The Clarke tax and truthful self-reporting......Page 192 Values of the Clarke tax......Page 193 Person 3......Page 194 The Clarke tax when no one is decisive......Page 195 The Clarke tax with two projects......Page 196 C. User prices......Page 197 Lindahl prices and user prices......Page 198 Two-part user prices......Page 199 User prices and fixed costs......Page 200 Self-financing user prices......Page 201 Do self-financing user prices necessarily exist?......Page 202 Who supplies the public good?......Page 203 Are user prices desirable?......Page 204 The inefficiency of exclusion......Page 205 Diversity in application of user prices......Page 206 Preferences and differences among government jurisdictions......Page 207 The scope of choice......Page 208 Choice of different quantities or qualities of the same public good......Page 209 Incentives to reveal true benefits......Page 210 Natural monopoly and cost sharing......Page 211 Cost sharing in separate jurisdictions......Page 212 The decision whether to leave a jurisdiction......Page 213 Tiebout and Lindahl......Page 214 Locational mobility......Page 215 Prices and politics in the Tiebout locational market......Page 216 Income and locational rents......Page 217 Cost sharing for public goods as a cooperation game......Page 218 A. Costs and benefits without market valuations......Page 221 The value of human life......Page 223 B. Valuation over time......Page 224 A project with benefits for multiple years......Page 225 What should the discount rate be?......Page 226 C. The discount rate and choice between public projects......Page 227 Social welfare functions......Page 228 Utility-maximizing choice of own contribution......Page 229 The reaction function......Page 231 Nash equilibrium for voluntary contributions......Page 234 Efficient contributions......Page 235 Changes in the efficient quantity as group size increases......Page 236 The change in the Nash-equilibrium quantity as group size increases......Page 237 Changes in income distribution......Page 239 Supplement S3B: Property taxes and incentives for zoning......Page 240 Joint supply of private and public goods......Page 242 Supplement S3D: An efficient economy with public and private goods......Page 243 Summary......Page 245 3.1 Types of public goods......Page 250 3.2 Information and public goods......Page 252 Supplement S3A: Group size and voluntary public-good contributions......Page 253 Supplement S3D: An efficient economy with public and private goods......Page 254 4 PUBLIC FINANCE FOR PUBLIC GOODS......Page 255 A. Efficient tax-financed public spending......Page 258 The excess burden of an income tax......Page 259 The excess burden and intrusion into other markets......Page 263 Indirect taxes......Page 264 A value-added tax......Page 265 Indirect taxes and fiscal federalism......Page 266 Rent seeking and costs of taxation......Page 267 Cost-benefit analysis and the excess burden of taxation......Page 268 Tiebout locational choice and taxes......Page 271 A personal head tax......Page 272 Taxes with no tax revenue......Page 273 The excess burden in labor markets......Page 274 The diversity in empirical estimates of the excess burden......Page 275 B. Tax revenue and the Laffer curve......Page 276 Tax revenue......Page 277 Individual behavior and the aggregate Laffer curve......Page 278 The political sensitivity of the Laffer curve......Page 279 C. Who pays a tax?......Page 280 A tax that sellers are obliged to deliver to the government......Page 281 Sharing of the excess burden......Page 282 Political pronouncements and taxation......Page 283 Fiscal illusion and the effective incidence of taxes......Page 284 Economy-wide effects on who pays taxes......Page 285 D. Taxes on international trade......Page 286 The excess burden of an import tariff......Page 287 Protectionist rents......Page 288 Why use an import tariff?......Page 289 Import quotas......Page 290 4.2 Tax Evasion and the Shadow Economy......Page 291 Public policies......Page 292 Why do people evade taxes?......Page 293 Opportunities for tax evasion......Page 294 B. The behavior of the tax authorities......Page 295 Welfare fraud......Page 296 Corruption and the shadow economy......Page 297 The incentive to claim exaggeration......Page 298 Conspicuous consumption and visible spending......Page 299 4.3 Government Borrowing......Page 300 A two-period example......Page 301 B. Intergenerational tax sharing......Page 303 Ricardian equivalence......Page 304 The preferences of future taxpayers......Page 305 D. Constitutional restraint on government borrowing......Page 306 Supplement S4A: The excess burden with substitution and income effects......Page 307 The excess