Public Expenditure Analysis
Units: 12
Public Expenditure Analysis is a 12 unit course designed to deal with the expenditure side of the public sector budget in a series of modules. It has been conceptualized as a blending of private finance and public expenditure principles. The former provides a systematic framework, capital budgeting, for the evaluation of private-sector capital projects, while the latter builds on the former, and introduces issues of externality, the social rate of discount, and incomplete markets through the mechanism of shadow pricing. Public Expenditure Analysis prepares those Heinz and other CMU students seeking careers in the public sector, or those parts of the private sector that routinely deal with the public sector’s capital budgeting decisions. It answers the question “when should a community build a bridge?”
Public Expenditure Analysis is divided into 4 modules. In Module 1, the course develops the essential techniques of private sector evaluation principles for short-term and long-term capital projects. In Module 2, special problems which arise in the evaluation of public sector capital projects are discussed; a variety of evaluation techniques and applications especially suited to public sector projects are then examined. In Module 3, actual cost-benefit studies in the policy areas of education, environment, health, criminal justice, transportation and recreation are examined. In Module 4, evaluation at a high level of aggregation is dealt with through the use of generational accounting models. These models are examples of aggregate long and short-term public evaluation problem areas typically dealt with by national governments. Also in Module 4 groups of students perform and report a critical review of a cost-benefit study they have chosen. Throughout the course, similarities and differences between the public sector and private sector are emphasized, and examples from the real world are discussed in class.
The course presumes that the student has had courses in microeconomics and economic statistics, owns a calculator capable of doing x^(a/b) or x^1.361, and is familiar with the use of spreadsheet packages on a personal computer. Students may also find the HP10BII Financial calculator (used in RWJ below) to be particularly convenient to use in class, along with Excel, and various standard tables. The HP calculator now lists for $19.83 on Amazon. Students are expected to bring their calculator to each class session, and perform calculations in conjunction with class activities.
There are two required, somewhat expensive but worthwhile texts for the course, and students are expected to bring the textbook to class that pertains to that portion of the course. Please be sure that you obtain the proper (8th) edition and exact ISBN of Ross, Westerfield and Jaffe (about $65) to save you a lot of money.
1. Private sector evaluation principles are found in Ross, Westerfield, and Jaffe Corporate Finance, Eighth Edition, 2008. (McGraw-Hill Publishing ISBN 0-07-333718-0). Required reading is denoted as RWJ below.
2. Public Sector principles of evaluation are contained in Cost-Benefit Analysis: Concepts and Practice Fifth Edition (2018). (ISBN 978-1-108-40129-6: Paperback Cambridge University Press), by A.E. Boardman, D.H. Greenberg, A.R. Vining, and D.L. Weimer Chapters from the text (denoted CBA below) are required reading.
More information can be found at: http://www.andrew.cmu.edu/user/rs9f/public_expenditure_analysis.pdf
No required courses, although a first course in micro-economics and statistics are helpful. Conceptually, Public Expenditure Analysis deals with the spending side of the public budget, whereas Public Finance deals with the revenue side of the public budget.