Public Sector Economics
Final Exam
Course Introduction
Public Sector Economics examines the role of government in the economy, focusing on the rationale for public intervention, the provision of public goods, taxation, government expenditure, and the design of effective public policies. The course analyzes how governments address market failures, redistribute income, and influence economic efficiency and equity. Topics include cost-benefit analysis, externalities, social insurance programs, fiscal federalism, and the measurement and impacts of government debt. Through theoretical frameworks and real-world case studies, students gain insights into the challenges and trade-offs involved in managing public resources and shaping economic policy.
Recommended Textbook
Public Finance 9th Edition by Harvey S. Rosen Ted Gayer
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22 Chapters
735 Verified Questions
735 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) Why do/should we care that federal expenditures are becoming an increasingly larger portion of GDP?
Answer: We should care that federal expenditures are becoming an increasingly larger portion of GDP because of public sector crowding out.
Q2) Personal income and Social Security payroll taxes are currently the largest sources of government revenue.
A)True
B)False
Answer: True
Q3) Public finance
A)is not like public economics.
B)develops principles for understanding the economic role of government.
C)only works for local and state governments.
D)is all of the above.
Answer: B
Q4) Payroll taxes are a major financing tool at the federal level.
A)True
B)False
Answer: True
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Chapter 2: Tools of Positive Analysis
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Sample Questions
Q1) The substitution effect
A)is when individuals consume more of one good and less of another.
B)is associated with changes in relative prices.
C)will have no effect if goods are unrelated.
D)is all of the above.
Answer: D
Q2) The equation containing Y<sup>3 </sup>would be A)linear.
B)quadratic.
C)a Nash equilibrium.
D)inefficient.
E)nonlinear.
Answer: E
Q3) Normative 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)embodies value judgments.
Answer: D
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Chapter 3: Tools of Normative Analysis
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Sample Questions
Q1) Market failure can occur when
A)monopoly power exists in the market.
B)markets are missing.
C)consumers can influence prices.
D)all of the above.
Answer: D
Q2) Points outside the production possibility frontier are
A)producible.
B)endowment points.
C)consumer equilibrium points.
D)unattainable.
Answer: D
Q3) The marginal rate of substitution is
A)the slope of the utility curve.
B)the slope of the contract curve.
C)the slope of the utility possibilities curve.
D)none of the above.
Answer: A
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Chapter 4: Public Goods
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Sample Questions
Q1) Public goods are characterized by A)nonrivalness.
B)excludability.
C)the sum of the MRSs equaling MRT.
D)all of the above.
Q2) From Figure 4.3 ,the market price of rockets is A)10.
B)4.
C)6.
D)20.
Q3) Vertical summation of demand curves yield results equivalent to those of horizontal summation.
A)True
B)False
Q4) Demand curves for pure public goods satisfy the law of demand.
A)True B)False
Q5) Private goods are always provided by the private sector. A)True B)False
Page 6
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Chapter 5: Externalities
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Sample Questions
Q1) Which policy is more effective when handling externalities: Cap-and-trade or emissions fee?
Q2) The desire in the US for owner-occupied housing led to subsidies that contributed to the recession which started in 2007.
A)True
B)False
Q3) Which of the following is correct?
A)SMC = PMC - MD
B)MPB = MSB + MEB
C)SMC = PMC + MD
D)MSC = MPB
E)MSB =MSC + MPB
Q4) A subsidy for pollution not produced can induce producers to pollute at the efficient level.
A)True B)False
Q5) An emissions fee is preferable to a cap-and-trade when MSB are elastic and costs are uncertain.
A)True
B)False
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Chapter 6: Political Economy
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Sample Questions
Q1) Arrow's impossibility theorem is not relevant to modern analysis of political economy.
A)True
B)False
Q2) The Marxist view would say that there is an overproduction of goods by the private sector.
A)True
B)False
Q3) Most economists - both liberals and conservatives - believe a balanced budget amendment is an ill-conceived idea.
A)True
B)False
Q4) Government bureaucrats want larger budgets
A)because salaries are sometimes tied to budget size.
