Chapter 1

Question 1

What is another way of stating the major goal in the study of public finance?

Answer 1

Another way of stating the major goal is to understand the impact of government expenditures, regulations, taxes, and borrowing on incentives to work, invest, and spend income.

Question 2

What is the main controversy regarding the role of government in any society?

Answer 2

The main controversy is whether government does too much or needs to do more.

Question 3

How has the government scope changed over time in modern industrial nations?

Answer 3

The government scope has grown significantly from a small share of the economy in the early 1900s to between 30-50 percent today

Question 4

What is the definition of public finance?

Answer 4

Public finance is the field of economics that studies government activities and alternative means of financing those activities.

Question 5

What is the major goal in the study of public finance?

Answer 5

The major goal is to understand the economic basis of government activities and analyze the costs and benefits of allocating resources to government use as opposed to allowing private enterprises and households to use thoseresources.

Question 6

What are the resources that the government needs to provide goods and services?

Answer 6

The resources are labor, land, equipment, buildings, and raw materials.

Question 7

What are some examples of goods and services that the government provides to citizens?

Answer 7

Some examples are roads, national defense, police and fire protection, social security pensions, primary and secondary schooling, transfer payments to the poor, and university education.

Question 8

What is the meaning of non-excludability in the context of public goods?

Answer 8

Non-excludability means that the goods and services are shared by all citizens and free of charge. No one can be excluded from enjoying their benefits when they are provided.

Question 9

What is the difference between price rationing and nonmarket-rationing?

Answer 9

Price rationing means that the allocation of goods and services is determined by the market forces of supply and demand. Nonmarket-rationing means that the allocation of goods and services is determined by other criteria, such as need, merit,oreligibility.

Question 10

What is the real cost of government provision of goods and services?

Answer 10

The value of private goods and services that must be sacrificed when resources are transferred to government use (i.e direct opportunity cost).

Question 11

How is the trade-off between government goods and services and private goods and services illustrated?

Answer 11

With the familiar production-possibility curve.

Question 12

How do taxes affect our choices as individuals?

Answer 12

Taxes affect the prices of goods and services (thus affect our consumption choices), as well as our incentive to work/leisure and save(invest)/consume.

Question 13

What is the term for the distortion in resource use and loss in output that results from the effect of taxes on incentives?

Answer 13

The term is deadweightloss.

Question 14

What is the main difference between a mixed economy and a pure-market economy in terms of government involvement?

Answer 14

In a mixed economy, the government supplies some goods and services and regulates private economic activity. In a pure-market economy, the government has no role in providing or regulating any goods and services.

Question 15

What is the main advantage of a pure-market economy over a mixed economy in terms of individual choice?

Answer 15

In a pure-market economy, individuals can purchase goods and services freely, according to their tastes and economic capacity, given the market-determined prices. In a mixed economy, political decisions can force citizens to finance government services regardless of their personal preferences.

Question 16

What is the main disadvantage of a pure-market economy over a mixed economy in terms of social welfare?

Answer 16

In a pure-market economy, there is no provision of public goods or services that benefit the society as a whole, such as national defense, education, health care, etc. In a mixed economy, the government can provide these goods or services through taxation and expenditure.

Question 17

What is an example of a country that has a mixed economy today?

Answer 17

The USA and almost all other nations today have mixedeconomies.

Question 18

What are some key characteristics of a mixed economy?

Answer 18

Some key characteristics of a mixed economy include government supplying goods and services, government regulation of private economic activity, and a specific range of government expenditure as a percentage of GDP.

Question 19

In a mixed economy, what is the typical range of government expenditure as a percentage of GDP?

Answer 19

In a mixed economy, government expenditure typically ranges between ¼ to ½ of GDP.

Question 20

How much of National Income do taxes typically absorb in a mixed economy?

Answer 20

Taxes typically absorb at least ¼ of National Income in a mixed economy.

Question 21

In a mixed economy, provision of goods and services occur through what institutions?

Answer 21

In a mixed economy, the provision of goods and services takes place through political institutions rather than markets.

Question 22

How is decision-making different in a mixed economy compared to a purely market-based economy?

Answer 22

In a mixed economy, decision-making involves interaction among all individuals of the community through processes like voting and elections, rather than just relying on buyers and sellers in the market.

Question 23

What can political decisions in a mixed economy potentially do with regard to financing government services?

Answer 23

Political decisions in a mixed economy can force citizens to finance government services regardless of their personal preferences.

Question 24

What do the lower and upper loops in the circular flow model of the economy represent?

Answer 24

The lower loop represents the input markets, where households sell their resources to firms, and the upper loop represents the output market, where outputs are offered for sale to households

Question 25

In the input market, which entities represent the supply side and which represent the demand side?

