Public Finance Ch 1-4

The tax reform package passed by Congress is estimated to result in $1.5 trillion less revenue collected over ten years if the economy grew at the same rate it was expected to before the tax change, but is estimated to result in a $1.0 trillion reduction of revenue after increased economic growth is taken into account. The indirect effect of the tax reform package over ten years is:

$0.5 trillion revenue gain

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. Refer to Figure 10-13. If the government imposed a corrective tax that successfully moved the market from the market equilibrium to the social optimum, then tax revenue for the government would amount to

$2,000.

Before considering any public project, the government should (i) compare the total cost and total benefits of the project. (ii) conduct a cost-benefit analysis. (iii) infer that citizens who vote for a project are willing to pay equally for it.

(i) and (ii) only

Which of the following is a disadvantage of government provision of a public good such as national defense? (i) The government does not know the exact willingness of consumers to pay for the public good. (ii) The free-rider problem is more likely to occur when the government provides a public good than when the private sector provides a public good. (iii) Taxpayers do not agree on the optimal quantity of the public good that the government should provide.

(i) and (iii) only

Figure 21-25 The figure pertains to a particular consumer. On the axes, X represents the quantity of good X and Y represents the quantity of good Y. Refer to Figure 21-25. Suppose the price of good X is $10, the price of good Y is $5, and the consumer's income is $210. Then the consumer's optimal choice is to buy

14 units of good X and 14 units of good Y.

Table 11-1 Consider the town of Springfield with only three residents, Sophia, Amber, and Cedric. The three residents are trying to determine how large, in acres, they should build the public park. The table below shows each resident's willingness to pay for each acre of the park. Acres Sophia Amber Cedric 1 $10 $24 $6 2 8 18 5 3 6 14 4 4 3 8 3 5 1 6 2 6 0 4 1 7 0 2 0 Refer to Table 11-1. Suppose the cost to build the park is $24 per acre and that the residents have agreed to split the cost of building the park equally. If the residents vote to determine the size of park to build, basing their decision solely on their own willingness to pay (and trying to maximize their own surplus), what is the largest park size for which the majority of residents would vote "yes?"

2 acres

Table 11-2 Consider a small town with only three families, the Greene family, the Brown family, and the Black family. The town does not currently have any streetlights so it is very dark at night. The three families are considering putting in streetlights on Main Street and are trying to determine how many lights to install. The table below shows each family's willingness to pay for each streetlight. Number of Streetlights The Greene Family The Brown Family The Black Family 1 $340 $480 $420 2 260 380 400 3 160 260 340 4 40 130 240 5 0 50 100 6 0 0 20 Refer to Table 11-2. Suppose the cost to install each streetlight is $900. How many streetlights should the town install to maximize total surplus from the streetlights?

2 streetlights

Positive production externalities

agglomeration economies; large plants raise the productivity of surrounding plants by bringing in more labor and infrastructure (production increases the well-being of others who do not compensate the producer)

Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain? (i) corrective taxes (ii) tradable pollution permits (iii) amendments to the Clean Air Act

both (ii) and (iii)

Figure 21-17 Refer to Figure 21-17. When the price of X is $40, the price of Y is $40, and income is $160, Paul's optimal choice is point B. Then Paul's income increases to $320, and his optimal choice is point E. For Paul,

both good X and good Y are normal goods

The recent tax cut package passed by Congress is estimated to have a direct effect of $1.5 trillion in revenue losses, but an indirect effect of increasing revenue by $500 billion through increased economic growth over the 10-year time frame being examined. The net effect is $1.0 trillion less revenue over ten years. The $1 trillion revenue figure is an example of

dynamic scoring

A cable television broadcast of a movie is

excludable and not rival in consumption.

The deficit is a ________ and the public debt is a __________

flow; stock

To achieve the optimal provision of public goods, the

government must either provide the goods or subsidize their production.

A consumer consumes two normal goods, coffee and chocolate. The price of coffee rises. The income effect, by itself, suggests that the consumer will consume

less coffee and less chocolate.

A negative externality will cause a private market to produce

more than is socially desirable.

Figure 10-1 Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates

negative externalities.

Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets an $80 benefit from being messy but imposes a $60 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to

pay you at least $60 but less than $80 to live with the clutter.

Negative production externality ex

pollution alcohol (When consumption reduces the well-being of others who are not compensated by the consumer)

Because there are positive externalities from higher education,

private markets will under-supply college classes

If you take a large group and randomly sort them into two groups, then the two groups should have roughly the same features (distribution of age, gender, preferences, etc.). If you then change something one group faces relative to the other, you can determine the effect of changing that one specific thing. This is an example of a

randomized trial

A free rider is a person who

receives the benefit of a good but avoids paying for it.