B)to fulfill an "empire building" tendency.
C)because it may be necessary to ensure marginal benefits of output equal marginal costs.
D)because of all of the above.
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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Sample Questions
Q1) The presence of positive externalities _____ justify the current structure of government programs for higher education.
A)should B)does
C)should not
D)does not.
Q2) The federal government subsidizes higher education
A)less than primary and secondary education.
B)more than primary and secondary education.
C)about the same as primary and secondary education.
D)because it does not subsidize primary and secondary education.
Q3) Education is one of the few areas of study in your text that do not require the use of public finance.
A)True
B)False
Q4) Government subsidies for education are motivated by A)concerns over disease.
B)concerns over creating jobs for teachers.
C)concerns over equity.
D)concerns over choice.
Page 9
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Chapter 8: Cost-Benefit Analysis
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Sample Questions
Q1) The rate at which future money must be discounted is known as the A)rate of inflation.
B)exposure rate.
C)discount rate.
D)time rate.
Q2) What is the interest rate that should be used to ensure a total balance of $3,000 two years from now if you have a starting balance of $2,000?
Q3) When wages are viewed as benefits instead of costs of a project,it is an example of the
A)labor game.
B)chain-reaction game.
C)double-counting game.
D)dating game.
Q4) Some people prefer more risky projects than less risky projects.But some people prefer less risky projects to those that are more risky.What explains this behavior?
Q5) The internal rate of return is likely to lead to incorrect decisions.
A)True
B)False
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Chapter 9: The Health Care Market
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Sample Questions
Q1) Health care costs have been increasing dramatically in the US.
A)True
B)False
Q2) Since nearly a third of all people between the ages of 18 and 24 are uninsured,does it make sense to impose a surcharge for medical services to this cohort?
Q3) A third-party payment is
A)made by three people.
B)a payment that requires three signatures.
C)is made by someone other than the consumer.
D)is not used in the US health system.
Q4) Health care markets may be inefficient because of
A)poor information.
B)adverse selection.
C)moral hazard.
D)all of the above.
Q5) Expected values
A)are calculated as the average value.
B)are calculated over all possible outcomes.
C)are weighted by the probability of an even occurring.
D)all of the above.
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Chapter 10: Government and the Market for Health Care
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Sample Questions
Q1) Generally,managed care means
A)health care is provided by teams,not by an individual doctor.
B)limits are placed on utilization of health care services.
C)health care is provided by the government to all citizens.
D)doctors pick which patients they want to see.
Q2) In 1980,26 million people in the US were over the age of 65.What is the amount currently?
A)34 million
B)35 million
C)36 million
D)37 million
Q3) The Medicaid program provides health insurance for the A)elderly.
B)poor.
C)veterans of wars.
D)slow.
Q4) What do you feel would be the effect of a mandate that requires all people to purchase health insurance?
Q5) The idea of a Health Savings Account (HSA)was enacted in 2003.What do you think are its main strengths?
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Chapter 11: Social Security
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Sample Questions
Q1) Social insurance can be justified on the grounds of A)adverse selection.
B)decision-making costs.
C)income distribution.
D)paternalism.
E)all of the above.
Q2) Social security taxes are projected to fall short of benefits starting in A)2005.
B)2010.
C)2017. D)2020.
Q3) The Social Security Administration has which program(s)to administer?
A)disability payments
B)health benefits
C)pensions
D)survivors' benefits
E)all of the above
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?
Page 13
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Chapter 12: Income Redistribution: Conceptual Issues
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Sample Questions
Q1) An in-kind transfer is a
A)transfer made by people to be kind to others.
B)transfer of wealth.
C)transfer of goods and services instead of cash.
D)system of clearing checks by local banks.
Q2) Measures of income before intervention are calculated on an annual rather than a lifetime basis.
A)True
B)False
Q3) Social welfare functions require that a society has at least three people living in it.
A)True
B)False
Q4) The middle class in the United States has _______ since the late 1960s.
