Questions and Answers of Economics Of The Public Sector

An important class of externalities to which attention has recently been directed is called information externalities. The information produced by one individual or firm generates benefits for
Explain why subsidies for pollution abatement equipment, even if they result in an efficient level of pollution abatement, will not result in an efficient resource allocation.
Assume that there is uncertainty about the value of pollution control as a result of, for instance, uncertainty about the costs of pollution. Draw two diff erent "demand curves" (or benefit curves)
Assume there are two types of communities in the United States, those in which there is a high benefit of pollution control and a high cost of pollution control, and those in which there is a low
The impact of some externalities is very local, such as noise from airplanes landing and taking off at an airport. Such externalities depress the value of the immediately surrounding real estate. We
Zoning laws, which restrict how individuals can use their land, are sometimes justified as a means of controlling externalities. Explain. Discuss alternative solutions to these externalities.
What is the externality associated with an additional individual’s driving on a congested road? How do tolls help alleviate this externality? How should the toll be set?
Explain why a system of joint implementation for reducing greenhouse gases is more efficient than a system whereby each country must reduce its pollution by a fixed amount.
Many economists are worried that unless all countries are required to reduce their levels of greenhouse gas emissions, reductions in emissions in one country may be partially off set by increases in
Global warming is related to the concentration of greenhouse gases in the atmosphere. Once in the atmosphere, gases remain there for long periods of time (centuries). Greenhouse gases include carbon
Two different strategies are debated for reducing greenhouse gas emissions. One is that all the countries in the world should adopt common measures, such as a carbon tax. The other is that all
Corporate Average Fuel Economy (CAFE) standards stipulate the average fuel efficiency (miles per gallon) of cars produced by each manufacturer. That is, the average fuel efficiency of cars sold by
Discuss some of the problems with CAFE standards. How might a system of “tradable CAFE standards” be designed, and why might such a system improve efficiency?
To resolve the controversy over insurance coverage of Superfund sites, it has been proposed that the insurance industry be taxed to create a fund out of which claims would be paid. What difference
One proposal to reduce automobile emissions involves “pay at the pump insurance,” under which individuals would pay, say, 25 cents per gallon of gasoline, with the proceeds going toward an
Assume that there are eight oranges to be divided between Friday and Crusoe. Take a utilitarian view-assume that social welfare is the sum of the utilities of the two individuals. Using the data from
Now take a Rawlsian view and assume that the social welfare function is the level of utility of the individual with the lowest utility level. Using the data from Problem 1, and again assuming there
Consider an accident in which an individual loses a leg. Assume that it lowers the individual's utility at each level of income but increases his or her marginal utility (at each level of income),
If marginal utility did not decrease at all for both Friday and Crusoe, what would the utility possibilities schedule look like?
Assume that Crusoe’s and Friday’s utility functions are described in Problem 1. Assume now, though, that initially Crusoe has six oranges and Friday two. Assume that for every two oranges taken
Draw the utility possibilities schedule based on the data from Problem 1. Mark the points that maximize social welfare under the two alternative criteria from Problems 2 and 3.Data From Problem
For each of the following policy changes, explain why the change is or is not likely to be a Pareto improvement:a. Building a park, financed by an increase in the local property tax rate.b. Building
Assume you are shipwrecked, and there are ten of you in a lifeboat. You know that it will take ten days to reach shore and that there are rations for only ten person-days. (The ration is the minimum
In the past three decades there has been extensive privatization of public enterprises. The U.S. government sold Conrail, the French government sold off many of its banks, and the British government
Under the Reagan administration, the Interior Department greatly increased the rate at which it leased off shore oil and gas. This had the effect of significantly reducing the prices that the
The Postal Service claims that one reason why it cannot provide services as cheaply as private firms is that it is required to provide services to rural areas but cannot charge them more than the
There are many private security firms, and many large housing developments have police protection provided by such private fi rms. Few towns, though, contract out their police departments. Why do you
The military buys most of its equipment from private contractors but does not use private contractors to staff its ships or fly its airplanes. What differences in the nature of the services provided
There have been recurrent proposals for education voucher schemes, in which the government provides a voucher that can be used to purchase education from either a public provider (the local town) or
Discuss what organizational form (e.g., private firm, government corporation, or normal government production) you think might be appropriate for each of the following. In each case, discuss problems
Recently, there have been several proposals to privatize the Social Security system; some countries have actually privatized part or all of their social security systems. What arguments might be put
Assume that some individual's marginal valuation of public goods increases. What does this do to the Pareto efficient level of public expenditures? If this individual is not the median individual,
Assume that all individuals have identical preferences but some individuals are wealthier than others. Assume there is a single public good and a single private good.a. Show diagrammatically how you
Assume instead there is uniform taxation, so all individuals face the same tax price. Recall that along each individual's demand curve, the price equals the marginal rate of substitution. Thus,the
Demand curves are said to be income elastic if the demand for the good increases more than proportionately with income. For instance, with the demand curvethe demand for public goods increases with
In the text, we suggested that for well-off individuals with uniform taxation, preferences for education were not single-peaked. Why might preferences for local parks and urban public transportation
Who may be the actual beneficiaries of the following government program or proposed programs? That is, taking into account how individuals respond to the government program, who is actually better
Explain how the following actual design features have an important effect on the consequences of government programs:a. The income ceiling for eligibility for SNAP benefits is reduced by expenditures
Median voter theory says that to predict changes in collective decision making, one should focus on the median voter. Between 1973 and 1993, average incomes in the United States increased, whereas
One popular voting scheme is rank-order voting, in which individuals assign a rank (1, 2, 3) to the possible alternatives; the assigned ranks are then added up, and the alternative with the lowest
Is the median voter always the voter with the median income? Give examples.