burden as payment to avoid the tax......Page 308 Summary......Page 310 4.1 Taxation......Page 314 4.2 Tax evasion and the shadow economy......Page 316 Supplement S4A: The excess burden with substitution and income effects......Page 317 5 MARKET CORRECTIONS......Page 319 A. Attributes of externalities......Page 321 Efficiency gains from resolution of an externality......Page 322 Externalities involving consumers......Page 323 Externalities for which corrections are not required......Page 324 Missing markets and asymmetric information......Page 326 The tragedy of the commons......Page 327 Private ownership......Page 328 Rent seeking and resolution of the tragedy of the commons......Page 329 The commons and the old and new worlds......Page 330 Reciprocal beneficial externalities: The case of bees and apples......Page 331 A contractual alternative to common private ownership......Page 333 C. The Coase theorem......Page 334 Legal rights with the smoker......Page 335 Sharing of the gains......Page 336 Income effects......Page 337 Failures of the predictions of the Coase theorem......Page 338 Transactions costs without asymmetric information......Page 339 Collective action and externalities......Page 340 Assignment of legal rights to minimize transactions costs......Page 341 Market capitalization and the Coase theorem......Page 342 Self-esteem and social approval......Page 343 Self-defense and crime......Page 344 5.2 Public Policies and Externalities......Page 346 Who decides when an externality merits public policy?......Page 347 Personal freedom and externalities......Page 348 Taxes and subsidies......Page 349 A corrective tax......Page 350 The equivalence of the corrective tax and subsidy......Page 351 Taxes and marginal damage......Page 352 Sequencing of private resolution and public policy......Page 353 The case against subsidies......Page 354 A case against taxation......Page 355 Regulation......Page 356 Auction of quotas......Page 358 Sale of quota rights in a competitive market......Page 359 Distribution of the quota among existing producers......Page 360 C. Political decisions......Page 361 Producers as supporters of environmental policy......Page 362 Political decisions and externalities......Page 363 The origin for measuring political support......Page 365 A change in the public interest......Page 366 Political institutions and the environment......Page 367 Biodiversity......Page 368 Climate change......Page 369 The prisoners’ dilemma and impediments to international agreement......Page 371 Two rules for international assignment of emissions quotas......Page 372 Free riding by governments......Page 373 Preconditions for international agreement among globally aware governments......Page 374 Environmentalists and producers as political allies......Page 375 The case of the dolphins......Page 376 Trade in hazardous waste......Page 377 Are markets or governments to blame for environmental externalities?......Page 378 Compulsory spending......Page 379 Addictions......Page 381 Transplants and blood......Page 382 Slavery and markets in people......Page 383 Exposure to the sun......Page 384 Hyperbolic discounting......Page 385 Hyperbolic discounters......Page 386 Experiments......Page 389 Hyperbolic discounting and public policy......Page 390 Private resolution of problems of self-control......Page 391 Paternalism and usury......Page 392 Illegal markets......Page 393 B. The limits of intuition: framing and bounded rationality......Page 394 Why are the choices between lotteries equivalent?......Page 395 Framing effects......Page 397 C. Community values and locational choice......Page 398 Moral relativism......Page 399 D. Interdependent utilities and censorship......Page 400 Paternalism and eugenics......Page 402 Supplement S5A: Externalities and non-convexities......Page 404 Summary......Page 406 5.1 Externalities and private resolution......Page 411 5.2 Public policies and externalities......Page 412 5.3 Paternalistic public policies......Page 414 Supplement S5A: Externalities and non-convexities......Page 416 6 VOTING......Page 417 Voting and the Lindahl consensus......Page 421 Transactions costs and opportunism with a consensus voting rule......Page 424 A majority-voting equilibrium......Page 425 The median voter......Page 428 Does majority voting result in efficient public spending?......Page 430 The distribution of benefits in the population......Page 431 Voting versus markets......Page 432 The Condorcet winner......Page 433 Cycling or instability of voting outcomes......Page 434 Choice over different types of public goods......Page 436 Control over the agenda......Page 437 The Condorcet winner and cost-benefit