Public Sector Economics
Exam Materials
Course Introduction
Public Sector Economics examines the economic role of government in the allocation of resources, distribution of income, and stabilization of the economy. The course covers core topics including public goods and externalities, taxation and government expenditures, market failures, cost-benefit analysis, and the design and effects of government policies. Students analyze theoretical frameworks and real-world case studies to understand how government interventions can address economic inefficiencies and promote social welfare, as well as the challenges associated with public sector decision-making and policy implementation.
Recommended Textbook
Public Finance 10th Edition by Harvey S. Rosen
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707 Verified Questions
707 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) The unified budget is
A) a budget that includes all nations.
B) a document which itemizes all the federal government's expenditures and revenues.
C) a document that accounts for all spending by states.
D) none of these answer options are correct.
Answer: B
Q2) Government output is hard to account for because government A) is so large.
B) provides goods that have no resale value.
C) keeps secrets about what it produces.
D) goods are generally not sold or produced in easily measurable units.
Answer: D
Q3) Local governments rely heavily on property taxes.
A) True
B) False
C) Uncertain Answer: A
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Page 3
Chapter 2: Tools of Positive Analysis
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Sample Questions
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) "Since the social sciences are not like the natural sciences,experiments are a waste of time." Comment on the above statement.
Answer: It is true that social sciences are not the same as natural sciences.Experiments have been used successfully to tell us more about the world we live in.There are limits that social scientists should be aware of,but to dismiss the use of experimental analysis entirely would be incorrect.
Q3) The following can be analyzed using econometrics:
A) labor supply.
B) market demand.
C) tax-setting behavior.
D) poverty.
E) all of these answer options are correct.
Answer: E
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Page 4
Chapter 3: Tools of Normative Analysis
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Sample Questions
Q1) If James has a utility curve characterized by the function of U = 2X<sup>3</sup> Y<sup>2</sup>,what is his marginal rate of substitution between goods X and Y?
Answer: To find the MRSs,take the partial derivative of the function with respect to X and divide it by the partial derivative with respect to Y,which yields (3/2)* (Y/X).
Q2) In equilibrium,the MRT should not equal the MRS of all individuals.
A) True
B) False
C) Uncertain
Answer: B
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.
Q4) Externalities can be difficult to detect in open economies.
A) True
B) False
C) Uncertain
Answer: C
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Page 5
Chapter 4: Public Goods
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Sample Questions
Q1) Impure public goods
A) are nonrival in consumption.
B) cannot be priced in the market.
C) are rival in consumption.
D) are never provided by the private sector.
Q2) 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?
Q3) A pure private good is
A) nonrival in consumption and subject to exclusion.
B) rival in consumption and subject to exclusion.
C) rival in consumption and not subject to exclusion.
D) all of these answer options are correct.
Q4) Charging individual prices that are based on consumers' willingness to pay is
A) government price supports.
B) will pricing.
C) second tier pricing.
D) price discrimination.
Q5) Discuss and contrast the advantages and disadvantages of public highways versus toll roads.
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) Congestion pricing
A) is a tax.
B) keeps nasal passages clear.
C) is never efficient.
D) all of these answer options are correct.
Q3) Pollution rights may be traded if
A) polluters try to hide pollution.
B) administrators are uncertain about Pigouvian taxes.
C) there is no market for pollution.
D) pollution is harmless.
Q4) List and discuss three problems that might arise when using the Coase theorem.
Q5) For market efficiency,MSC must be equated to MSB.
A) True
B) False
C) Uncertain
Q6) Why are command- and -control regulations less flexible than incentive based systems?
Page 7
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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
C) Uncertain
Q2) In the presidential election of 2008,record numbers of people vote in national,state,and local elections.This phenomenon was even more pronounced among young voters.What are possible explanations for this?
Q3) Which of the following is an example of a special-interest group?
A) Democratic party
B) Bureau of Alcohol,Tobacco,and Firearms
C) National Rifle Association
D) Association of State Legislators
E) all of these answer options are correct.
Q4) Governments grow because low income individuals cannot use the political process to redistribute income towards themselves.
A) True
B) False
C) Uncertain
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Chapter 7: Education
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Q1) A criticism of market-oriented schemes says that consumers may not be well informed.
A) True
B) False
C) Uncertain
Q2) In 2008 ___________ had the highest annual expenditures on public and private schools per student.
A) Spain
B) France
C) United States
D) Japan
Q3) There is no correlation between more years of schooling and increased earnings.
A) True
B) False
C) Uncertain
Q4) Under school voucher systems,financial support goes to
A) to the school.
B) to the state.
C) to the city.
D) to the family.
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Chapter 8: Cost-Benefit Analysis
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Sample Questions
Q1) The value of a human life
A) can be estimated by potential future earnings.
B) can be subjected to cost-benefit analysis.
C) is an intangible that is hard to price.