Which of the following is mandatory spending (entitlement spending)?

social security

Positive consumption externalities ex

vaccines (consumption increases the well-being of others who do not compensate the consumer)

Jerry consumes two goods, hamburgers and ice cream sandwiches. He has maximized his utility given his income. Ice cream sandwiches costs $2, and he consumes them to the point where the marginal utility he receives is 6. Hamburgers cost $4, and the relationship between the marginal utility that Jerry gets from eating hamburgers and the number he eats per month is as follows: Hamburgers 1 2 3 4 5 6 Marginal Utility 20 16 12 8 4 0 How many hamburgers does Jerry buy each month?

3

Figure 10-11 Refer to Figure 10-11. "The social value of the last unit produced exceeds the private cost of the last unit produced by $13.50." This statement is correct at which quantity of output?

330 units

The Occupational Safety and Health Administration (OSHA) has determined that the probability of a worker dying from exposure to a hazardous chemical used in the production of fertilizer is 0.008. The cost of imposing a regulation that would ban the chemical is $32 million. If the value of a human life is equal to $10 million, how many people must the policy affect in order for the benefits to exceed the costs?

401

Figure 21-16 Refer to Figure 21-16. The price of X is $20, the price of Y is $5, and the consumer's income is $40. Which point represents the consumer's optimal choice?

A

If Texas bought land around the Comal River for $500 million in order to construct a dam, this would be

A decrease in cash but an increase in capital

Figure 10-17 Refer to Figure 10-17. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

An amount equal to the external cost.

Private marginal benefit

Direct benefit to consumers of consuming an additional unit of the good by the consumer.

Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that

Firm B will no longer pollute, and Firm A will not reduce its pollution at all.

From the above graph, what can we say?

Gas prices seem to have very little demand on gasoline demand in the short term.

Figure 21-18 Refer to Figure 21-18. Bundle D represents a point where

MRSxy < Px/Py.

When should the government intervene the economy?

Never

In a certain city, the government is considering acquiring some land and turning it into a park (without any fences or gates). In an attempt to determine the extent to which residents of the city would value the park, residents are asked to fill out a questionnaire. Which of the following is correct?

On the questionnaire, some residents are likely to exaggerate the value they associate with the park. b. On the questionnaire, some residents are likely to exaggerate the costs they associate with the park. c. The use of such a questionnaire in cost-benefit analysis is likely to produce only rough approximations of residents' perceptions of the costs and benefits of a park.

Social marginal benefit

Private marginal benefit minus any costs associated with consumption of the good.

49 of the 50 states have mandated the use of seatbelts. The states chose to do so at different times. In each state that required seatbelts, property damage accidents and pedestrian deaths ROSE the year after implementation, while driver fatalities declined. What can we reasonably say from this information?

Seat belt laws cause pedestrian deaths

Which of the following is not an important area of public finance?

Social security Healthcare Education Welfare

We set up an experiment as follows. We set up a control group with all of the female waitstaff of a restaraunt and have them draw smiley faces on the checks when they give them to patrons, and we have all the male waitstaff simply leave the check alone, and we find that tips increase when there is a smiley face on the check. What have we learned? Choose the BEST answer.

That customers tip more when their server is a woman OR when there is a smiley face on the check.

The crowding-out effect would be a problem if

The supply of savings relative to the budget deficit is fairly small

What is the goal of public finance?

The understand the proper role of government in the economy.

What is the problem with page 83 of the textbook?

They didn't update Table 3-1.

Under which of the following scenarios would a park be considered a public good?

Visitors can enter the park free of charge and there are always plenty of empty picnic tables.

Negative production externality

When production reduces the well being of others who are not compensated by the firm. Social marginal cost > Private marginal cost (marginal damage is the difference).

Consider the four basic questions of public finance listed in the chapter. Which of these questions are positive—that is, questions that can be proved or disproved—rather than normative—that is, questions of opinion?

When should the government intervene in the economy? Correct What is the effect of those interventions on economic outcomes? Correct How might the government intervene? Correct Why do governments choose to intervene the way they do?

If gasoline taxes were significantly increased in the United States, then

a. some of the government regulations that require automakers to produce more fuel-efficient cars would become unnecessary. b. other taxes, such as income taxes, could be lowered. c. it is likely that roads would become safer and the environment would become cleaner.