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Institutional Subscription. Free Shipping Free global shipping No minimum order. Editor Raj Chetty is the recipient of the John Bates Clark Medal from the American Economic Association Focuses on new approaches to both revenue generation and expenditures in public finance Presents coherent summaries of subjects in public economics that stretch from methodologies to applications Makes details about public economics accessible to scholars in fields outside economics.

Powered by. You are connected as. Connect with:. Use your name:. Thank you for posting a review! We value your input. Share your review so everyone else can enjoy it too. Your review was sent successfully and is now waiting for our team to publish it. Reviews 0. Updating Results. If you wish to place a tax exempt order please contact us. These reports are described at the start of Chapter 5. Government provision of information to rural areas could be undertaken in an effort to subsidize and thereby maintain small rural businesses and thus rural populations.

In such a situation, this kind of information provision might be compared with other subsidies for the same purpose, for example, tax incentives for firms to locate in rural areas. Throughout history, improvements in institutional performance have occurred primarily through the slow accumulation of successful precedent, or as a by-product of expertise and experience. Institutional change was traditionally generated through the process of trial and error much in the same manner that technical change was generated prior to the invention of the research university, the agricultural experiment station, or the industrial research laboratory.

With the institutionalization of research in the social sciences it is becoming increasingly possible to substitute social science knowledge and analytical skill for the more expensive process of learning by trial and error. The contributions of economic research are to identify the changes in institutions and physical and human capital necessary to exploit new technology and to identify the effects of these changes. It offers the opportunity to suggest the changes that are most likely to succeed, and thereby to reduce the costs of institutional innovation.

Changes in institutions include modifications of government policy that address market failures and inequities in income distribution, as well as property rights and other aspects of the political infrastructure in which a market economy functions. A particularly important contribution of economic research in a representative democracy is to identify in some detail the effects of changes in policy or, for that matter, the effects of leaving policy unchanged in the face of changing technology on different economic interests. It is rarely, if ever, the case that a change in policy will leave every interest in an improved or equivalent condition.

But if those who gain do so enough that those who lose can in turn be compensated in such a way that no party loses ground, then a combination of a change in policy and redistribution maybe politically feasible. The identification of potential winners and losers beforehand is a contribution of economic research that can facilitate the political process. The need for economic knowledge, driven by change in technology, is both private and public. Private firms allocate very substantial resources to the acquisition of economic knowledge in the pursuit of economic efficiency.

This is especially the case for large enterprises, for example multinational firms that deal in a variety of legal and institutional environments. Markets for information have become extremely important components of the world economy, including not only securities but also derivatives of securities like futures and options contracts. The largest and most difficult questions remain public, however.

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In a representative democracy, the establishment of property rights is inherently a public issue. Problems of market failure from environmental externalities alone demand. Issues of income distribution are as important today as they have ever been. Economic knowledge has been developed and applied in addressing many of these questions. For example: the creation of property rights and subsequent allocation of part of the electromagnetic spectrum has made use of research on auction design McAfee and McMillan, The institution of time-of-use pricing to delay the construction of new electricity-generating capacity has drawn on extensive controlled experiments carried out by econometricians Aigner, Concepts of property rights have been extended and new market mechanisms have been developed as policy makers have balanced the amelioration of negative environmental externalities with economic efficiency.

The creation of a market for sulfur dioxide emission licenses for electric power plants is one example. Another is the Conservation Reserve Program designed largely by ERS, in which farmers bid to take environmentally sensitive acreage out of production for year periods. Use of public economic research by one organization or individual does not diminish its value to anyone else. It is nonrival and therefore a public good.

Many kinds of public economic research are also nonexcludable and are therefore pure public goods. For example, advances in computable general equilibrium models have made more timely and accurate anticipation of changes in taxes and tariffs possible, but new ideas as such cannot be patented, and these advances are therefore nonexcludable. Private markets will underproduce economic research because of its pure public good character. Economic information is also nonrival, but it may be excludable. For example, ERS regularly provides information of keen interest to various industries, as do industry newsletters, but given current technology this information is often excludable for example, by limiting electronic access.