D) all of these answer options are correct.
Q2) Suppose in a certain city the demand for low-cost housing can be characterized by the equation P = 500 - 2Q,where Q is housing measured in square feet.Further,suppose that supply is characterized by the equation: P = 25 + 3Q.
(A)How much consumer surplus is there?
(B)Suppose that a grant is given so that the supply of housing is increased.This increase changes the supply curve to P = 3Q.How much does consumer surplus change because of the grant?
Q3) Government budgets are
A) always adhered to.
B) not necessary.
C) guides for project analysis.
D) easy to create.
Q4) 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?
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Chapter 9: The Health Care Market
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Sample Questions
Q1) Which one of these conditions is not a part of asymmetric information?
A) parties are engaged in and economic transaction.
B) information is not uniform.
C) the government usually intercedes to fix the problem.
D) all of these answer options are correct.
Q2) The U.S.is the leader in health care.
A) True
B) False
C) Uncertain
Q3) We have read that the uninsured and the insured behave differently in regard to medical services.Suppose that the insured have a demand curve that can be written as Q = 100 - P,where Q is the quantity of medical services and P is the price.Suppose further that the uninsured have a demand curve that can be written as Q = 100 - 2P.
(a)At a price of $10 of medical services,how much will each demand?
(b)At a quantity of 50 units,how much will the price be for the insured and uninsured?
Q4) 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?
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11
Chapter 10: Government and the Market for Health Care
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Sample Questions
Q1) In the United States,universal health care is administered by
A) the federal government.
B) state governments.
C) private insurance companies.
D) hospitals.
E) none of these answer options are correct.
Q2) Job lock is good for the U.S.work force.
A) True
B) False
C) Uncertain
Q3) What was the percentage of GDP that was expended,in total,on health care?
A) 0.132%
B) 12%
C) 13.2%
D) 16%
Q4) Private health insurance pays for what percentage of health care expenditures?
A) 0
B) 5
C) 40
D) 35
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Chapter 11: Social Security
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Sample Questions
Q1) In 2011,the Social Security program had costs of
A) $30 million.
B) $20 trillion.
C) $200 billion.
D) none of these answer options are correct.
Q2) A fully funded plan requires
A) you to pay for your dinner as you go to the table to eat.
B) current working citizens to pay for current retired citizens.
C) no taxes since current workers pay for current retirees.
D) retirees to be paid from accounts that have accumulated with interest over their working lives.
Q3) The Social Security Trust fund actually has no money in it and is filled with IOUs.Does this information impact your thinking regarding Social Security?
Q4) 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
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Chapter 12: Income Redistribution: Conceptual Issues
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Sample Questions
Q1) A notion that supports the idea that some items should be distributed equally to all is known as
A) Pareto efficiency.
B) the Hoover Principle.
C) poverty gap closing.
D) commodity egalitarianism.
Q2) Suppose that in a certain society $10,000 is the official cut-off of income for the poor.This means that any person making less than $10,000 is considered poor.Suppose further that there are three people in this society: Randy,Marlon,and Tito,with incomes of $9,900,$9,900,and $5,000,respectively.
A)How many people are in poverty?
B)How much income would it take,on average,to lift every poor person out of poverty?
C)What if some policy caused $200 to be taken from Tito and given to Randy.How many people are in poverty now? How much income would it take,on average,to lift every poor person out of poverty?
Q3) How would poverty be affected in the United States if the measure were changed to a more comprehensive one that included the value of in-kind transfers,medical services,and taxes?
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14
Chapter 13: Expenditure Programs for the Poor
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Q1) Workfare requires able-bodied individuals to participate in work-related activities in order to receive transfer payments.
A) True
B) False
C) Uncertain
Q2) Providing housing decreases the incentive for the poor to find their own.
A) True
B) False
C) Uncertain
Q3) Enrollment in the Medicaid program
A) is designed for those persons 65 years of age and older.
B) has increased due to expanded eligibility.
C) covers all medical expenses that a poor person may incur.
D) requires a substantial co-payment that has not been helpful to poor families.
Q4) Medicaid is the most expensive program that the government runs that provides benefits to the poor.
A) True
B) False
C) Uncertain
Q5) What are some of the drawbacks,as you see them,to a program like Workfare?
Page 15
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Chapter 14: Taxation and Income Distribution
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Sample Questions
Q1) A demand curve that is perfectly inelastic is
A) horizontal.
B) vertical.
C) at a 45 degree angle.
D) parallel to the X-axis.
Q2) In a general equilibrium model,a tax on a single factor in its use only in a particular sector can affect returns to all factors in all sectors.
A) True
B) False
C) Uncertain
Q3) Unit taxes vary along with the price of the taxed commodity.
A) True
B) False
C) Uncertain
Q4) Taxes
A) are mandatory payments.
B) are necessary for financing government expenditures.
