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1、Part 1 Getting StartedInstructors Manual to accompanyPublic Finance, Eighth Edition, by Harvey S. Rosen and Ted GayerSuggested Answers to End-of-Chapter Discussion QuestionsSome of the questions have no single “correct” answer reasonable people can go off in different directions. In such cases, the
2、answers provided here sketch only a few possibilities.Chapter 1 - Introduction1.a.Putins statement is consistent with an organic conception of government. Individuals and their goals are less important than the state.b. Locke makes a clear statement of the mechanistic view of the state in which indi
3、vidual liberty is of paramount importance.2.Libertarians believe in a very limited government and are skeptical about the ability of government to improve social welfare. Social democrats believe that substantial government intervention is required for the good of individuals. Someone with an organi
4、c conception of the state believes that the goals of society are set by the state and individuals are valued only by their contribution to the realization of social goals.a.A law prohibiting gambling would probably be opposed by a libertarian and advocated by a social democrat. Someone with an organ
5、ic conception of the state would first decide whether gambling would help to achieve the states goals before taking a position on this issue. If the view is that gambling keeps individuals from being productive, then someone with an organic view would probably be in favor of prohibiting it, but if g
6、ambling is considered a good way to raise more revenue for the state, then they might oppose the prohibition.b. Libertarians oppose the law mandating seat belt use, arguing that individuals can best decide whether or not to use seat belts without government coercion. Social democrats take the positi
7、on that the mandate saves lives and ultimately benefits individuals. The organic view would probably lead to favoring the mandate on the grounds that reduced health care costs caused by fewer accidents benefit society.c. Libertarians oppose the law mandating child safety seats, arguing that individu
8、als can best decide whether or not to use child safety seats without government coercion. Social democrats take the position that the mandate saves lives and ultimately benefits individuals. The organic view would probably lead to favoring the mandate on the grounds that reduced health care costs ca
9、used by fewer accidents benefit society.d. Libertarians would probably oppose a law prohibiting prostitution, while social democrats would likely favor such a law. The organic view depends on the type of society policymakers are attempting to achieve. The law would probably be favored on moral groun
10、ds.e. Libertarians would probably oppose a law prohibiting polygamy, while social democrats would likely favor such a law. The organic view depends on the type of society policymakers are attempting to achieve. The law would probably be favored on moral grounds.f. Libertarians would likely oppose th
11、e law, believing that individual business owners should make the decision about which language is used for their signs. Social democrats would also probably oppose the law in order to foster a more inclusive society. Those with an organic view would probably favor the law if they hold the view that
12、every member of the society should speak the native language.3.The 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
13、say that people can decide what is best for themselves - whether to consume high calorie food - and do not need prodding from the government. In contrast, social democrats might argue that people are too short sighted to know what is good for them, so that government-provided inducements are appropr
14、iate.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. This law would not increase government expenditures, but the high costs of complianc
15、e would increase the regulatory budget. c. Its 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
16、 at a slower rate than the GDP. One must also consider coincident federal credit and regulatory activities and state and local budgets.d. 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 governme
17、nt sector as a whole would not go down as much as one would have guessed.5.The inflation erodes the real value of the debt by 0.016 x 420 billion or 6.72 billion. The fact that inflation reduces the real debt obligation means that this figure should be included as revenue to the government.6.The fed
18、eral government grew by $910 billion. However, because the price level went up by 24 percent, in terms of 2005 dollars this amounted to a real increase of $540 billion (=$2.47 trillion - 1.24*$1.56 trillion=$2.47 trillion-$1.93 trillion). As a proportion of GDP, federal spending in 1996 was 19.9 per
19、cent ($1.56 trillion/$7.82 trillion) and in 2005 it was 19.8 percent ($2.47 trillion/$12.48 trillion). Hence, the size of government grew in absolute terms and fell slightly in relative terms. To get a more complete answer, one would want data on the population (to compute real spending per capita).
