Applied Public Economics
Exam Materials
Course Introduction
Applied Public Economics examines the role of government in the economy through the lens of real-world policy issues and empirical analysis. The course explores how public policies such as taxation, government spending, social insurance, education, and health care affect economic outcomes, equity, and efficiency. Students learn to apply microeconomic and econometric tools to evaluate the design, implementation, and impact of public intervention, drawing on case studies and current policy debates. Emphasis is placed on understanding key concepts such as market failure, externalities, public goods, and the trade-offs involved in redistribution and resource allocation.
Recommended Textbook Public Finance 10th Edition by Harvey S. Rosen
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Chapter 1: Introduction
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Q1) Payroll taxes are a major financing tool at the federal level.
A) True
B) False
C) Uncertain
Answer: A
Q2) The Constitution of the United States says nothing about state economic activity.
A) True
B) False
C) Uncertain
Answer: B
Q3) The federal government gets most of its revenue from A) personal income taxes.
B) property taxes.
C) sales taxes.
D) payroll taxes.
Answer: A
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Chapter 2: Tools of Positive Analysis
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Q1) Positive economics
A) does not depend on market interactions.
B) only looks at the best parts of the economy.
C) examines how the economy actually works (as opposed to how it should work).
D) is very subjective.
Answer: C
Q2) A model is a simplified description of some aspect of the economy.
A) True
B) False
C) Uncertain
Answer: A
Q3) Econometrics is the statistical analysis of economic data.
A) True
B) False
C) Uncertain Answer: A
Q4) Why might the consequences of imposing a tax on harmful fast foods not adhere to theory?
Answer: Preferences of people with different desires could be altered in unintended ways.All variables could not be controlled for.
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Chapter 3: Tools of Normative Analysis
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Q1) In equilibrium,the MRT should not equal the MRS of all individuals.
A) True
B) False
C) Uncertain
Answer: B
Q2) Pareto points in the Edgeworth Box are
A) found when utility curves are tangent.
B) found when MRS are equal.
C) found when one person cannot be made better off without making another person worse off.
D) all of these answer options are correct.
E) none of these answer options are correct.
Answer: D
Q3) Why might asymmetric information contribute to the problem of a market failure?
Answer: One of the underlying tenets of economics is complete and free flowing information.Without such information,one side of a transaction could gain an unfair advantage making free exchange impossible.
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Chapter 4: Public Goods
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Q1) The MRT is
A) the marginal ring tone.
B) the minimal rate of time.
C) the maximum rate of transformation.
D) none of these answer options are correct.
Q2) Private goods are always provided by the private sector.
A) True
B) False
C) Uncertain
Q3) Discuss and contrast the advantages and disadvantages of public highways versus toll roads.
Q4) Choosing between public or private provision of a good always lead to market efficiencies.
A) True
B) False
C) Uncertain
Q5) Suppose there are two individuals with identical demand curves characterized by the equation P = 2 - Q.What is market demand if these demand curves are added horizontally? Vertically?
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Chapter 5: Externalities
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Q1) Technology standards work in reducing externalities of all kinds.
A) True
B) False
C) Uncertain
Q2) Externalities require government intervention when
A) violence will result between disputing parties.
B) there are only a few sellers in the market.
C) property rights are not clearly established.
D) the government imposes sales taxes.
E) all of these answer options are correct.
Q3) A Pigouvian subsidy
A) cannot exist with externalities.
B) is the same thing as a Pigouvian tax.
C) is measured in terms of Pigouvian dollars.
D) moves production to the socially optimal level of output.
Q4) In the 1970s,the U.S.relied on Command-and-Control models of pollution regulation.
A) True
B) False
C) Uncertain
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Chapter 6: Political Economy
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Q1) Suppose there were three candidates running for office: Dewey,Cheatum,and Howe.Suppose a majority of voters preferred Cheatum to Dewey.Does this mean that a majority of voters preferred Howe to Dewey?
Q2) Government is inherently bad.
A) True
B) False
C) Uncertain
Q3) Special interest groups are a determent to the political process.
A) True
B) False
C) Uncertain
Q4) With multiple-peaked preferences,
A) a unique political equilibrium does not exist.