A)stayed the same
B)decreased
C)increased a great deal but then declined
D)increased slightly
Q5) If the least wealthy person in a society has millions of dollars,should we still consider that person poor?
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Chapter 13: Expenditure Programs for the Poor
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Sample Questions
Q1) A needy family consisting of a mother and three children currently receives cash benefits that average $12 per day.The mother of this family is allowed to earn an average of $4 per day before her benefits begin to decline.After that,for each dollar earned,cash benefits decline by 67 cents for each dollar earned.Assume that she can find work at $4 per hour.How many hours will she have to work per day before her benefits are eliminated?
Q2) This question is similar to Discussion Question 1 of Chapter 13 in your textbook.In New York,a welfare recipient can earn $90 per month without having her benefits reduced.Beyond $90,benefits are reduced by 57 cents for every dollar of earnings.Consider Jackie,a resident of New York,who can earn $10 per hour.If she does not work at all,she is eligible for welfare benefits of $577.
(A)If she works 10 hours,how much are her work earnings,how much is her welfare benefits,and how much is her total income?
(B)After Jackie works a certain number of hours,she does not receive any benefits at all.What is that number of hours? enjoy
Q3) Crowding out can occur when public insurance crowds out private insurance. A)True B)False
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15
Chapter 14: Taxation and Income Distribution
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Sample Questions
Q1) Suppose that demand is perfectly inelastic.Supply is normal and upward sloping.What is the economic incidence of a unit tax placed on suppliers?
Q2) In the press,there has been a considerable amount of attention given to the notion of corporations being taxed.Explain how it is that a tax on a business could be borne entirely by consumers.
Q3) A monopoly has ______ seller(s)in the market.
A)0
B)1
C)3
D)many
Q4) 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?
Q5) A tax on consumers will cause the demand curve to shift A)right.
B)left.
C)up.
D)down.
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Page 16
Chapter 15: Taxation and Efficiency
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Sample Questions
Q1) The VMP is the Value of Marginal Product.
A)True
B)False
Q2) When a single tax is imposed,the excess burden is proportional to the compensated elasticity of demand and to the square of the tax rate.
A)True
B)False
Q3) Unit taxes vary along with the price of the taxed commodity.
A)True
B)False
Q4) Equivalent variation is a method employed to measure excess burden.Comment on why a method such as compensating variation would not be appropriate for this analysis.
Q5) Refer to Figure 15.8.If VMPmkt can be characterized by the equation VMPmkt = 502Hmkt,where H is the number of hours worked,and VMP<sub>home</sub> can be characterized by the equation VMP<sub>home</sub> = 45 - 3Hhome,where H is the number of hours worked,what is H* if there are a total of 40 hours to be worked between work and home?
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Chapter 16: Efficient and Equitable Taxation
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Sample Questions
Q1) Horizontal equity incorporates the notion that
A)those earning higher incomes should pay more in taxes.
B)those earning equal incomes should pay the same in taxes.
C)taxes paid should be unassociated with income levels.
D)there should be no excess burden created by a tax.
Q2) A situation in which the government cannot implement an optimal tax policy because the policy is inconsistent with the government's incentives over time is known as
A)government tax problem.
B)time inconsistency of optimal policy.
C)the double?counting game.
D)Wagner's Law.
Q3) Income is a poor measure of relative position when attempting to determine horizontal equity.
A)True
B)False
Q4) Working fewer hours to reduce your tax burden is tax evasion.
A)True
B)False
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Chapter 17: The Personal Income Tax
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Sample Questions
Q1) Since 1986 there have been over 15,000 changes to the tax code.
A)True
B)False
Q2) The "making-work-pay" credit allows
A)credit for working.
B)people to file taxes on April 19th.
C)credit associated with learning.
D)all of the above.
Q3) Inflation
A)has no impact on taxing strategies.
B)can be temporarily offset with tax cuts.
C)only became a tax problem in the late 1990s.
D)generally affects state governments most severely.
Q4) Capital gains are
A)treated exactly like other sources of income.