In apparent contradiction, there is widespread production of economic knowledge by private interests on many economic questions.

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Any contemplated important change in public economic policy is likely to bring forth a host of studies originating in the private sector. On one hand, it is vital for private-sector interests to be able to identify impacts of contemplated policy change that may have gone unnoticed. On the other hand, many of the effects identified by private-sector interests are rent seeking: that is, a private-sector interest that stands to benefit substantially from a proposed change may support that change with evidence indicating that it will benefit some wider group.

The claim may or may not be true, but in this situation the private-sector interest cannot be expected to provide evidence on who stands to lose. The outcome of this sort of private-sector research is well understood and well anticipated by a simple analysis of market failure. To the extent that the gains or losses of a proposed policy change are spread out, with no single interest.

To the extent that the gains or losses are concentrated on a small collection of interests, the incentive to produce the knowledge increases. This situation has at least two very undesirable features. The first is that policy changes tend to reflect concentrated interests. The second is that this fact may emerge only well after the change has been made, if at all, in an environment of ongoing changes in diverse economic policies.

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This is not even policy experimentation: it is policy chaos. Public-sector research in economics complements but does not displace private research. Gathering evidence on likely outcomes before the fact, rather than after, affords the potential for large gains.

First and most important, it provides the only alternative to carrying out the field experiment of actually making the policy change. For example: research on auction design is a very attractive alternative to uninformed experimentation with the rules for government auctions, for example in the sale of the electromagnetic spectrum and the leasing of productive cropland for conservation purposes.

Controlled experiments in time-of-use pricing for electricity on a small scale indicated the pricing schedules that would best achieve energy conservation and environmental goals on the large scale. And the work of ERS in the s provided the basis for prior assessment of important aspects of current world trade agreements on agriculture, whereas experimentation with actual policy change would have been extremely expensive. Second, studying outcomes before rather than after the fact can identify gainers, losers, and the potential for redistribution from the former to the latter, thereby providing sound information from which essential political agreements can be struck.

For example, ERS demand modeling made an important contribution in support of the Uruguay round — of trade negotiations under the General Agreement on Tariffs and Trade GATT : it identified the important domestic gainers and losers in the principal agricultural exporting nations.

This enabled policy officials to convey to Congress that domestic political interests who opposed the agreement were overstating their potential losses, and to make the case that the losses of losers from liberalized agricultural trade would be more than offset by gains of the winners. A third attraction of economic analysis before the fact is that it suggests what should be monitored after the fact in order to evaluate the impact of the change in policy. This last contribution remains intact even if public-sector research on the issue is ultimately ignored in reaching the decision about policy change.

The evidence gathered subsequently may have bearing on future policy questions and can be used to compare the consequences of policy change with predictions before the fact, thereby improving economic analysis. For example, ERS has long. It maintains information on agricultural output and prices and models of supply, which have been used to identify the effects of proposed changes in subsidy programs during the consideration of major farm legislation that must be renewed about every five years. Economic research is carried out in academic institutions, in private firms, and in government agencies primarily federal.

The product of research activities is new knowledge. A straightforward consideration of the market for this new knowledge typically explains the kinds of economic research conducted in these three sectors, as the following two examples illustrate. Many assets, goods, and services are bought or sold by means of auctions.

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This is especially the case for assets, goods, and services acquired or divested by governments. Auctions can be conducted in a wide variety of ways: bids can be oral or written, the price in an oral auction may be ascending or descending, the price paid many or may not correspond to a highest or lowest bid, the seller or buyer may or may not announce a minimum or maximum acceptable price. To a buyer or a seller organizing an auction, the most important question is how to minimize or maximize respectively the price of the object being bought or sold.

The relation between the organization of the auction and the transaction price of the object depends on economic characteristics of the object and the potential buyers and sellers that transcend specific settings. Knowledge about this relation is a public good, because it is not diminished by its use, and it would be difficult to both apply this knowledge and exclude it from others. Thus it is not surprising that advances in the theory of auction design Engelbrecht-Wiggans et al. The theory identifies the economically relevant characteristics of an auction that in turn predict the consequences of alternative auction designs.