B) all individuals have a point that is most preferred.
C) the law of transitivity is violated.
D) all of these answer options are correct.
Q5) Special interest groups are not always perceived to add a positive to society.Discuss why this is so.
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Chapter 7: Education
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Q1) Refer to Table 7.1 below.By what percentage does real annual expenditures in public elementary and secondary schools rise between 1980 and 1985? Between 2005 and 2010? What can be said about the rate of change?
Q2) Loans are better than grants for higher education.
A) True
B) False
C) Uncertain
Q3) Do you believe that class size reductions will help student performance?
Q4) A criticism of market-oriented schemes says that consumers may not be well informed.
A) True
B) False
C) Uncertain
Q5) Public provision of education might
A) cause property values to fall.
B) crowd out private provision.
C) decrease local taxes.
D) none of these answer options are correct.
Q6) Does increasing reliance on student loans distort students' career choices?
Page 9
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Chapter 8: Cost-Benefit Analysis
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Q1) The government has hired you to advise them on the merits of a project that is being proposed.The project is expected to generate benefits of 14 million dollars today,5 million dollars in one year from today,and 1 million dollars in two years from today.(These are the only years of concern.)The project costs nothing today,but will cost 20 million dollars in two years.Assume the interest rate is 10%.If the benefit-cost ratio is greater than 1,the project should be allowed.What is your policy suggestion?
Q2) Some analysts have argued that cost-benefit analysis does not take into account issues involving equity and is nothing more than an efficiency test.Do you agree with this statement?
Q3) The term "present value" refers to the future value of present day money.
A) True
B) False
C) Uncertain
Q4) When the benefit-cost ratio of a project is greater than 1,the project should be considered.
A) True
B) False
C) Uncertain
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Chapter 9: The Health Care Market
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Q1) Suppose that the demand for medical services can be characterized by the equation P = 100 - Q.Suppose further that the supply of health services can be characterized by the equation P = Q + 50.
(a)What is the equilibrium quantity and price in the market for health services?
(b)In an effort to make health services more affordable,the government restricts the price of health services to be no greater than $65.What will happen to the quantity of health services in the market?
Q2) Paying money in order to guarantee a certain level of compensation should an adverse event occur is
A) risk aversion.
B) risk smoothing.
C) risk pooling.
D) risk rating.
Q3) President Obama has suggested some form or universal health coverage for all Americans.How do you feel about this?
Q4) Health care costs have been increasing dramatically in the U.S.
A) True
B) False
C) Uncertain
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Chapter 10: Government and the Market for Health Care
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Q1) What does job lock mean?
A) A tendency for workers to remain in their jobs to keep their insurance coverage
B) A job where a time clock is used
C) A job that provides insurance coverage only after several years of employment
D) all of these answer options are correct.
Q2) Under federal tax law,employer-provided health insurance is not subject to taxation.
A) True
B) False
C) Uncertain
Q3) __________ account(s)for the largest portion of public health expenditure in the United States.
A) Children's hospitals
B) Universal health coverage
C) Medicaid
D) Medicare
Q4) With the aging of the American population,it might be necessary to reduce the medical benefits to elderly.How do you feel about this idea?
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Chapter 11: Social Security
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Q1) Average indexed monthly earnings are derived from the worker's earnings history and determine the primary insurance amount (PIA).
A) True
B) False
C) Uncertain
Q2) Social insurance can be justified on the grounds of A) adverse selection.
B) decision-making costs.
C) income distribution.
D) paternalism.
E) all of these answer options are correct.
Q3) Suppose that the ratio of retirees to working citizens is currently 1 to 5,meaning that there are 5 working people for every retiree.Suppose that in thirty years the ratio will change to 1 to 2.If benefits remain the same,what will happen to the tax rate assuming retirees are provided benefits in a pay-as-you-go system? How much would benefits decrease if the tax rate remained the same?
Q4) Work disincentives in the system of Social Security have seen the number of persons in the program increase dramatically.What incentives could be put in place to reverse,or at least slow,this trend?
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Chapter 12: Income Redistribution: Conceptual Issues
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Q1) Poverty is relative and not absolute.
A) True
B) False
C) Uncertain
Q2) For the additive social welfare function to yield results,we must assume
A) individuals have identical utility functions.