B)taxed differently than other sources of income.
C)generally not associated with a "lock-in effect."
D)only realized at death.
Q5) How much do you believe that current tax policy is influenced by politics,as opposed to sound and efficient tax policy?
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Chapter 18: Personal Taxation and Behavior
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Sample Questions
Q1) 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.
Q2) Refer to Figure 18.1.If the total number of hours (T)per week is 168 and the wage rate is $10,how much consumption is possible if the number of hours worked is 35? How does your answer change if the wage rate decreases to $8.50 but number of hours worked also increases to 40?
Q3) Full loss offset allows individuals to
A)claim children as dependents.
B)deduct mortgage interest from taxes.
C)deduct savings interest from taxes.
D)deduct capital losses from taxable income.
Q4) The consumption bundle that is available,if there are no exchanges with the market,is known as the A)federal system.
B)endowment point.
C)Ramsey Rule.
D)Gross Replacement Rate.
Page 20
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Chapter 19: The Corporation Tax
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Sample Questions
Q1) For corporate taxes,the lowest tax bracket is
A)9 percent.
B)12 percent.
C)15 percent.
D)22 percent.
Q2) Large firms sometimes have manufacturing and development that take place in multiple states.Should they be subject to taxation in every state in which they do business?
Q3) Return to Question 17 above.Suppose that we now know that the present value of depreciation allowances is 0.20.In addition,there is an investment tax credit of 0.10.How does this new information change your answer to Question 17? What effect does this new information have on the user cost of capital?
Q4) Oxnard Rims,Inc. ,has $5 million in assets and $2 million in debt.During the course of the year,it takes in $1 million in net revenue after deduction of all costs (except for interest)and incurs interest expenses of $500,000.Oxnard Rims,Inc. ,pays an average tax rate of 35% on its profit.
Calculate the percentage return on equity after taxes for the corporation. If the market interest rate is 12.5%,do you think Oxnard Rims pleased its investor for the preceding year?
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Chapter 20: Deficit Finance
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Sample Questions
Q1) When government borrowing decreases private investment by raising the market interest rate,this is known as
A)the Director's Law.
B)crowding out.
C)positive economics.
D)the Ramsey Rule.
Q2) If we assume that government borrowing crowds out private investment,then future generations will have a smaller capital stock.Ricardo's view is that this will not be the case,because people are forward looking.Do you agree?
Q3) The deficits of the 1980s can be regarded as structural.
A)True
B)False
Q4) Lerner's view on debt financing is
A)Future generations bear a burden of external debt.
B)Burden of debt can be transferred across generations.
C)Internal debt creates no burden for the future generations.
D)Government debt crowds-out the available funds for private sector.
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22
Chapter 21: Fundamental Tax Reform: Taxes on Consumption
and Wealth
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Sample Questions
Q1) A consumption tax generally will be borne according to labor earnings.
A)True
B)False
Q2) 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.
Q3) Throughout this discussion of taxes,there has been repeated mention of the need for progressivity in the tax system.Why is this an important goal for tax systems in most societies?
Q4) A tax levied on an individual's total lifetime acquisitions from inheritances and gifts is known as
A)inheritance tax.
B)death tax.
C)accessions tax.
D)unified transfer tax.
Page 23
Q5) Many states have no state-level personal income tax.How do you think that effects expenditure decisions?
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Chapter 22: Public Finance in a Federal System
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Sample Questions
Q1) The proportion of total direct expenditure made by local governments is called the centralization ratio.
A)True
B)False
Q2) The town of Little Bohemia has an estimated elasticity of demand for land of 2.What effect would there be to the quantity demanded from a 10% decrease in the price of land due to a tax increase?
Q3) The ratio of tax collections to tax capacity is known as tax effort.
A)True
B)False
Q4) It is easier to avoid state and local taxes than federal taxes.
A)True
B)False
Q5) Grants as a percent of total federal outlays have been increasing since the 1960s.
A)True
B)False
Q6) The Tiebout model can be summarized as "voting with the invisible hand."
A)True
B)False
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