Public Finance

Front 1

Coase Theorem

Back 1

Part I – When there are well-defined property rights and costless bargaining, then negotiations between the party creating the externality and the party affected by the externality can bring about the socially optimal market quantity. Part II – The efficient solution to an externality does not depend on which party is assigned the property rights, as long as someone is assigned those rights. Problems with theory include assignment, hold outs, free rider, and transaction costs.

Front 2

Price (Tax) v. Regulation (PF 140-46)

Back 2

Quantity regulation assures there is as much reduction as desired, regardless of the cost (nuclear waste). Price regulation through taxes leaves the amount of reduction uncertain, is dependent on the point beyond which reductions cost more than the tax they must pay, which is good when the necessity of regulated item is flexible and marginal benefits are flat(global warming)

Front 3

Positive Externalities

Back 3

When a firm’s production increases the well-being of others but the firm is not compensated by those others or When an individual’s consumption increases the well-being of others but the individual is not compensated by those others.

Front 4

Substitution Effect v. Income Effect (Rosen excerpt)

Back 4

n/a

Front 5

Public Good

Back 5

Goods for which the investment of any one individual benefits everyone in a larger group.

Front 6

Public Good

Back 6

Goods for which the investment of any one individual benefits everyone in a larger group.

Front 7

Tiebout Model

Back 7

The Tiebout model suggests that the provision of local public goods can be efficient if individuals “vote with their feet” by moving to towns with others who share their tastes for public goods. Missing from public goods are shopping and competition.

Front 8

General Obligation (“GO”) Bond

Back 8

n/a

Front 9

Taxation as Regulation (Posner)

Back 9

Regulation is part of public finance. Think about the distributive functions of government to tax, spend, & regulate. Regulation can be achieved by taxing and spending, vice versa. Taxation can serve as a system of cross-subsidization and wealth redistribution to effect certain gov’t policies. Efficiency by allowing regulation to ensure even the poorest can access necessities, be it food, public transport, access to justice.

Front 10

Preference Revelation Problem

Back 10

Individuals have an incentive to lie about their willingness to pay, since the amount of money they pay to finance the public good is tied to their stated willingness to pay. Individuals may behave strategically and pretend their willingness is low so others will bear a larger cost. This occurs do to the free rider problem. Thus, people may not be willing to tell the government their true valuation, because the government might charge them more for the good if they say they value it highly.

Front 11

Revenue Bond

Back 11

n/a

Front 12

Lease-Purchase Financing/Rider

Back 12

n/a

Front 13

Assessment Financing/Business Improvement District

Back 13

n/a

Front 14

Optimal Fiscal Federalism

Back 14

The question of which activities should take place at which level of government

Front 15

Official Statement and “blind reliance”

Back 15

(a) General. As a means reasonably designed to prevent fraudulent, deceptive, or manipulative acts or practices, it shall be unlawful for any broker, dealer, or municipal securities dealer . . . to act as an underwriter in a primary offering of municipal securities with an aggregate principal amount of $1,000,000 or more (an “Offering”) unless the Participating Underwriter complies with the requirements of this section or is exempted from the provisions of this section.
(b) Requirements.
(1) Prior to the time the Participating Underwriter bids for, purchases, offers, or sells municipal securities in an Offering, the Participating Underwriter shall obtain and review an official statement that an issuer of such securities deems final as of its date, except for the omission of no more than the following information. . .
Blind Reliance - An underwriter must investigate and disclose material facts that are known or “reasonably ascertainable” . . .
[A]n underwriter may not “blindly” rely on information provided by the issuer.
a. An underwriter must investigate and disclose material facts that are known or reasonably ascertainable. b. An underwriter may not “blindly” rely on information provided by the issuer.c. If an underwriter doesn’t investigate/disclose material facts but instead blindly relies on information provided by the issuer, he may be liable for security fraud.

Front 16

Continuing Disclosure

Back 16

A Participating Underwriter shall not purchase or sell municipal securities in connection with an Offering unless the Participating Underwriter has reasonably determined that an issuer of municipal securities, or an obligated person for whom financial or operating data is presented in the final official statement has undertaken, either individually or in combination with other issuers of such municipal securities or obligated persons, in a written agreement or contract for the benefit of holders of such securities, to provide the following to the Municipal Securities Rulemaking Board in an electronic format as prescribed by the Municipal Securities Rulemaking Board, either directly or indirectly through an indenture trustee or a designated agent:

Front 17

Bond Counsel

Back 17

n/a

Front 18

Arbitrage Bond

Back 18

n/a

Front 19

Private Activity Bond

Back 19

n/a

Front 20

Rule 10b-5 and “Industry Standard”

Back 20

(a) Use of interstate commerce for purpose of fraud or deceit
It shall be unlawful for any person in the offer or sale of any securities . . . by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser
Industry Standard- voluntary guidelines issued by the Government Finance Officers Association (“GFOA”) have received widespread acceptance and, among a number of larger issuers, have been viewed as “in essence obligatory rules. the National Federation of Municipal Analysts (“NFMA”), have published voluntary disclosure guidelines covering industry specific sectors, including among others, housing, student loans, transportation and healthcare. conduct must be measured is not defined solely by industry practice, but must be judged by a more expansive standard of reasonable prudence, for which the industry standard is but one factor to consider

Front 21

Liability Rule (Calabresi and Melamed)

Back 21

n/a

Front 22

Crowding Out

Back 22

As the government provides more of a public good, the private sector will provide less

Front 23

Diminishing Marginal Utility

Back 23

The more of something you have, the less the marginal utility is for each additional unit, such that if you have nothing of something, an additional unit will be worth more then when you have a bunch of something

Front 24

Social Welfare Function versus Commodity Egalitarianism (PF 54)

Back 24

A function that combines the utility functions of all individuals into an overall social utility function vs the principle that society should ensure that individuals meet a set of basic needs, but that beyond that point income distribution is irrelevant

Front 25

Net Present Value

Back 25

n/a

Front 26

Tax Expenditure (Weisbach and Nussim)

Back 26

Government revenue losses attributable to tax law provisions that allow special exclusions, exemptions, or deductions from gross income, or that provide a special credit, preferential tax rate, or deferral of liability. Weisbach and Nussim…

Front 27

“Deficit”

Back 27

n/a

Front 28

Three state law items on a careful bond counsel’s checklist

Back 28

(1) Cal Const. Art. 13D, Sec 6 - opportunity for public protection of increased rates if written protests by majority of owners, then the agency cannot do the fee increase. The official statement should warn about this. (2) Cal. Const. Art 13D – Power of People to lower fees through the initiative process added by Prop 218. (3) A third risk factor, at some point, is that the direct democracy initiative could effect projects, as something new can occur that affects it.

Front 29

A strong rationale for the federal tax exemption for municipal bonds (Gillette)

Back 29

The tax exemption, unlike a grant, relegates the decision to subsidize to the local level. Professor Gillette suggests that this problem might be alleviated if Congress were more selective in conferring tax-exempt status on government bonds. He also examines other problems associated with the tax exemption that are attributable to local control, most notably the tendency of local governments to enter the bond market without regard to their collective overuse of the market and the likelihood that decisions to issue tax-exempt bonds will be made by officials who are not accountable to local residents for the long-term consequences of their decisions. In closing, the author cautions that, despite these problems, section 103 nonetheless promotes federalism values by serving as a means of financing local preferences.

Front 30

Allocative Size of Government (Shaviro)

Back 30

n/a