analysis......Page 438 Pareto improvement and compensatory payments......Page 439 C. Logrolling......Page 440 Logrolling with efficient proposals......Page 441 Logrolling with inefficient proposals......Page 442 Logrolling with money payments......Page 443 All-inclusive logrolling coalitions......Page 444 Why is there stability in coalitions?......Page 445 D. Checks and balances......Page 446 Checks and balances in fiscal federal systems......Page 447 Instability of voting outcomes as a form of checks and balances......Page 448 6.2 Political Competition......Page 449 A. Direct and representative democracy......Page 450 Ostrogorski's paradox......Page 451 The paradox......Page 452 B. Political competition with a single issue......Page 453 Policy convergence in practice......Page 454 Expressive voters and abstention......Page 455 Convergence and primary systems of voting......Page 456 More than two candidates......Page 457 C. Political competition with multiple issues......Page 459 A special case of a stable equilibrium......Page 462 Principled political coalitions......Page 463 Expressive voting and stable outcomes......Page 464 Two-round-elimination voting......Page 465 Plurality......Page 466 Proportional representation......Page 467 Preferential voting......Page 469 Approval voting......Page 472 6.3 Voting on Income Redistribution......Page 473 A. Majority voting and income redistribution......Page 474 Majority voting when benefits are private......Page 475 Income redistribution by majority voting......Page 476 Why is majority voting in practice not maximally appropriative?......Page 479 Immigration......Page 480 Conclusions on voting on income distribution......Page 481 B. The franchise and voting on income redistribution......Page 482 C. The decision to vote......Page 483 Voter participation......Page 485 A coalition of low- and high-income voters......Page 486 A coalition of the middle class and Director's law......Page 487 Conclusions on voting......Page 488 Summary......Page 490 6.1 The median voter and majority voting......Page 494 6.2 Political competition......Page 496 6.3 Voting on income redistribution......Page 497 7 SOCIAL JUSTICE......Page 501 7.1 Social Justice and Insurance......Page 504 Risk aversion and insurance......Page 506 Inequality aversion......Page 508 Mutual risk-sharing contracts......Page 509 Social insurance......Page 510 Social welfare and Pareto improvement......Page 511 Interpersonal comparisons of utility......Page 512 Anonymity......Page 513 Distribution of predetermined income......Page 514 The leaky bucket of redistribution......Page 515 The source of the leaky bucket of income redistribution......Page 516 Feasible redistribution......Page 517 Bentham......Page 519 Rawls and the weakest link......Page 521 Bentham and Rawls as limiting cases......Page 522 The Laffer curve and income redistribution......Page 525 The choice of the social insurance contract......Page 527 Bentham's lottery and the certainty in life offered by Rawls......Page 529 The lottery from a social welfare function between Bentham and Rawls......Page 530 The fundamental choice between social equality and efficiency......Page 531 Subjective weights on efficiency and equality......Page 532 Why deviate from the objective probabilities?......Page 533 Avoidance of regret......Page 534 The work ethic......Page 535 The work ethic and tax evasion......Page 536 D. Adverse selection and time inconsistency......Page 537 A. Moral hazard and insurance......Page 539 Moral hazard and personal effort......Page 540 The prisoners' dilemma and moral hazard......Page 541 B. Behavior without moral hazard......Page 544 C. Moral hazard and adverse selection in diverse populations......Page 545 A work ethic and diverse populations......Page 547 Moral hazard due to norms from outside a society......Page 548 Sources of attitudes to a work ethic......Page 550 D. Public-policy responses to moral hazard......Page 551 Governments and moral hazard......Page 552 The two cases for incomplete insurance......Page 553 A. Altruism and charity......Page 555 Interdependent utilities......Page 556 A three-person society......Page 557 A two-person example......Page 559 Utility from giving......Page 560 The exploitation of charitable intentions......Page 561 Misrepresented preferences by the donor......Page 563 Degrees of charity......Page 564 Social status......Page 565 The ultimatum game......Page 566 Aberrant rational behavior......Page 569 Punishment of unfair behavior......Page 570 Anonymous behavior and social approval......Page 571 Differences in behavior between ultimatum and dictatorship games......Page 572 Gender differences in dictatorship games......Page 