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Instructor’s Manual
to accompany
Public Finance
Seventh Edition
Suggested Answers to Discussion Questions
and Sample Exams
by Harvey S. Rosen
March 2004
?McGraw-Hill/Irwin 2004
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Suggested Answers to Discussion Questions
Some of the questions have no single “correct” answer – reasonable people can go off in different directions. In such cases, the answers provided here sketch only a few possibilities.
Chapter 1 1. a. Putin’s statement is consistent with an organic conception of government.
Individuals and their goals are less important than the state.
b. Rehnquist makes a clear statement of the mechanistic view of the state.
2. a. A person with an organic conception of the state might react favorably, arguing
that even if an individual owner is worse off because he must show only French movies, the nation is better off because it achieves more unity.
b. A libertarian would certainly reject this policy and the reasoning behind it--there is
no “national interest” independent of the interests of individuals, and people should have the right to run their lives in the way that they prefer--including seeing whatever movies they want. c. A Social Democrat would try to balance these two aims, and it is hard to predict
how he or she would come out.
3. Mechanistic view of government says that the government is a contrivance created by
individuals to better achieve their individual goals. Within the mechanistic tradition, people could disagree on the obesity tax. Libertarians would say that people can decide what is best for themselves. They do not need prodding from the government. In contrast, social democrats might believe that people are too short sighted to know what is good for them, so that government-provided inducements are appropriate. 4. a. If the size of government is measured by direct expenditures, the mandate does not
directly increase it. Costs of compliance, however, may be high and would appear as an increase in a “regulatory budget.”
b. It’s hard to say whether this represents an increase or decrease in the size of
government. One possibility is that GDP stayed the same, and government purchases of goods and services fell. Another is that government purchases of goods and services grew, but at a slower rate than the GDP. One must also consider coincident federal credit and regulatory activities and state and local budgets. c. The federal budget would decrease if grants-in-aid were reduced. However, if
state and local governments offset this by increasing taxes, the size of the government sector as a whole would not go down as much as one would have guessed.
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5. 6.
The inflation erodes the real value of the debt by 0.032 x ￡332 billion or ￡10.6 billion. This figure should be included as revenue to the government.
The federal government grew by $450 billion. However, because the price level went up by 16 percent, in terms of 2001 dollars this amounted to a decrease of $224 billion (=$1.86 trillion - 1.16x$1.41 trillion). As a proportion of GDP, federal spending in 1993 was 21.2 percent and in 2001 it was 18.2 percent. Hence, by both measures, the size of government fell. To get a more complete answer, one would want data on the population (to compute real spending per capita). Also, it would be useful to add in expenditures by state and local governments, to see if the total size of government fell. Also, although it would be harder to measure, one would want to try to gain some sense of how the regulatory burden on the economy grew during this time period.
Chapter 2 1. The reality that astronomers are trying to understand is not influenced by any “policies”
that astronomers might implement. Moreover, the parameters with which astronomers must deal are constant over time, while the parameters in economics can change across time and space. 2. A change in the marginal tax rate changes the individual’s net wage. This generates both
an income effect and a substitution effect. As long as leisure is a normal good, these effects work in opposite directions. Hence, one cannot tell a priori whether labor supply increases or decreases. One could ask taxpayers to describe how they would change their behavior under the proposal, but it is hard to imagine that this would yield useful results. In a social experiment, a control group would confront the status quo, and an experimental group would face the new tax regime. This is clearly infeasible. Econometric investigation of labor supply seems the best approach, particularly if data associated with past changes in tax rates can be brought to bear on the problem. 3. Generally, economic outcomes are affected by a number of variables. Economists cannot
perform controlled randomize experiments, which makes it difficult to assess how any single variable affects a given outcome. Similarly, brain impairment may be due to a number of factors. Ecstasy users clearly are not a random sample of the population. Hence, one does not know whether brain impairment is due to Ecstasy or some variable that is correlated with Ecstasy use. 4. The text points out the pitfalls of social experiments: the problem of obtaining a random
sample and the problems of extending results beyond the scope of the experiment. Participants in the study had found it to their advantage to be a part of the experiment, which may have resulted in a self-selected population unrepresentative of the wider group of health care consumers. Further, physicians’ “standard practices” are largely determined by the circumstances of the population as a whole, not the relatively small experimental group.
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5.
There appears to be a weak relationship between deficits and interest rates. Indeed, it might appear that when large deficits lead to lower interest rates. However, one would need more data to investigate this question. One would want to look at deficits relative to GDP. One would like to control for other factors that can affect interest rates, such as monetary policy and the level of economic activity.
Chapter 3 1. a.
In this particular insurance market, one would not expect asymmetric information
to be much of a problem – the probability of a flood is common knowledge. Moral hazard could be an issue – people are more likely to build near a beach if they have flood insurance. Still, one would expect the market for flood insurance to operate fairly efficiently.
There is substantial asymmetric information in the markets for medical insurance and malpractice insurance. For efficient consumption, the price must be equal to the marginal cost, and the effect of insurance may be to reduce the perceived price of medical care consumption. That would lead to consumption above the efficient level. Because of the roles of regulation, insurance, and the shifting of costs from the uninsured to the insured, there is little reason to expect the market to be efficient.
In the stock market there is good information, and thousands of buyers and sellers. We expect, in general, efficient outcomes.
From a national standpoint, there is a good deal of competition and information. The outcome will likely be efficient. However, some firms might exercise some market power.
Student loan markets may be imperfect because of asymmetric information--student knows better than lender whether he will work hard enough to repay the loan.
Car insurance markets may be imperfect because of asymmetric information. Drivers who know they are particularly accident prone will be particularly likely to want car insurance (or policies with greater coverage).
b.
c.
d.
e. f. 2.
Point a represents an equal allocation of water, but it is not efficient because there is no tangency. Point b is an efficient allocation (but not the only one). ’.
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3.
AD:
1) 2)
The dashed line is positioned at the halfway point on the horizontal axis. Point b is a tangency
The marginal rate of transformation between foreign and domestic moves depends on the ration of their prices before taxes and subsidies. Because of the wedge created by the taxes and subsidies, the two price ratios are different. Therefore, the marginal rate of substitution and marginal rate of transformation are not equal, and the allocation of resources is inefficient. a.
Social indifference curves are straight lines with slope of –1. As far as society is concerned, the “util” to Augustus is equivalent to the “util” to Livia.
4.
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《财政学》（第七版）课后题答案