B) individuals' utility functions have diminishing marginal utility of income.
C) the total amount of income available is fixed.
D) all of these answer options are correct.
Q3) Giving poor people food instead of cash for food
A) is an in-kind transfer.
B) will benefit some more than others,depending on their utility function.
C) is politically popular.
D) all of these answer options are correct.
Q4) The poverty line in the United States
A) last changed in 1980.
B) never changes.
C) changes with the level of inflation and family size.
D) changes with the minimum wage.
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Chapter 13: Expenditure Programs for the Poor
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Q1) One of the changes in the welfare system of the United States that occurred in 1996 was a move to block grants for states.What advantage(s)might a block grant system allow?
Q2) Under TANF,the time limit for receiving benefits during a lifetime is
A) 12 years.
B) 13 weeks.
C) 60 months.
D) 5 months.
Q3) The Earned Income Tax Credit (EITC)
A) provides more income to those people on welfare.
B) is a tax on low income workers.
C) provides additional tax credits to low income workers.
D) is a tax break for the wealthiest Americans.
Q4) A dollar reduction in benefits as a result of a dollar income from working is a
A) 50% tax rate.
B) 75% tax rate.
C) 22.5% tax rate.
D) 100% tax rate.
Q5) What are some of the drawbacks,as you see them,to a program like Workfare?
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Chapter 14: Taxation and Income Distribution
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Q1) A lump sum tax is one for which the individual's liability does not depend on behavior.
A) True
B) False
C) Uncertain
Q2) Consider a monopolist who has a total cost curve of: TC = 7X + (1/2)X2.The market demand equation is X<sub>d</sub> = 386 - (1/2)P.
A)What are the equilibrium quantity,equilibrium price,and profits in this market?
B)Suppose that a unit tax of $1 is placed on the monopolist.What happens to the equilibrium quantity,equilibrium price,and profits? How much tax revenue does the government generate?
C)Suppose that the same unit tax of $1 is placed on consumers.What happens to the equilibrium quantity,equilibrium price,and profits? How much tax revenue does the government generate?
D)What can be said about the taxes?
Q3) Why is it the case that taxes in one market can have impacts on supply and demand in others and should policy makers take this into account when setting taxes?
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Chapter 15: Taxation and Efficiency
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Q1) A tax that causes the price that producers receive for a commodity to deviate from the buyer's price is
A) an unit tax.
B) a compensated tax.
C) an income tax.
D) a price-distorting tax.
Q2) Suppose the inverse demand curve for good A is given by the equation P<sub>A</sub> = 10 - Q<sub>A</sub>/10,and the supply curve is perfectly elastic (horizontal)at $1.Good A is presently taxed at $2 per unit.Good B (which is independent of good A)has an inverse demand curve,P<sub>B</sub> = 5 - Q<sub>B</sub>/20,and is also perfectly elastic at $1.Good B is untaxed.
(A)How much tax revenue is collected and what is the excess burden of the $2 tax on A?
(B)How much revenue is collected if the tax on good A is reduced to $1 per unit and good B is taxed at $1 per unit?
(C)What is the total excess burden of taxing both goods at $1 per unit?
(D)Which tax system is preferable from the point of view of economic efficiency?
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Chapter 16: Efficient and Equitable Taxation
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Q1) One of the conditions mentioned in our formulation of the Ramsey Rule is that goods be unrelated in consumption.Do you think this is a reasonable assumption? If this condition does not hold,will the Ramsey Rule still work?
Q2) Income is a poor measure of relative position when attempting to determine horizontal equity.
A) True
B) False
C) Uncertain
Q3) Optimal commodity taxation would
A) put a tax on leisure time,which is currently untaxed.
B) have the smallest amount of excess burden possible for a given amount of tax revenue.
C) optimize tax rates on the wealthiest Americans.
D) eliminate tax evasion in the United States.
Q4) A linear income tax schedule is known as
A) a flat income tax.
B) a regressive tax.
C) a Haig-Simons tax.
D) a user fee.
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Chapter 17: The Personal Income Tax
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Q1) Tax expenditures are revenues that
A) are always recouped during tax season.
