1. Semester: II
2. Number of Credits: 4

Course Description
The focus of the course, which draws on Microeconomic theory, is on the development of analytical tools and their application to key issues relating to the spending, taxing and financing activities of government. Students would be expected to write a short research paper. The topic of the assignment would be outside of what has been taught in the classroom.
Prerequisites: Fundamental Theorems of Welfare Economics; First and Second Best Analysis; Differential Integral and Calculus

Module 1: Government in a Market Economy (10 hours)
Rationale for State Intervention – Market Failures and Externalities – Tax and Regulation – Distribution – Social Choice - Social Welfare Function – Arrow Impossibility Theorem (with proof).  

Module 2: Public Expenditure: Rationale and Evaluation (14 hours)
Public Goods: Pure and Local – Optimal provision –Preference revelation mechanism – Private provision of Public Goods - Merit Goods.
Clubs and Club Goods: Institutional forms and Clubs; Game Theory and Club Goods; Uncertainty and the Theory of Clubs - Intergenerational Clubs
Evaluation of Government Expenditure: Welfare Foundations of Cost Benefit analysis - The technique of CBA - CBA in practice - Some case studies in CBA.

Module 3: Taxation and Public Sector Pricing  (14 hours)
Sources of Government Revenue:  Tax and Non-tax sources - User Charges – Government Debt.
Basic Concepts of Tax Theory:  Excess Burden – Tax Incidence – Tax/Subsidy capitalization
First Best Principles of Taxation: Ability to Pay - Horizontal and Vertical Equity.
Second Best Theory of Taxation: Second Best Theory of Taxation with General Production and Many Consumers - Optimal Commodity Taxation - Taxation under Asymmetric Information - Optimal Income Taxation.
VAT: Tax Base – Different Variants of VAT - Border Tax Adjustments.
Public Sector Pricing: Pricing and Efficiency – Marginal Cost Pricing - Ramsey Pricing – Price Regulation – Regulating Marginal and Ramsey Prices.

Module 4: Reforms and Government (10 hours)
Need for Reform:  Unsustainability of the fisc -Time Consistency Problem – Credibility and Commitment
Fiscal Rules: Rationale - International and Indian Experience
Privatisation: Ownership and Incentives – Ownership and Economic Efficiency
Decentralisation: Decentralisation Theorem - International and Indian Experience
Administrative  Efficiency: Role of Bureaucracy

1.	Bos D. Pricing and Regulation: an Economic theory for Public Enterprises and Public Utilities, Elsevier
	Science, Amsterdam, 1994
2.	Gang I. and A. Dasgupta: Value Added Tax Evasion, Auditing and Transactions Matching in John
	McLaren (ed.) Institutional Elements of Tax Design and Reform, World Bank 2002.
3.	Kopits G.: Fiscal Policy Rules for India, Economic and Political Weekly, March 3, 2001
4.	Niskanen William: Bureaucracy and Public Economics, Edward Elgar, 1995
5.	Oates W. An Essay on Fiscal Federalism, Journal of Economic Literature, September 1999, vol. 37
6.	Vickers J. and G. Yarrow: Privatisation: An Economic Analysis, The MIT Press, 1988.