Ascertaining these characteristics for a particular object being sold may or may not be a public good. For example, procurement of milk for public school lunches is a similar process in most states and school districts. Determination of the economically relevant characteristics is a public good, and no one school district has much incentive to carry out this research. Most of the work has been done by academics.


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In contrast, the features of the market for procurement of weapons by the U. Department of Defense are unique to that market, and the department has sponsored research to study these features and improve the design of its procurement auctions. A second example is the research that has provided the basis for time-of-use pricing of electricity. Because the generation and delivery of electricity has been a natural monopoly, it has been regulated by a public utility commission in each state. Demand for electricity varies systematically throughout the day and. Since electricity cannot be stored efficiently, generating capacity must be adequate to meet the maximum rather than the average demand for its use.

However, by changing the price of electricity systematically throughout the day or the year, it is possible to alter the systematic variation in demand.

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Recognizing the advantages of studying policy changes before rather than after the fact Aigner, , the then Federal Energy Administration supported a series of experiments to quantify the relationship between the pricing policy and the demand for electricity. Constructing the econometric framework and sampling design for these studies raised similar methodological issues across states. Research addressing these issues was carried out predominately by academics, with findings published in research journals and therefore widely available.

In applying the econometric framework and sampling design, issues specific to each state arose, since industry mix and seasonal demand for electricity vary widely by state Aigner, This work was sponsored by individual state utility commissions, typically by contract to individuals or private-sector research organizations. In both of these examples, the basic research produced knowledge that is close to a pure public good.

The economics of auction mechanism design and the econometrics of electricity pricing experiments are in no way diminished when they are applied to yet another policy problem, and it is essentially impossible to exclude this knowledge from use by others. Indeed, centuries of experience have established that basic research is most successful when it is publicly available, so that those who do the same kind of research can criticize it and build on it in a timely fashion.

Economic and many other kinds of research in the United States is based on a partnership between the federal government and academic institutions, one that explicitly recognizes the public good nature of basic and applied research and is designed to produce it efficiently.

This partnership is founded on two secondary marketplaces. In one, academic advancement and salaries are based on the contribution to knowledge as measured by peer evaluation, largely through the medium of peer-reviewed scientific journals. In the other, resources for carrying out research are provided by the federal government based on the prospects for their efficient use as measured by past performance and peer evaluation of proposals. The two secondary marketplaces are closely related. They provide a very strong set of incentives for creative, productive work that has made the United States the leader among all nations in economic and other research.

It brings many of the brightest young scientists to the United States for training, and many of the best of these stay on and make further vital contributions. In both the auction design and electricity pricing examples, the basic research conducted in the public-academic sector was used in private decisions as well as in the making of public policy.

In both cases, the decision makers were aware that new research coming out of the public-academic sector could contribute to a better decision. They determined the bearing of this research on the. Establishing the link between basic research, on one hand, and a decision, on the other, is a critical step that typically demands substantial time, talent, and resources.

If the link has previously been made by others in similar situations, then it is inefficient to repeat the process from the ground up each time. This gives rise to extensive markets in applied research in support of decision making, involving both private- and public-sector entities. In the private sector, it includes consulting firms and newsletters. In the public sector, it includes university professional schools and some of the activities of community colleges and vocational schools. More novel circumstances are likely to demand greater sophistication in bringing economic knowledge to bear on the question at hand.

To the extent that a situation is novel, the simple model of imitating others in similar situations is more likely to lead to a bad outcome, and the more critical it becomes to establish a solid economic basis for the decision. In the private sector, novel decisions are faced by firms in new industries, and markets provide substantial rewards for making such decisions effectively.

In the public sector, decisions in novel circumstances must be taken by governments confronting the institutional aspects of technical progress for the first time. The U. During the last decade, he has turned part of his attention to a research tool that is increasingly gaining in importance in economics: the laboratory experiment. Christian Seidl was born on August 5, , in Vienna, Austria.

He was awarded the Dr. JavaScript is currently disabled, this site works much better if you enable JavaScript in your browser. Economics Public Finance. Buy eBook.


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