How might the majority voting model be used to explain the growth of government expenditures?a. Should changes in median or average income better explain increases in the demand for government
In Chapters 12 to 16, we will use the framework we have discussed in this chapter to analyze several diff erent government programs. Before reading those analyses, see if you can answer the following
Draw the budget constraint between housing and "other consumption" for an individual on SNAP, where the amount of food assistance the individual receives depends on his or her income net of housing
State governments effectively subsidize tuition in state universities and colleges. How might this affect the amount of education that individuals get? Is there a substitution effect? Is there a
Consider a project that costs $100,000 and yields a return of $30,000 for five years. At the end of the fifth year, there is a cost of $20,000 to dispose of the waste from the project. Should the
Assume there is uncertainty about the costs of disposing of the waste: there is a fifty-fifty chance that they will be $10,000 or $30,000. Discuss how this uncertainty affects the cost- benefit
Assume now that there are two groups in the population. Each contributes equally to the cost of the project, but two-thirds of the benefits accrue to the richer group. Discuss how this alters the
Discuss why, under each of these circumstances, a social cost-benefit analysis might differ from a private cost-benefit analysis:a. The unemployment rate is 10 percent.b. The government has imposed a
For each of the following projects, what benefits or costs might be included in a social cost-benefit analysis that might be excluded from a private cost-benefit analysis:a. A hydroelectric projectb.
How might the techniques used to analyze the distributional consequences in cost–benefit analysis be employed to ensure that concerns about environmental justice are incorporated into the analysis?
How are issues of incidence analysis and capitalization (discussed in the previous chapter) incorporated into cost-benefi t analysis? For each case below, does it make a diff erence to your answer
The government is debating whether to spend $100 billion to reduce global warming damage 100 years from now. It is estimated that $800 billion of damage will be averted. A critic of the expenditure
Assume the government has decided to install a missile system designed to provide a second strike capability with 100 missiles. It is now considering whether to increase the number to 110. Assume you
Should military officers and Defense Department officials be proscribed from working for private defense contractors for a period of several years after termination of their government service?
In what ways is the purchase of a hammer or of labor services by the military different from the purchase of an MX missile system? How does this affect government procurement policies in these two
Consider the following proposed system of bidding: the contract would be awarded to the lowest bidder at the price bid by the second-lowest bid. Why does such a system encourage bidders to bid their
In some cases, the government runs duplicative projects, particularly at early stages of development. What do you think are the advantages of doing this? The disadvantages?
Consider the following proposal for reducing cost overruns. Two contractors would be given a contract to produce a tank of a given specification. Producer A would be reimbursed for the actual costs
Imagine that Congress is considering a bill to reduce the current seventeen-year life of patents to eight years. What negative effects might this change have on the rate of innovation? What positive
Suppose that many years ago, one inventor received a patent for orange juice, and then another inventor came forward and requested a patent for lemonade. The first inventor maintained that the orange
Why might a company invest in R&D even if it does not believe it will be able to patent its discovery?
Some public goods are "local"-that is, they provide services only to those living in a particular locality. What might be meant by a "global" public good? Why might knowledge be thought of as a
In what sense is international security, including efforts to stymie nuclear proliferation, a global public good?
List the various distortions in incentives that arise in the health care sector. (Be sure to include those that affect the purchase of insurance as well as the purchase of health care services
In what ways is the purchase of medical services similar to the purchase of a car? In what ways is it different?