Answer 25

In the input market, households represent the supply side, while firms represent the demand side.

Question 26

In the output market, which entities represent the supply side and which represent the demand side?

Answer 26

In the output market, firms represent the supply side, while households represent the demand side.

Question 27

What type of economy is represented in the circular flow model of the economy, and what is a key characteristic of this type of economy?

Answer 27

The diagram represents a pure market economy, and a key characteristic of this type of economy is that all goods and services are produced by businesses, with no government intervention.

Question 28

Where is the Input Market in the circular flow model of the economy

Answer 28

At the bottom of the diagram

The Input Market have housholds that provide resources while firms use these resources in exchange of dollars with the Household

Question 29

Where is the Output Market in the circular flow model of the economy

Answer 29

At the top of the diagram

The Output Market have housholds that Consume Goods in exchange of dollars with the firms who produce these Goods.

Question 30

In a mixed economy, how does the government participate in markets initially?

Answer 30

In a mixed economy, the government participates in markets initially as a buyer of goods and services.

Question 31

Besides being a buyer, what are the two additional roles that the government plays in a mixed economy?

Answer 31

In a mixed economy, the government also serves as (i) a provider of other goods and services and (ii) a provider of transfer payments.

Question 32

How does the government acquire the inputs it needs in a mixed economy?

Answer 32

The government acquires the inputs it needs in a mixed economy by purchasing them from households and business firms.

Question 33

What methods does the government use to finance its purchases of goods and services in a mixed economy?

Answer 33

The government finances its purchases of goods and services in a mixed economy by imposing taxes, charges, and fees.

Question 34

How does the government provide goods and services in a mixed economy, and what is this process referred to as?

Answer 34

In a mixed economy, the government provides goods and services through nonmarket rationing.

Question 35

Can you provide an example of how the government acquires inputs to provide a specific service in a mixed economy?

Answer 35

An example would be that to supply national defense services, the government must acquire steel, labor, and other inputs necessary to support the armed forces

Question 36

What is this phenomenon:

aging of the world’s population

Answer 36

an increasing average age and a higher percentage of elderly individuals due to factors like economic development, improved healthcare, and lower fertility rates.

Question 37

What factors contribute to the aging of a population?

Answer 37

Factors contributing to the aging of a population include economic development, access to healthcare, and increased life expectancy at birth. Additionally, policies like China’s one-child policy can also impact the age distribution of a population.

Question 38

How does this aging phenomenon affect public finance and government budgets?

Answer 38

The aging phenomenon affects public finance and government budgets through the concept of old-age dependency ratios. As the percentage of the population aged 65 and older increases in comparison to the working-age population (ages 15-64), it places a fiscal burden on the government. This is because a smaller percentage of the population is productive and generating income through taxes to fund government programs such as Social Security pensions and healthcare.

Question 39

What does an old-age dependency ratio represent?

Answer 39

An old-age dependency ratio is measured by the percentage of the population aged 65 and older compared to the population aged 15-64. It serves as an indicator of the proportion of retired individuals to active workers in a nation.

Question 40

How does a rising old-age dependency ratio impact government finances?

Answer 40

A rising old-age dependency ratio indicates that a smaller percentage of the population is in the labor force and actively contributing income through taxes to fund government programs. This puts additional financial pressure on the government to support an increasing number of retirees, potentially leading to budget challenges.

Question 41

What is the impact of a high dependency ratio on government finances?

Answer 41

A high dependency ratio leads to significant increases in Social Security pensions and government-funded healthcare expenditures.

Question 42

How can the increased expenditures due to a high dependency ratio be funded on the revenue side?

Answer 42

On the revenue side, the government can consider increasing tax rates on the working population. However, this approach may negatively impact incentives to work and produce, potentially affecting economic growth.

Question 43

What are the potential consequences of the government deciding to borrow to finance the deficit caused by a high dependency ratio?

Answer 43

If the government chooses to borrow to finance the deficit, it could result in soaring interest rates and declines in private investment, which is known as the “crowding out” effect. This could adversely affect economic growth.

Question 44

What are the consequences of maintaining the same level of taxes without increasing borrowing in the face of a high dependency ratio?

Answer 44

If taxes remain the same and the government does not increase borrowing, there will be limited funds available for other government programs, such as infrastructure, which could lead to low economic growth.

Question 45

What options does the government have if it cannot afford to fund healthcare for an aging population without increasing taxes or borrowing?

Answer 45

In such a scenario, the government may need to consider involving the private sector in providing healthcare services. Alternatively, it could choose to maintain the same level of healthcare spending by borrowing, but this could lead to a deterioration of services due to the increased number of elderly individuals and could burden future generations.