Gruber4e Ch02

Public Finance and Public Policy Jonathan
CopyrightGruber
© 2012 Fourth
WorthEdition
Publishers
Copyright © 2012 Worth Publishers

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Theoretical Tools of Public Finance

2

2.1 Constrained Utility Maximization
2.2 Putting the Tools to Work: TANF and Labor Supply among Single Mothers
2.3 Equilibrium and Social Welfare
2.4 Welfare Implications of Benefit Reductions: The TANF
Example Continued
2.5 Conclusion
PR E PAR E D BY
Dan Sacks

Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright © 2012 Worth Publishers

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C HAPT ER 2 ■ T H E O R ET I CAL T O O LS O F PU B LI C F I NAN C E

Theoretical Tools of Public Finance.

This chapter covers the theoretical tools of public finance.
• Theoretical tools: The set of tools designed to understand the mechanics behind economic decision making. • Empirical tools: The set of tools designed to analyze data and answer questions raised by theoretical analysis. Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright © 2012 Worth Publishers

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C HAPT ER 2 ■ T H E O R ET I CAL T O O LS O F PU B LI C F I NAN C E

Constrained Utility Maximization

• Utility function: A mathematical function representing an individual’s set of preferences, which translates her well-being from different consumption bundles into units that can be compared in order to determine choice. • Constrained utility maximization: The process of maximizing the well-being (utility) of an individual, subject to her resources (budget constraint).
• Models: Mathematical or graphical representations of reality. Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright © 2012 Worth Publishers

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C HAPT ER 2 ■ T H E O R ET I CAL T O O LS O F PU B LI C F I NAN C E

Preferences and Indifference Curves

• Indifference curve: A graphical representation of all bundles of goods that make an individual equally well off. • Because these bundles have equal utility, an individual is