573 Estimates of intergenerational economic mobility......Page 574 Characteristics other than income......Page 575 Assortative mating......Page 576 Meritocracy in labor markets......Page 577 Moral hazard and economic mobility......Page 578 A global insurance contract behind the veil of ignorance......Page 579 The World Bank and global insurance......Page 580 Moral hazard......Page 581 The principal–agent problem......Page 582 The incentives of the donor......Page 583 Global representative government......Page 584 Supplement S7A: Measurement of income inequality......Page 585 Supplement S7B: An impossibility theorem for social aggregation......Page 587 Summary......Page 588 7.1 Social justice and insurance......Page 594 7.2 Moral hazard......Page 595 7.3 Social justice without government......Page 596 Supplement S7B: An impossibility theorem for social aggregation......Page 598 8 ENTITLEMENTS......Page 599 The choice between money and in-kind transfers......Page 601 Which form of delivery of entitlement do taxpayers prefer?......Page 605 Market responses and the value of entitlements......Page 606 Vouchers as means of delivering in-kind entitlements......Page 607 B. Education and other rejected entitlements......Page 608 Government and private schools......Page 609 Government schools and market choices......Page 610 Households that reject the entitlement......Page 611 Externalities and entitlements......Page 613 Should governments disallow private spending?......Page 614 Signaling rather than learning......Page 615 The content of education......Page 616 Entitlements and locational choice......Page 617 Unequal wages: discrimination or failure of equal opportunity?......Page 618 Gender differences......Page 619 Social identity and ex-ante equality......Page 620 Higher education......Page 621 Differences in abilities......Page 623 D. Targeted entitlements and incentives......Page 624 Why is there involuntary unemployment?......Page 625 Asymmetric information and unemployment insurance......Page 627 The schedule for payment of benefits over time......Page 628 Compulsory self-financed unemployment benefits......Page 629 Persistent welfare dependence......Page 630 Income support contingent on work......Page 631 Welfare reform......Page 637 A hunter–gatherer society......Page 639 Demonstration effects......Page 640 A free-rider problem and taxation......Page 641 Designated contributions......Page 642 Designated benefits for retired people......Page 643 Solutions to the problem of increasing tax burdens......Page 644 The demographic prisoners' dilemma......Page 645 Generational accounting......Page 647 Political procrastination......Page 648 Government bonds......Page 649 Durable productive assets......Page 650 Individual or pooled personal savings?......Page 651 Effects on savings and growth......Page 652 D. Transition from intergenerational dependence......Page 653 Voting for change......Page 654 The incentive for deferral of solving problems......Page 655 A. The problem of containing health costs......Page 657 B. The market for health insurance......Page 658 Market alternatives......Page 659 Universal health entitlements through markets......Page 660 Private competition with universal compulsory coverage......Page 661 C. Socialized medicine......Page 662 D. Health-care choices......Page 663 Summary......Page 664 8.1 The attributes and consequences of entitlements......Page 668 8.2 The entitlement to income during old age......Page 673 8.3 The entitlement to health care and health insurance......Page 674 9 CHOICE OF TAXATION......Page 677 A. The Ramsey rule for efficient taxation......Page 679 Efficient taxation of personal incomes......Page 681 Social injustice in taxes on goods......Page 682 Efficient taxation and gender differences......Page 683 Taxation of innate ability......Page 684 B. The equal-sacrifice principle for socially just taxation......Page 685 The ability-to-pay principle of taxation......Page 686 Diminishing marginal utility of income......Page 687 An income-tax schedule......Page 688 An income-tax schedule with tax brackets......Page 689 The normative question about progressive taxation......Page 690 The equal-sacrifice principle of taxation......Page 691 Derivation of an equal-sacrifice income-tax schedule......Page 692 C. Optimal income taxation......Page 694 A linear income tax......Page 695 Choice of the social welfare function for deriving the optimal tax rate......Page 697 The general optimal income-tax problem......Page 698 The trade-off between progressive and regressive taxation......Page 699 The conclusions......Page 701 Complex tax structures and tax reform......Page 702 Why are income taxes