We have noted that there is extensive disagreement on what should be done about the way medical care is provided in the United States. To what extent is this disagreement due to differences in
Consider the “market failures” that arise in medical markets and current proposals for altering the way medical care is provided in the United States. Discuss the extent to which each of the
During the past fifty years there has been a decline in community-run hospitals and an increase in private (for-profit) hospitals. Are there reasons why hospitals should be particularly suited or
Critics of malpractice suits claim that they have contributed significantly to the rise of medical costs and want legislation that would limit the size of awards and lawyers' fees, or otherwise
Assume that medical expenditures are fully deductible from taxes. Show diagrammatically the effect on the demand for medical services. If the elasticity of demand with respect to price is 0.7, what
Some states have proposed requiring community rating-that is, insurance companies would not be allowed to charge individuals different premiums, regardless of their health, age, or sex; everyone in
Many employers offer their employees a choice of plans, paying a fixed share of the cost of each. What inefficiencies does this introduce ? Some employers, such as Stanford University, have instead
Economists have criticized the tax treatment of health insurance. Why have unions resisted changing this tax treatment ? What are the equity and efficiency consequences of capping the tax
a. Discuss the equity and efficiency arguments for raising tuition at state universities. To what extent do your answers depend on whether there is a good college loan program available?b. Discuss
List some characteristics of our educational institutions or outcomes of our educational system that seem to be more consistent with the screening view of education than with the human capital view.
The property tax base per student is often as high in industrial centers as it is in the suburbs. Why might you still expect expenditure per pupil to be lower in industrial centers than in the
Discuss the trade-off s involved in deciding on the appropriate level and form of decentralization/ centralization within education. Bear in mind that different aspects—finance, control of
Discuss the trade-off s between parental choice and equality of opportunity. To what extent should the principle of consumer sovereignty extend to parental rights to choose the amount and form of
Provide an economic analysis of the issue of tracking (putting students of similar abilities in the same classes). What evidence would you like to have to decide whether tracking is desirable? What
A community is considering how to allocate expenditures between education and other goods. Draw the budget constraint, putting "education" on the horizontal axis, and "other goods" on the vertical.a.
List the various concerns about inadequacies of the U.S. educational system. Evaluate various reform initiatives in terms of the extent to which they address these concerns.a. If you thought that the
Assume that spending more on the education of a student increases his or her productivity. Draw the relationship between productivity/wages (assuming that wages increase in tandem with productivity
It has sometimes been suggested that the government should restrict the use of SNAP assistance to “healthful” foods. Discuss the merits of this proposal. Assuming that it would be easy to
Consider a welfare program (such as housing) with an eligibility standard that requires that an individual’s income be below some threshold level. Draw the individual’s budget constraint with and
Consider a welfare program (such as SNAP) with benefits that decrease as an individual’s income increases. Draw the individual’s budget constraint with and without the subsidy. (Put hours of work
There have been proposals for more extensive use of government subsidies to help poor individuals purchase private housing (just as the government’s SNAP assistance helps them purchase food).
Several different proposals have been put forward concerning how housing subsidies shouldbe provided. Discuss the merits of:a. The government’s paying a given fraction of the family’s housing
Assume you were particularly concerned with the welfare of children. How would this affect the kind of welfare programs you might support or how you might design your welfare programs?
a. Draw the budget constraint of an individual facing a negative income tax with a constant marginal tax rate of, say, 30 percent, assuming the individual receives $1000 if he or she does not work
Several proposals have been made to encourage employers to hire former welfare recipients, but there has been concern that such subsidies will lead to welfare recipients' simply displacing other
Calculate the slopes of different segments of the stylized budget constraint of Figure 15.2. What other shapes might the budget constraint take? Percent of public
For each of the major aspects of the Social Security program (retirement insurance, survivors’ insurance, disability insurance) describe the market failures that gave rise to the program or that
List the risks against which the Social Security program provides insurance. In which of these instances do you think providing insurance affects the likelihood of the insured against events
What are the theoretical reasons why Social Security might be expected to decrease savings? Are there any theoretical reasons why Social Security might be expected to increase savings? Why might a
Discuss the equity and efficiency effects of the following recent and proposed changes in the Social Security system and, where appropriate, provide alternative reforms directed at the same
To what extent could the purposes of the Social Security program be served by a law requiring individuals to purchase retirement insurance from a private firm? Discuss the difficulties with such a
Do you think Social Security benefits, unemployment benefits, or disability payments should be treated like ordinary income for purposes of the income tax ?
Consider a simple life-cycle model, in which individuals live for two periods; they work in the first, saving for the second. Let C1 denote consumption in the first period and C2 in the second; r,
Smokers do not live as long as nonsmokers. This means that the expected present discounted value of Social Security benefits for smokers is much smaller than that for nonsmokers. Is this unfair ?

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