B) only apply to large corporations.
C) are needed to get full exemptions.
D) are forgone due to preferential tax treatment.
Q2) Flat tax
A) is same tax rate to everyone.
B) is same tax rate to each component of income.
C) allows a tax base with no deductions with a few exemptions and expenses.
D) is same tax rate to everyone and to each component of income only.
E) all of these answer options are correct.
Q3) A tax credit
A) is not the same as a tax deduction.
B) is another phrase for a tax deduction.
C) is never calculated on federal tax returns.
D) only applies to the EITC.
Q4) Only realized capital gains are included in taxable income.
A) True
B) False
C) Uncertain
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Chapter 18: Personal Taxation and Behavior
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Q1) Residential housing consumption is not affected by U.S.personal income taxes.
A) True
B) False
C) Uncertain
Q2) The Laffer curve is
A) never referred to in modern day discussions of public finance.
B) a curve that describes the relationship between tax rates and tax revenues.
C) used to describe the relationship between consumption and hours worked.
D) a curve that refers to the endowment of time.
Q3) In the leisure-income model,taxing income causes
A) the budget constraint to kink.
B) males to work to change their work habits dramatically.
C) utility to increase.
D) all of these answer options are correct.
Q4) Real rates of return are
A) not taxed.
B) not adjusted for inflation.
C) adjusted for inflation.
D) used in individual financing and not corporate financing.
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Chapter 19: The Corporation Tax
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Q1) In the short run,a tax on economic profits can be shifted.
A) True
B) False
C) Uncertain
Q2) Firms use the discount rate to
A) compute present value.
B) account for loss inventory.
C) calculate profit margins.
D) repatriate parent companies.
Q3) When one company is owned by a corporation but is chartered separately from the parent company,this is A) a subsidiary.
B) a clone.
C) used for tax evasion.
D) illegal.
Q4) The cost that a firm incurs as a consequence of owning an asset is known as A) accelerated depreciation.
B) expensing.
C) user cost of capital.
D) economic depreciation.
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Chapter 20: Deficit Finance
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Q1) The burden of debt is borne by future generations.
A) True
B) False
C) Uncertain
Q2) At a given point in time,if all past deficits and surpluses were added,we would get the
A) Ricardian model.
B) debt.
C) crowding-out model.
D) total amount of excess burden.
Q3) High real interest rates
A) increase the demand for the domestic currency by foreigners.
B) cause decreased job opportunity.
C) cause worker productivity to decrease.
D) crowd out interest-sensitive expenditures.
Q4) The burden of the debt can be viewed as
A) a moral question.
B) a political question.
C) a financial question.
D) all of these answer options are correct.
Page 22
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Chapter 21: Fundamental Tax Reform: Taxes on Consumption and Wealth
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Q1) Excise taxes are distortionary taxes.
A) True
B) False
C) Uncertain
Q2) A trust that is the legal owner of a life insurance policy is
A) a policy holder.
B) an insurance trust.
C) a trust fund.
D) none of these answer options are correct.
Q3) Why might an individual set up trusts?
A) as a strategy to avoid taxes on wealth.
B) for lower insurance premiums.
C) to insure the security of a loan.
D) to have a steady stream of income during retirement.
Q4) A publisher sells $400,000 worth of books,magazines,and other reading materials in a given year.The publisher earns a profit of $100,000 that year.Her purchase invoices indicate that she bought $100,000 worth of glue,paper,and other materials during the year.Her labor costs were $150,000,and she purchased $45,000 of new equipment that year.Calculate her tax liability under a 12% consumption-type,value-added tax.
Page 23
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Chapter 22: Public Finance in a Federal System
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Q1) Property taxes are currently unpopular.In the future,they will be more popular.
A) True
B) False
C) Uncertain
Q2) The Tiebout model assumes that public services are financed by a proportional property tax.
A) True
B) False
C) Uncertain
Q3) The Tiebout model can be summarized as "voting with the invisible hand."
A) True
B) False
C) Uncertain
Q4) Local property tax policy generally has a small effect on the property tax base.
A) True
B) False
C) Uncertain
Q5) The Tiebout model offers a quasi-market solution to public good production and community development.What are some drawbacks to this model?
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