progressive?......Page 703 Progressive taxes and post-tax incomes......Page 704 Social mobility and taxation......Page 705 Social justice and taxation of capital......Page 706 Residence-based taxation......Page 707 Time inconsistency......Page 708 The corporation as an independent legal entity......Page 709 The corporate profits tax and risk......Page 710 Why are dividends ever paid?......Page 711 Why is there a corporate-profits tax?......Page 712 Tax rates......Page 713 Efficiency......Page 714 Impediments to change......Page 715 Taxes on wealth......Page 716 Taxation through inflation and financial repression......Page 717 Should indirect taxes accompany the optimal income tax?......Page 719 Choice of taxes and a leviathan government......Page 720 9.3 Fiscal Federalism......Page 721 An ideal fiscal federal structure for public goods......Page 722 Externalities......Page 723 Natural monopoly for private goods......Page 724 Fiscal federalism and insurance through regional income-pooling......Page 726 B. Tax competition......Page 727 Tax competition and tax coordination......Page 731 Is tax competition desirable?......Page 732 Local-government principal–agent problems and yardstick competition......Page 733 Moral hazard......Page 735 Rent seeking and fiscal federalism......Page 736 The common-pool problem of centralized tax revenue......Page 737 Fiscal federalism and global government......Page 740 Summary......Page 741 9.1 Optimal taxation......Page 745 9.2 Capital and other tax bases......Page 746 9.3 Fiscal federalism......Page 748 10 THE NEED FOR GOVERNMENT......Page 751 Incomes and the quality of life......Page 753 The Industrial Revolution and the middle class......Page 755 Wagner's law......Page 756 Contradictions of Wagner’s law......Page 757 Externalities......Page 758 Supply of revenue and the growth of government......Page 759 Amenability of people to taxation......Page 760 Voting by government bureaucrats......Page 761 Market specialization and interest groups......Page 762 Liberalization of international trade......Page 763 International trade policy and size of government......Page 764 Benefits of growth of government since Adam Smith......Page 766 Growth of government in the latter half of the 20th century......Page 767 Hobbes on the nature of people and government......Page 768 Locke on the nature of people and government......Page 769 Hobbes on liberty......Page 770 The encompassing interest of the leviathan......Page 771 Constitutional restraint......Page 772 Zero-based budgeting......Page 774 A. Prospects for voluntary cooperation......Page 775 A repeated prisoners' dilemma......Page 776 Can trust be measured?......Page 778 Societies with anonymous cooperative and opportunistic types of people......Page 780 Trust in anonymous market transactions......Page 781 D. Social capital......Page 782 A. Political economy......Page 783 B. Fate and moral hazard......Page 785 A view from the left......Page 786 A view from the right......Page 787 D. Human nature......Page 790 Summary......Page 791 10.1 Growth of government and the need for government......Page 793 10.2 Cooperation, trust, and the need for government......Page 796 10.3 Views on the need for government......Page 797 1.2 Efficiency and social justice......Page 799 1.3 The rule of law......Page 800 2.1 The political principal–agent problem......Page 802 2.3 Life without markets and private property......Page 804 Supplement S2B: Institutions and natural monopoly......Page 805 3.1 Types of public goods......Page 806 3.2 Information and public goods......Page 808 3.3 Cost-benefit analysis......Page 809 Supplement S3D: An efficient economy with public and private goods......Page 810 4.1 Taxation......Page 811 4.2 Tax evasion and the shadow economy......Page 812 5.1 Externalities and private resolution......Page 813 5.2 Public policies and externalities......Page 815 5.3 Paternalistic public policies......Page 816 6.1 The median voter and majority voting......Page 818 6.2 Political competition......Page 819 6.3 Voting on income redistribution......Page 820 7.1 Social justice and insurance......Page 821 7.2 Moral hazard......Page 822 7.3 Social justice without government......Page 823 8.1 The attributes and consequences of entitlements......Page 825 8.2 The entitlement to income during old age......Page 828 8.3 The entitlement to health care and health Insurance......Page 829 9.1 Optimal taxation......Page 830 9.2 Capital and other tax bases......Page 832 9.3 Fiscal federalism......Page 833 10.1 Growth of government and the need for government......Page 834 10.3 Views on the need for government......Page 835 AUTHOR INDEX......Page 837 SUBJECT INDEX......Page 843