20、 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.7. Relative to
21、 GDP, defense spending grew from 4.9 percent of GDP in 1981 to 5.8 percent of GDP in 1985 and then grew from 2.9 percent of GDP in 2001 to 3.8 percent of GDP in 2005. The increase from 2001 to 2005 was proportionally larger.Chapter 2 Tools of Positive Analysis1.A change in the marginal tax rate chan
22、ges the individuals 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. If there were no political or legal impediments,
23、an experimental study could be conducted in which a control group confronts the status quo, and an experimental group faces the new tax regime. Other things that affect work effort would impact both the control group and the experimental group, so any difference in work effort between the two groups
24、 could be attributed to the change in marginal tax rates.2.This is a valid criticism of the exercise study and the remedy would be to set up a study in which individuals are randomly assigned to groups. In an experimental study, the group engaged in running would not be correlated with good health o
25、r a strong heart, so if they enjoyed longer life expectancy, it could be attributed to running instead of other factors.3.The workers who spend time on a computer probably have other skills and abilities that contribute to higher wages, so training children to use computers would not necessarily cau
26、se their earnings potential to improve. This study illustrates the difficulty of determining cause and effect based on correlations. The data do not reveal whether using a computer causes higher earnings, or whether other factors cause workers to use computers and to earn higher wages.4.The text poi
27、nts 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 populati
28、on unrepresentative of the wider group of health care consumers. In addition, the RAND Health Insurance Experiment was of limited duration, after which the participants would move to some other health plan. This design could induce certain behavior in the short-run that would not necessarily be pres
29、ent if the health insurance coverage were permanent rather than transitory. Further, physicians “standard practices” are largely determined by the circumstances of the population as a whole, not the relatively small experimental group.5.Random assignment to different class size allows researchers to
30、 determine if smaller class size improved test scores, but if some of the students switched classes, the results could be biased. For example, students might be randomly assigned to large classes, but they might have very concerned parents who make an effort to move their children into a smaller cla
31、ss within the same school or at a different school. In such a case, the students higher test scores might reflect that they have very involved parents rather than that they were in a smaller class. If, on the other hand, students changed classes or changed schools for other reasons, not related to h
32、ow they might perform on tests, the results would not be biased.6.Since only five states reduced income taxes, we could examine what happened in a control group of states (those with an income tax but with no change in the tax rates) and compare savings rates between the two. This is important becau
33、se other factors affect savings rates, but if other factors affected both the control group and the treatment group, then we can conclude that the treatment (lower taxes) caused the change in savings. If, for example, the saving rate for the five states with lower taxes (the treatment group) increas
34、ed by two percent, while the savings rate for the other states (the control group) increased by one percent, then we could conclude that lower taxes caused the saving rate to increase by one percentthe difference between the two percent increase in the treatment group and the one percent increase in
35、 the control group.7.There is a weak, positive relationship between deficits and interest rates, implying that larger deficits lead to lower interest rates. Inferences based on these data along would be problematic because there are only a few data points and because it would be more informative to
36、look at deficits relative to some benchmark, such as GDP, and to express both interest rates and deficits in real terms, rather than nominal terms. It would also be useful to control for other factors that can affect interest rates, such as monetary policy and the level of economic activity. Chapter
37、 3 Tools of Normative Analysis1.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,
38、one would expect the market for flood insurance to operate fairly efficiently.b. There is substantial asymmetric information in the markets for medical insurance for consumers and also malpractice insurance for physicians. For efficient consumption, the price must be equal to the marginal cost, and
39、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, taxes, and the shifting of costs from the uninsured to the insured, there is little reason to expect the
40、market to be efficient.c. In the stock market, there is good information and thousands of buyers and sellers. We expect, in general, efficient outcomes.d. From a national standpoint, there is a good deal of competition and information with regards to personal computers. The outcome will likely be ef
41、ficient for computer hardware. However, some firms might exercise some market power, especially in the software market; in these markets “network externalities” may be present where the value of a programming language or piece of software is dependent on the number of others who also use that softwa
42、re.e. The private market allocation is likely inefficient without government intervention. Student loan markets may suffer from asymmetric information the student knows better than the lender whether he will repay the loan or default on it, a form of adverse selection. Government intervention does n
43、ot “solve” the adverse selection problem in this case (because participation in the student loan program is not compulsory), but it may create a market that would not exist without intervention.f. There are several reasons why automobile insurance provision is likely to be inefficient without govern
44、ment intervention. As with other insurance markets, the automobile insurance market suffers from asymmetric information. Drivers who know they are particularly accident prone will be particularly likely to want car insurance (or policies with greater coverage), while drivers who are less accident pr
45、one (or able to self-insure) might choose to go without insurance. By mandating that people purchase auto insurance if they choose to drive, the adverse selection problem is mitigated to some extent (but, again, more accident prone drivers could still by more generous plans). Another market imperfec
46、tion, related to “underinsurance” has to do with the financial externalities from an automobile accident. An uninsured motorist who is at fault may not have sufficient income to cover the costs of the other drivers bills, and instead default on the obligation by g. declaring bankruptcy. The bankrupt
47、cy “floor” on costs creates various moral hazard problems.2.Point a represents an equal allocation of water, but it is not efficient because there is no tangency. Point b is one of many Pareto efficient allocations, representing a case where Catherine benefits enormously by trade, and Henrys utility
48、 is unchanged from the initial endowment.AD:1)The dashed line is positioned at the halfway point on the horizontal axis.2)Point b is a tangency3.If insurers in California could no longer use location to determine automobile insurance rates, some of the higher costs incurred by urban residents would be shifted to rural and suburban residents. This change would reduce efficiency, but the purpose of the policy is to improve equity, based on an argument that it is unfa