C) do not directly relate to the benefit of government goods and services received.
D) all of these answer options are correct.
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Chapter 15: Taxation and Efficiency
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Q1) Taxing in labor markets creates more excess burden than taxing in commodity markets.
A) True
B) False
C) Uncertain
Q2) The compensated demand curve
A) shows how the quantity demanded changes when the price changes.
B) shows how income is compensated,so that the individual's commodity bundle stays on the same indifference curve.
C) is sometimes referred to as the Hicksian demand curve.
D) all of these answer options are correct.
Q3) The differential taxation of inputs does not create an excess burden.
A) True
B) False
C) Uncertain
Q4) Suppose you had to design an economic system for a country that had never existed before,like one of the former Soviet Union countries.What criteria would you consider to minimize the excess burden of the system of taxation?
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Chapter 16: Efficient and Equitable Taxation
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Q1) In 2009,President Obama proposed raising the income tax on those making over $250,000 per year.Discuss the merits of this plan.
Q2) The idea of two individuals being equally well off in the absence and existence of taxation is
A) time consistency of optimal taxation.
B) flat tax income schedule.
C) benefits received principle.
D) utility definition of horizontal equity.
Q3) 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.
Q4) It is easier to under-report income in industries that deal with a lot of cash.
A) True
B) False
C) Uncertain
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Chapter 17: The Personal Income Tax
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Q1) Since its inception in 1913,there have been many revisions to the income tax code.
A) True
B) False
C) Uncertain
Q2) According to the H-S definition of income,employer contributions are excluded from money income.
A) True
B) False
C) Uncertain
Q3) Suppose there is a simple tax system that says you pay 10% for income up to $10,000,25% for income between $10,000 and $50,000,and 35% for all income above $50,000.Mr.Campbell has income of $72,000.Mrs.Campbell has income of $55,000.
(A)What is Mr.Campbell's individual tax liability? Mrs.Campbell's?
(B)What is their liability if they file a joint return?
(C)Is there a marriage penalty? If so,how much is it?
Q4) Discuss the advantages of using an income tax system such as the one discussed in this chapter,as opposed to a consumption tax.
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Chapter 18: Personal Taxation and Behavior
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Sample Questions
Q1) A compensation package offered by employers often includes
A) wages.
B) health benefits.
C) vacations.
D) pensions.
E) all of these answer options are correct.
Q2) Social savings is
A) just another way of defining security.
B) the sum of government and private savings.
C) government savings only.
D) defined by higher rates of interest for the government.
Q3) The analysis of a progressive tax is very similar to that of a proportional tax.
A) True
B) False
C) Uncertain
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.
Page 20
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Chapter 19: The Corporation Tax
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Q1) 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?
Q2) Corporations,like individuals,face an alternative minimum tax (AMT).
A) True
B) False
C) Uncertain
Q3) Before applying the 35 percent tax rate,firms may deduct
A) employee compensation.
B) interest payments.
C) depreciation allowances.
D) all of these answer options are correct.
Q4) 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?
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Chapter 20: Deficit Finance
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Q1) According to the Ricardian view of government deficits,
A) any future burden of tax financing should be ignored.
B) government deficits reduce interest rates.
C) taxpayers are less capable of saving when debt finance is used rather than tax finance.
D) the private sector supply of loanable funds will increase in the face of government deficits.
Q2) Because of the differing account conventions,there is a great deal of arbitrariness in a number that purports to be
A) the deficit.
B) the surplus.
C) the debt.
D) all of these answer options are correct.
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.
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Chapter 21: Fundamental Tax Reform: Taxes on Consumption and
Wealth
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Q1) Wealth taxes are assessed on a stock of assets instead of a flow such as income or sales.
A) True
B) False C) Uncertain
Q2) 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?
Q3) Suppose that the total number of hours (T)is 720 and the wage rate is $10.Suppose further that all income is spent on consumption,so that the vertical axis is also total consumption.
(A)Sketch this graph.
(B)Sketch the graph if a 5% consumption tax is imposed.
(C)Can you say conclusively that a consumption tax will lower hours worked?
Q4) One advantage of a consumption tax is that there are fewer problems with inflation.
A) True
B) False
C) Uncertain
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Chapter 22: Public Finance in a Federal System
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Q1) Disadvantages of decentralization are
A) intercommunity externalities.
B) forgone scale economies in the provision of public goods.
C) inefficient taxation.
D) the lack of ability to redistribute income.
E) all of these answer options are correct.
Q2) The proportion of total direct expenditure made by local governments is called the centralization ratio.
A) True
B) False
C) Uncertain
Q3) A local public good
A) only benefits members of a particular community.
B) gives higher benefits than regular public goods.
C) requires unanimous voting.
D) has become an integral part of the federal government.
Q4) In Tiebout Model,the tax can vary across communities.
A) True
B) False
C) Uncertain
Page 24
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